Century Aluminum Co (CENX) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Enrique De Anda. Please go ahead.

Thank you very much, Kathy. Hello, 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 statement 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 centuryaluminum.com.

I would now like to introduce Michael Bless, Century Aluminum's President and Chief Executive Officer.

Thanks, Enrique, and thanks for everybody for joining us this afternoon, especially those of you in the Northeast who are dealing with the aftermaths of the storm. You've got our very best wishes. I was raised in New England and lived in Manhattan for 10 years. And despite that, having like most people watched the images on TV and on the web the last couple days, can't imagine what you all are dealing with both professionally and personally. And so you've got our best wishes that the recovery period is as efficient and as quick as reasonably possible.

Let's go to slide 3, please, and let me give you a quick update of what we've been working on here at Century over the last couple months. Most importantly, we continue to make very good progress across the company on our safety initiatives. We made major investments in initiatives like training and behavior-based safety, and these are showing terrific results.

We're right now focusing on making sure our people can recognize the hazards that exist in the tasks that they perform, both everyday tasks, and also, most difficult, the non-recurring tasks for which procedures are written, but obviously not studied every day. We need to make sure our people understand that it's their responsibility to stop these activities rather than accept inappropriate risk. The performance metrics and safety have been good across the company. I'll review those in a few minutes.

And it's interesting, when we go a couple months at each of our facilities, and we have at each of them, without a recordable incident, people sort of gain a new attitude. They become convinced that a zero-accident environment is, indeed, possible. And this is obviously, it's success, I suppose, building upon success. So excellent, excellent progress there across the company. In 2013, I'm happy to report that each of our facilities, each of our businesses has committed to take their safety performance to a new level.

Let's move on. Hawesville, obviously, the plant continues to perform exceptionally well. This, despite the fact that we continue to deal with the aftermath of the upset conditions in the pot rooms that we experienced, as you remember, in the summer and the fall of 2011. It's a testament to the management team that they're dealing with these issues one-by-one, and that none of them are impacting the bottom line.

As we said, the issue at Hawesville is now an uncompetitive power contracting arrangement. As you know, we've had a lot of discussion and effort on this issue since the beginning of the year. And as we feared towards the end of the summer, we came to the regrettable conclusion that the plant just isn't viable under the current power price and under the current metal price environment. Thus, if there were no change to this environment, we'd regrettably have to close the plant at the end of the notice period in August of 2013.

As you'll remember, we put out a press release, we did, in fact, issue a notice of termination to the power supplier in August of 2013.

We're now working aggressively with all the constituencies, including Big Rivers and Kenergy. As you know, those are respectively the wholesale and retail power providers. We've got a long way to go, but I can report very good progress and a good and cooperative spirit over the last couple months. And I'll detail for you at the end of my comments about what we see over the next couple of months.

Moving on at Grundartangi, our Board has approved the expansion of hot metal capacity at the plant, and, thus, we've begun the major engineering work and ordering the major equipment. Just to remind you here, this is an increase in the hot metal capacity of the plant by about 15% over the next couple years. We're doing this without a change to the footprint of the plant, i.e., no new reduction [sales].

In order to achieve this, we'll require a modest amount of additional electric power. It's important to note that this will have no impact on the power that we require for Helguvik. As you might imagine, this is an attractive project. It's got a good financial return and very low technical risk, so we're excited about it.

Lastly, at Ravenswood, I want to update you on the events of the last couple months. But I thought it might be useful before doing that to take a step back and remind you about the situations that put it into context. Many of you know this who have been following the company, but I think it bears repetition.

So first and foremost, the tariff, the large user industrial rate in the region right now, i.e., that we would otherwise pay without any kind of special power arrangement is about $52 per megawatt hour. As you may remember going back to the winter of this year, 2012, the state legislature voted $20 million in annual tax credits from coal severance tax to reduce our power bill. This goes over 10 years, so $20 million over 10 years. This legislation was supported very strongly by the governor and other key leaders.

In addition, the power company has said that it'll continue to divert about $19 million of annual fixed costs, these are its fixed costs, away from Ravenswood's load. Before Ravenswood has shut, these costs were being billed to Ravenswood.

So when you add up those two, obviously, you've got about $39 million in annual support to reduce our power bill. And when you apply that to the $52 tariff, you get a resultant rate in the high $30s. So high $30s per megawatt, $30 per megawatt hour.

Those of you who know our business know that this kind of rate might be acceptable for an operating plant, a plant already operating, obviously, in the kind of long-term, even medium-term metal environment that the forecasters are talking about. Regrettably, it doesn't work for Ravenswood, obviously, given the start-up costs we need to incur to get the plant going again.

Just to remind you, as we've said before, we need to incur about $90 million, nine zero million dollars of spending in order to get the plant restarted. Again as a reminder, about half of that is working capital, mostly alumina, of course. Of course, you get that back as you sell your product. And about half of that is capital and other so-called sunk costs.

So at issue now on top of that $39 million is the so-called third tier of a power structure that we require to get the plant moving again. And this is a flexible rate that would be reference to the LME price. This has been in our filing to the PSC since last April. We need this kind of flexible rate in order to support those restart costs about which I just spoke, and importantly, going forward in order to provide a bridge for the plant during periods of extreme volatility in our industry.

Going back to 2008 and to 2009, if we had had this kind of structure, we believe it's unlikely that the plant would have had to close.

So let me give you an update since we talked to you last time. As expected, the Public Service Commission did issue its order in early October. That having been said, it did impose some terms on that third tier of the structure, we'll call it the LME tier of the structure, that simply don't work for us. And in that respect, last week we submitted our thoughts about how, in fact, it could work. And again here at the end of my comments I'll give you some more detail about what we said and what we see coming over the next couple months.

If we could turn to slide 4, please, just a quick review of the company's operations during the last couple months during the third quarter. As I said before, safety was good across the company during the quarter. I would note that Grundartangi, in particular, had an incident-free quarter. That's terrific performance in any event, and especially noteworthy, given that we've got a lot of temporary employees in the plant over the summer holidays.

Turning to production, as you can see, Hawesville was about flat to the second quarter -- Q3 over Q2. It was up a little bit in absolute terms, but flattish on a per-day basis. There was one less day. That's indicative of a stable operation, as I said.

Mount Holly was about flat, again on an absolute basis, but down just a little bit on a per-day basis, just due to a variety of small factors that have all been worked through by the management team there. Grundartangi was up about 1% in absolute and flattish on a per-day basis. So good production performance across the facilities.

Key production metrics, going down the chart here, as you see, generally good across the company. No major changes from the second quarter. Again, good, stable operations. At the bottom, importantly, conversion costs following across all of the facilities, as you can see. If you go back to July and look at what we told you, this performance is a bit better than we had forecast, even with the updated run rate operations cost that we showed you in July. So we're pleased here.

And to remind you, as we've shown you before, if you look back over the last 12 months, we've brought the company's cash breakeven point down significantly.

And with that, I'll turn it over to Shelly. She'll talk to you a little bit about the market environment and then summarize the financial results. Shelly.

Thanks, Mike. If you could turn to slide 5, please. During the quarter, LME prices averaged $1,920 per tonne. That's down $60 from Q2. Prices dipped just below $1,800 per tonne in August, which is the lowest level we've seen since late 2009. Aluminum prices rallied in September to a 6-month high of $2,177 in response to QE3 and expectations of additional Chinese stimulus. But since then, fears of a slowdown in China, the unresolved Eurozone economic crisis, and uncertainty around the US fiscal cliff, have caused prices to retreat back to the low $1,900s per tonne.

This illustrates what we've been talking about for the last few quarters, where the aluminum market is being driven more by macro concerns rather than the true fundamentals of our industry.

During the third quarter, LME stocks increased by about 220,000 tonnes and stands at about 5.1 million tonnes today. However, we're still seeing long lines to access metal from warehouses and financing deals remain economically attractive. This dynamic continues to support regional premiums at record high levels. The Midwest premium continued to rise during Q3 and is now just over $0.11 per pound. Duty paid European premiums have also increased to around $280 per tonne, and Japanese premiums are up to $255 per tonne.

Taking a look at the aluminum industry fundamentals, global consumption is up about 3.5% year-to-date. This is being driven primarily by demand growth of 8% in China and 9% in the US. In Japan, consumptions is up about 5.5% this year, while demand in Europe is down a little over 6%. Global production is also up around 3.5%, primarily due to Greenfield projects in China, where aluminum supply is up 11.5% year-to-date.

Moving on to alumina, prices edged up during the third quarter and are currently trading in the range of $320 to $330 per tonne. The most recent NALCO contract for 2013, priced at just over 16% of the LME. This would be equivalent to about $305 per tonne today, due to the recent decline in the LME.

So if we can move along to slide 6, please, I'll take you through the company's financial performance for the quarter. The average cash LME price was down 3% Q3 over Q2, but on a 1-month lagged basis, which is the basis for most of our sales, the LME price was down a little over 10%. When you look at our realized unit prices in the US, they were down only 6% quarter-over-quarter. This is due to improved premiums for Midwest deliveries and value-added products. In Iceland, our realized unit prices were down 8%, which reflects the increase in European premiums.

Turning to shipment volumes, in Q3, we had direct sales from Iceland of approximately 3,500 tonnes. If you include that amount along with the tolling volume, you'll see that Iceland shipments were up 1% Q3 over Q2. Shipments at Mount Holly were down 1% in the quarter, while Hawesville volumes were up 3.5%. The increased shipments at Hawesville were due to some high purity metal sales that we held back at the end of Q2 in order to take advantage of stronger markets for that product in early Q3. So overall, global shipments for the company were up 1.5% in the quarter.

Moving on to the income statement data, net sales were down 6% Q3 over Q2. The decline in the LME price drove net sales down by 9%, but higher premiums as well as slightly higher shipments offset a portion of this impact during the quarter. Adjusted operating income decreased $18 million from Q2 to Q3, primarily due to lower LME prices.

So let me take you through a few of the key cost drivers during the quarter. In Q3, we saw lower LME-linked alumina and power costs of $7 million, and raw materials were better by $4 million. The raw material improvement was primarily due to lower carbon costs at our Hawesville facility.

As we've discussed on previous calls, we have seen declining carbon costs at Grundartangi and Mount Holly over the last couple quarters, and now Hawesville is seeing that reduction as well.

Power costs at Mount Holly were down $2 million during the quarter due to the amended power agreement that was put in place last quarter. This agreement became effective on June 1, so Q3 was the first full quarter to reflect the benefit of the new arrangement.

Partially offsetting these cost improvements, SG&A was up $2 million quarter-over-quarter. The increase consisted primarily of ongoing expenses to maintain our new anode facility in the Netherlands until the plant begins production. You can expect to see this increase in SG&A continue for the next several quarters until the restart is complete. Once the facility's up and running, most of these expenses will be reflected in cost of goods sold.

Moving down the income statement, we had a quarterly adjusted loss of $24 million, or $0.25 per share on total common and preferred shares. Our adjustments to reported net loss in Q3 include the elimination of an $8.2 million lower cost-of-market inventory adjustment, as well as the elimination of a net $4.1 million credit related to a couple of litigation items.

Lastly on this slide, I'll just make a couple quick comments on cash flow. As you can see here, CapEx for the quarter was $4 million. As is normal, we expect capital spending in the fourth quarter will be significantly higher than the average of the first 3 quarters of the year. Helguvik CapEx was $2 million during the quarter. And starting in 2013, we expect this spending to drop down to about $1 million per quarter, until we're able to restart major construction efforts.

So quarter-over-quarter cash was up $17 million, and we ended September with $173 million on the balance sheet.

Let's go on to the next slide, and I will take you through the changes in cash in a bit more detail. So on slide 7, we show our normal cash flow waterfall bridging Q2 to Q3. And I'll just focus on a few of the more unusual items here.

During the third quarter, we had a withholding tax payment of $13 million as related to the return of cash from Iceland to the US. As was mentioned previously, these are temporary tax payments that are refunded to us at the end of the year. In fact, just today, we received a refund of approximately $28 million for withholding taxes paid in early two thousand -- I'm sorry -- late 2011, and early 2012.

In addition to the withholding tax payments, we had another $4 million during the quarter which consisted of income tax payments for Iceland, as well as the modest tax payments in the US, due to limitations on NOL usage in certain states.

Moving to the right, you can see we had an $8 million cash inflow from an insurance settlement during the quarter. This claim related to the Grundartangi transformer that was damaged during transport back in 2010.

The last thing I'd like to point out on this slide is the $21 million benefit from a late customer payment. As you may recall from last quarter, we had a large payment that was due at the end of Q2, but not received until the first business day of Q3. As a result, the quarterly change in cash was positively impacted by this payment, which normally would have been a Q2 receipt.

With that, I'll hand it back to Mike.

Thanks, Shelly. If we could go to slide 8, please, I'd just like to give you some detail on some of the major things on which we'll be working over the next couple months. First and foremost, Hawesville, as I talked about before, again just to state the plant isn't viable we've determined under the current power contract. So we now need to work to change that situation. And we're focused on the steps required so that we can purchase power from the competitive wholesale markets.

We obviously also need to be able to bring this power across the grid to this Hawesville smelter itself. In this respect, we've confirmed that there are no major physical impediments to doing this. So we're now working with Big Rivers and Kenergy on the contractual and regulatory requirements necessary to wheel that power into the region.

As I said, the process is going well. It's a good cooperative spirit - all parties are working together. We've got some significant issues to overcome, but we're becoming increasingly optimistic that we're going to find a solution that fits the needs of all the constituencies to solve this problem.

Moving on to Ravenswood. Again, as I said a few moments ago, we did file a so-called request for reconsideration late last week that was in response to the PSC's order in early October, as I described. In that filing that we made last week, we essentially provided the Public Service Commission with 2 alternatives.

In the first, we accepted the key premises in their order from early October, i.e., those things related to that third tier of the structure that simply don't work for us. We said that under that construct, however, we couldn't restart the plant, we wouldn't' be able to restart the plant in the current economic conditions. In essence, we'd have to wait for better days in order to restart the plant under those conditions.

We also submitted an alternative proposal that being a rate for the next 5 years at which we would be able to start the plant even in the current market conditions. We expect to hear back from the PSC within the next week or two, and then we'll assess where to go from there.

We still believe strongly that a pathway should exist that makes sense for all constituencies to get this plant restarted. It's one of the major goals in our company both this year and going into 2013. We remain committed to get this plant restarted. We continue to believe that it's a good investment case for our share owners, and it goes without saying it'll be a great thing for the community of Ravenswood and the nearby communities when this plant restarts.

Moving on to Helguvik. We met with one of our 2 power suppliers this week in an attempt to close off the remaining issues between us. As we told you before, we've essentially agreed [in headline] terms with this particular supplier, and we're hopeful that we can be in the same position with the other supplier before the end of the calendar year.

We're also encouraged by the progress we're seeing on other work that has to take place to support the smelter, the restart of our construction project, and of course over the longer term, the operation of the smelter itself. For example, the grid operator, the national grid company, continues to finalize agreements with the communities through which the high-voltage lines will go.

We believe we continue to have support from all the key important constituencies here, both inside the government and otherwise, and we're committed to be in a position to restart the major project activities during the first half of 2013.

Couple other items. Shelly talked about our new anode plant in the Netherlands. Just to remind you the rationale for this acquisition. We talked about it last time.

Basically three parts. The first I could characterize as relatively defensive. We came to the conclusion based on the fact that our former European suppliers were going in different directions with their businesses that we needed to make captive our European supply, this increasingly important strategic material. And this is the balance and complement, of course, the supply we get from our 40 percent-owned company in China, BHH.

Second, was a more strategic rationale, given that we now will control all of our anode supply, we'll be able to drive more aggressively. For example, procuring larger anodes that are required for both the Grundartangi hot metal expansion and then the production at Helguvik as we go forward.

And then third, the project, i.e., the acquisition and the related capital spending has a good financial return when you compare the constant, which we believe we'll be able to product these anodes in Europe, first is the price at which we believe we'd be paying the former third-party suppliers over time, we see a good financial IRR there.

So we're now finalizing the engineering work for the capital projects that are required for a restart, and to remind you, we expect to spend between $30 million and $35 million over the next 9 to 12 months or so in getting that plant back ready for operations.

One last item that's new. We've recently informed our folks here that we plan to move our headquarters, corporate office from Monterey to Chicago. For those of you who have been following the company for some time, you know that the company's corporate office has been out here in Monterey, California, since the company's founding back in the early and mid-'90s. It goes without saying that in the US, all of our operations, all of our customers, our suppliers, our communities are in the Midwestern and southeastern part of this country.

So the rationale for this move is pretty straightforward. We want to drive closer integration between our corporate staff and our businesses. We'll also obviously make it more efficient for our people to travel to our international operations. We'll be in a better time zone. We'll be closer to a major airport. It's pretty straightforward.

We plan to have the move completed by the middle of 2013, and we will have some costs that'll roll through the income statement here over the next couple quarters related to the move.

With that, Shelly and Ricky, I think we can move to take questions.

Kathy, we're ready for questions.

Thank you. (Operator Instructions) Kuni Chen from CRT Capital Group.

I guess just to start off on Ravenswood, can you just remind us structurally during let's say a period of low aluminum prices, how you'd like to see part of the economics there transfer to the rest of the rate base?

Sure, Kuni. It's pretty straightforward. So again, the first 2 tiers, the tax credit and the -- we'll call it the fixed cost are fixed. So those don't change based on the metal price.

And then the third tier, per your comment, would basically float. It's not unlike the arrangements that we have with the power suppliers in Iceland. So it would be flexible up and down based on the metal price, and it's engineered to I mean, in so many words, to protect the plant's cash flow in simple English. It's engineered to ensure that even the kind of metal prices that we saw, maybe not at the very, very depth that we saw in the spring of 2009, but it's something right up to there, hundreds of dollars below where we are right now that the plant would be at worst breakeven from a cash standpoint.

Basically the gist of that is, though, at a lower metal price, you pay less and --

Precisely.

-- other folks might pay a little bit more?

That's precisely it.

Right. Okay. And I saw some commentary out there in some of the media sources, I think talking about the, as far as Ravenswood goes, kind of the longer term viability of Century as a company. I just wanted to get your take on kind of what that was all about. And I guess why -- what's the downside to West Virginia if you decide to invest $90 million to restart this plant? Why are they looking at kind of the longer term credit picture of the company?

I don't think -- to answer the perhaps the latter -- the ultimate part here of your question first, there's certainly no downside. There's only huge upside as we see it to, as I said, to Ravenswood and the surrounding communities.

I don't know, I do think I know what you're referring to. There was a reference, and I can't remember which media it was in. There are a lot of Kuni constituents out there. I don't know, can't precisely guess as to why some of them would be saying something like that.

Just to get a bit more specific, and this is all, of course, a matter of public record, the PSC's orders and our filings and other constituencies' filings are all a matter of public record.

One of the things that the PSC did put in its order that came out in early October was that to the extent in that tier 3 structure that there was any deficiency -- so any amounts that we would pay because of a low metal price that were below its tariff. Tariff obviously reduced by the support, the $39 million of support. The PSC's idea is that that would be kept in sort of an account, and that their concept is that Century would repay that at the end of the 10-year period. So I think there was some discussion there about what entity in the Century corporate structure would guarantee that amount.

We have, obviously, said that that part of their proposal makes no sense to us. And that's what I referred to when I said that we had -- that there were parts of it that we just couldn't accept. To us that would simply be, frankly, borrowing our losses. And on behalf of our share owners that makes no sense at all. So just speculating, my best guess is that's the kind of thing to which those comments are referring.

Okay. All right. No, that helps clear it up. I'll turn it over to the other folks. Thanks.

David Gagliano from Barclays.

Thanks for taking my question. Hi, I wanted to just ask, on Hawesville, and I know you've talked about this in the past. But I was wondering if we can just quantify the potential cost savings in tens of millions of dollars.

If, for example, you renegotiate Hawesville and you reset the power rate at sort of the current power rate, prevailing power rate, if you're successful in reaching out and resetting that power rate, what's the total dollar impact?

No problem, David. It's a great question, obviously. And so, I mean, rough order of magnitude, if you compare the current power price under the Big Rivers contract to not even the current market power price, but given that it's upward sloping, the average price we could get if we fixed it for a couple-year period, a 3- to 5-year period.

So that's even a little bit higher than the current price again because the curve in that region -- the power for power price in that region is upward sloping. You're talking about a per tonne production cost difference to the smelter of over -- redundant -- over $200 per tonne, well over $200 per tonne in delta there. And then just simply multiplied by the plant's 250,000 tonne capacity, you get a sense right there that it's sort of at a minimum of $50 million EBITDA kind of delta.

Okay. All right. That's perfect. That's very helpful. Now, on another subject, again, it comes up a lot with a lot of companies, so nothing personal. I just want to, and, like you said, a lot of us are doing this remotely, so I would have normally worked this out. But can you just help me understand the liquidity situation? I believe it's $175 million now. I'm doing some quick, back-of-the-envelope. I think it was -- CapEx is call it $15 million a quarter, but then there's -- I'm sorry $15 million a year, I think. But without me -- instead of me guessing here with everybody on the line, can you just walk me through the cash flow situation, sort of the sources and uses --

Sure.

-- over the next year?

Sure. I'll ask Shelly to dive into it. Nothing -- you can't offend us, David, so no offense taken. It's a very reasonable question. So, Shelly, you want to kind of --

Sure.

-- try to attack that?

Sure, I'll take a stab at it. Mike, you can add onto it.

Okay.

So as you said, we're right around $175 million in cash as of quarter end. And we also have $42 million of availability on our revolver. Basically at this point it's only being used for letters of credit. So we have almost full available [lead] there on the remaining piece.

Obviously, cash flow's going to be highly, highly dependent on your metal price. But kind of taking that aside and looking at some of the major cash outflows and inflows, we did have the large refund that I mentioned that we received today in Iceland. That was $28 million. So that will be Q4 inflow.

As you said, we've got our normal maintenance CapEx. We've got the Grundartangi expansion that Mike mentioned. We've got the Vissingen project. I don't think we put any number on that. So just to give you a sense for the restart of the first furnace there, that's going to be about $30 million to $35 million over the next several quarters.

Mike, what are some other major items you can think of?

I think Shelly's got it right, David. The only thing I would mention, she's got it right and you had it right, David, about maintenance CapEx is kind of here at Century $10 million to $15 million. Although, I would note, and you'll remember that during the financial crisis in the latter quarters of '08, and then going to '09, we held it at levels much, much below that, which you can do for a year or 2, but don't want to do for very long because you start impacting reliability. And of course, we wouldn't scrimp a penny in terms of anything directed towards safety or environmental.

So you got kind of $10 million to $15 million in a sort of normal run rate year on maintenance CapEx. And the only thing I would note, Shelly talked about the 2 major projects this coming year that are on the -- that are in the plan. Number one, the first year of the Grundartangi hot metal expansion which we have some large capital items that need to get procured and paid for. And number two, the Vissingen, the anode plant restart CapEx.

Those are highly sort of variable projects, so that while we will make some commitments here probably in the next couple months for some big ticket items. Those can -- if the world gets much, much worse, those can be stopped and started.

Okay. All right. That's helpful. Thank you. I appreciate it.

Sal Tharani from Goldman Sachs.

First of all, hopefully you move to Chicago and we can see you a little more often. And you mentioned all the constituents you're going to be closer, you didn't mention that you'll be closer to a lot of analysts who cover you and perhaps (inaudible).

No comment.

I was wondering a couple things, couple of housekeeping, and then I have some more questions on electricity. The insurance settlement of $8 million, does it go through the P&L?

Yes, it did. It went through the P&L. It was in other income down at the bottom of the P&L.

Okay, got you. And did you give the number for the Grundartangi hot metal expansion?

Yes, we talked about that one before, but I don't think -- thanks for catching it, Sal. I don't think I restated it now. So it's a couple year project. The spending and the activity goes on for about the next 4 years, 2013 through 2016. And the aggregate spending is about $65 million dollars.

That's the total spending?

That's total spending, yes.

Okay. Most of it going to be in the front end where you're going to buy the equipment.

That's a good question. Yes, there's a good chunk of it, especially this coming year that one of the big-ticket and long-lead time items is some upgraded high-voltage equipment. And that'll be in 2013. So roughly maybe a third of that number could be in 2013.

Okay, great. Now, on the electricity, the contract you have at Hawesville, do you know what region is this? Is this facility in [Misa] or [Pejambi]?

It's Misa. Misa, right.

Misa.

Yes.

And also, the new contract is for the power and delivery separate or is it part of one contract?

Well, there's no contract yet, of course. But what would probably happen, and I underscore probably because we're talking about all of this. But we would probably continue to be served by Kenergy, which is the retail supplier today. And by statute, the power supplier in that region that serves Hawesville.

So the way it would -- it could work, it will probably work, is that we would purchase power on the wholesale market and then it would be brought in and Kenergy would -- we'd obviously pay Kenergy to physically supply it to us.

Got you. And that --

So, in essence, I guess it's a short-winded, rather than the long-winded answer I just gave you, 2 separate contracts. But again, this is all sort of subject to the next couple of months worth of discussion.

Got you. And one last question on the [powers]. Are you negotiating a fixed power contract or a floating contract?

Well, the way, again, sorry to give you the weasel words. But the way it would probably work is that you would go out to a party and -- or parties, I should say, given it's a large load here, and contract to physically by the physical power. And then either with that same party or parties, and/or with financial parties, you could make a decision to fix out some or all of that physical power. So there are 2, I guess the simple way to look at it, separate decisions.

Got you. Thank you very much.

Brett Levy from Jefferies and Company.

Did Sal ask if your conference calls are going to get earlier when you move to Chicago?

We can talk about that. How's that? We'll put it on the list. But thank you.

Okay. Also, as you guys look at kind of the political environment and everything else going on in Iceland, was there something that kind of stopped you from doing what you're doing now in terms of the expansion at Grundartangi and that you've reached headline agreement with one of your 2 suppliers at Helguvik? Is there something that's changing that sort of should make us more optimistic that things move forward faster there?

No, I don't -- I mean, Brett, we're getting more optimistic. Obviously, Grundartangi is done. I would note on Grundartangi that there is a requirement, as I think we've -- I know we've talked about in the past. The current operating permit is for 300,000 tonnes. We're now scraping 280,000. So we'll have to apply for -- we think it's a reasonably straightforward process. But we take these processes seriously.

So we'll have to apply for an increase in the operating permit because, as I said, we're going to expand the plant's fixed -- pardon me -- hot metal capacity by 15%. So that'll put us well above 300,000, it goes without saying.

I wouldn't make anything -- just as in the US, I never thought about those 2 items sort of related before. And so I guess, trying to answer your question with as much brevity as possible, there's been really no change in the political or the external environment there. Other than I think people and my colleagues in Iceland would say this more strongly than I could possibly say it, would say that the relevant constituencies in Iceland continue to acknowledge that -- and I'm talking about Helguvik specifically now -- that the project is critical for Iceland, especially southwestern Iceland, the Reykjanes Peninsula.

So I think it's just these things have taken time. They take time in any project. I think they've taken longer here just because of the complex situation, post-financial crisis in Iceland that you're well aware of. So that again, long and rambling answer. But I think briefly no, no real change in the sort of external environment.

And then given the outlook for the sort of 2.5 potential operations in the United States, what are your thoughts on hedging a certain portion of production going into the next several quarters? I think I ask this most quarters. But what --

Yes. No, it's a great question. And believe me, we think about it not quarterly. We think about it daily, weekly. And as you know, because we have done some hedging in the recent past, we are -- open to it is not the right term. We think that at the right time and in the right context, it's the right thing for our company with our profile, our balance sheet, our cost structure, our et cetera, et cetera, et cetera.

Given our cost structure, our plants' breakeven points and all that, and the current metal price, it's kind of difficult to envision doing anything. I mean, you got to go out a couple years out on the curve, out on the screen to see prices that wouldn't be at all conducive to locking something down. And as you know, especially with an environment with this kind of volatility, the price of just sort of standard protection, puts and collars and such is reasonably high.

So we look at it. We like it as part of our strategy at the right time. Right now I would say, Shelly, in the current metal price environment, it would be -- I'd be surprised to see us do anything.

And shame on me for not asking this as a bond guy. But obviously your [core] prices have gotten fairly low, your maturities are relatively close. Is there a particular event, whether it's clarity on Helguvik or any of the US situations that sort of are the lynchpin to wanting to kind of push out your maturities?

No, that's a great question. And as you would hope and -- hope, expect, we've been looking at this very carefully with advisors and such. And I think you're hitting at the right -- you're asking it in the right way, in my opinion, Brett.

I think when you look at where we are right now, if I were to be presumptuous and sit on your side of the table as a credit analyst, the uncertainty at Hawesville though we are confident, I think, in a month or two when our level of confidence, hopefully we can report to you, has gone up even further, and we've kind of checked a couple critical boxes that would be something I would think that I would hope that -- we would hope that investors would look at and say, hey, that's a key risk off the table. And to David Gagliano's question, I can start looking at that kind of pro forma profitability with a lot more confidence.

Thanks very much, guys.

Richard Garchitorena from Credit Suisse.

Thank you, everybody. So my first question is more of an overall broader-based question. But I guess when you look at the issues with the contracts at Hawesville and Ravenswood, and you weigh that against CapEx for new restart projects, what's the IRR? Or what's the cost of capital that you target when you're in discussions, to try and work to a favorable power agreement?

Yes. Look, I don't have to tell you, we don't have a corporate hurdle rate, nor do I think -- do I think that companies ought to. Because we do what I think companies ought to do, certainly project-based companies or companies whose businesses are more project based is look at each of these on its own merits. And given the risks, both financial and technical, I don't have to go on. I'm sure everybody on the other end of this phone knows what I'm talking about. And so we look at each of these differently.

Now, Hawesville is a bit different. There's no capital required there. There's no -- we'd love to be in a position with a market base power price a year from now where we're thinking of capital projects to improve that plan; to lower the operating cost; to increase the efficiency of that plan; to improve the product profile of that plan. Those are all opportunities that could afford -- that could be afforded to us once we have a good and stable outlook about a competitive power price.

But so there's no kind of IRR calculation there per se. We're not investing anything other than, of course, our time and energy, and some modest out-of-pocket legal and other costs in getting this regulatory process done.

Obviously, in Iceland it's quite different. At Grundartangi, you have a project there I just talked about, $65 million in spending over the next 4 years. A very attractive return there based on the incremental footprint.

Just to do the simple math for you and those of you who follow the industry will have the basis of comparison. We're going to spend $65 million, if we're correct, and we think our estimates are quite good to get 40'ish thousand tonnes of incremental capacity. So just slightly over $1,500 per tonne of incremental capacity. New capacity's coming on around the world in Greenfield plants, of course, at 4 and 5 times that installed cost.

So you can start to guess what the IRR there may be. Just because those are incremental tonnes, you're spreading them over a fixed-cost base that's already there, and you don't have to increase. So, a good project.

Ravenswood's the same. Given the power structure that we have envisioned, the return there would be an attractive one. But we need to get the power situation right. Because as I've said, you've got $90 million of spending required, again only half of which is sunk into the ground, the rest is in working capital which it, of course, turns into cash.

Okay, great. And then my other question, in terms of the anode facility, I was just wondering if you could give us some color in terms of how we should think about the benefits going forward, once it's up and running, relative to current costs?

Sure. You want to take this one?

Yes. So, obviously, we're going to be making our own anodes now through the Grundartangi facility, which has historically purchased and brought into Iceland pre-baked anodes. And the expectation is that as we produce them, our builds, we'll be able to bring down the average cost of those anodes versus buying them from a third-party supplier.

We'll also be able to bring in larger anodes, which will be part of the expansion tonnes that Mike talked about. So that's also a supportive factor as well.

Great, thank you.

Tim Hayes from Davenport and Company.

Two questions just to make sure, you haven't bought any power yet forward for Hawesville, correct?

No, absolutely not. And remember we couldn't, wouldn't, it would be pure speculation until we had an agreed deal with a regulator signing off. So, absolutely not.

Okay. That's what -- and then the expansion at Grundartangi, any thoughts on how much that would lower the operating cost?

Well, we'll give you when we, as we normally do, when we give you our assumptions for 2013, and the next -- in the call. And this will be in February, Tim, we'll give you specific estimates on spending for 2013, increased production and shipment volume for 2013, and, as you say, the impact on the OpEx.

We're right in the middle of our planning process now. We had our annual planning meeting just last week in Kentucky, or two -- actually last week in Kentucky. And we'll be presenting our plan per our normal process, to our Board in early December. And so we'll be ready to talk with you about that in early 2013.

Okay. Very good, thanks.

Timna Tanners from Bank of America.

Good afternoon, and congratulations and welcome back to Shelly.

Thanks, Timna.

I just want to make sure I understand. I'm sorry if I missed some of this on the call - a little hectic over here. But I mean, what should we be thinking of as outsiders in terms of catalysts or things on the horizon that are going to help us know whether or not these rate cases are getting decided or Helguvik's expansion goes ahead? Like what can we track externally? And how are we going to know when those are making progress or not?

Sure. That's a good question, Timna. So in West Virginia, again, that's an active process in front of the State Public Service Commission. And when we make a filing or, as I said, or the PSC makes a filing, it's a matter of public record. You can go on their website and see it.

Of course, we have an obligation, which I hope people believe we take seriously when there's a material event that happens, we'll obviously issue a press release. And if it's really material, we'll hold a special conference call. But we'll keep you up-to-date through then and obviously update you quarterly through these calls. But if you want to follow sort of the back and forth of it, it's a matter of public record.

Now, in Kentucky, there's not a public process yet. We're speaking with the current power providers. And when we are ready, we jointly are ready, it'll come in the form of a filing that the power company will make with the PSC there. And I imagine, I can't speak with specificity, but I imagine that that will also be a matter of public record in that state as well. And so you can -- you'll be able to follow that. Again, when we come to key points, we'll certainly disclose them through a press release.

On Helguvik, you really need to rely on us. There's no sort of public -- we're in bespoke negotiations with 2 private companies. One is actually owned by the municipality of Reykjavik, the capital, and one is owned by private investors, 60% of it, I should say, owned by a listed Canadian company, listed on the Toronto exchange. And so there I think you have to rely on our updating you, our disclosures, certainly our press release, if we come to a material point here in order to get updates there.

Okay. That's helpful. And the other thing I was going to ask is, we're talking so much about power, and I understand it's a huge part of the cost structure. But is there anything else that you want to highlight that you see ahead in terms of cost pressure or opportunities going forward?

That's a great question. I think Shelly talked about carbon.

Yes.

And we've seen structural or -- I shouldn't say so much structural. But we've seen decreases in the cost of the carbon that we make in the US and the third-party anodes that we buy currently from China and Europe for Iceland, as principally, as coke prices have come down reasonably significantly here over the last 6 to 9 months.

Across the rest of the spectrum, things are reasonable stable at this point in time. Shelly talked about where alumina is rating. Both on a spot basis and on a contract basis, it's trading around 16% of the LME. That would be an FOB refinery basis, so you'd have to add on freight from wherever you're taking it from and moving it to. But that market has been ,Shelly, reasonably stable here over the last 6 to 12 months.

It has. And, obviously, we're contracted out all of next year at percentage LME contracts. So our elemental cost will float with the metal price.

But it's something that we think about longer term, of course. As Shelly said, we start to develop a small short position in 2014, and then larger in 2015, as some of the larger tolls in Iceland start to come off.

Okay. Super helpful, thank you.

Our final question comes from the line of Paul Massoud from Stifel Nicolaus.

Thanks for taking my question.

I wanted to ask about Helguvik. If I remember correctly, you had arranged about $250 million in financing from some European banks, I think before the financial crisis. And so I guess my question is, one, is that the right figure? Do I have that right?

And, two, when should we start to think about you guys stepping forward on the financing side for expanding at Helguvik? I mean, can we assume that it's going to be around the time that you get say 2 headline agreements or agreements in principle with both the power contractors? Or should we assume there needs to be much more of a solid agreement before you actually start approaching the financing question.

Paul, just on size, I think you've still got the right size, that has not changed. As you mentioned, these are agreements that we were working on quite some time ago, not as long as you indicated. It was after the financial crisis. But it's been several years now.

So there's a significant amount of work that would need to go into refreshing those arrangements and getting it to a position where everyone's ready to move forward again. But as you indicate, the critical item will be having the assurance that we need on the power contracts. And once we have that, we'll be in a position to very quickly move forward on the financing again.

The latter part of your question, Paul, I think it's 2 things. I think it's agreements with those 2 power suppliers. So we've only got 2, so we need to -- and whether it's an agreement in principle or a signed contract will depend on a variety of factors. Principally, what do you have to do to take a signed contract -- or an agreement principle to a contract. What other things do you need to accomplish or conditions that need to be satisfied or all that kind of stuff.

There are also other things that need to happen in Iceland. As I said, I gave one example, the national grid company called [Lunsnet] needs to conclude agreements with all the municipalities that are involved here. There are other things that -- we told you, we're largely completed with our own permitting, but the power companies need to make sure. And we need to be satisfied that they have all their permitting in place.

Obviously, we're going to be very cautious given the amount of money we're talking about here that we're not going to go forward; A, to re-start project spending; and/or B, to finalize or certainly take down any financing until we are quite satisfied that the project is a go.

But as Shelly said, we have a structure in place that might need to get tweaked, depending on sort of what the world looks like and the European financing markets as we get closer to a restart date.

But we restudied a bunch of alternatives. There are other structures that are out there. The Icelandic financing institutions have strengthened quite a bit over time and are quite anxious to participate here on a larger scale than they were able to do, just sort of a year ago.

So we're certainly continuing to keep all of it warm. But from a finalization standpoint, we're got to get the project to a more final state, which, again, we think -- we have reasonable confidence here we'll be able to do over the next couple months.

Thanks. I guess maybe just one other question on that is do you see any sources of potential inflation in the original cost Helguvik that may have popped up since you put out your original estimates for --?

Sure. That's a great question. So we've got a team. In fact, most of the spending that's going on going forward in addition to the site activity where we're putting siding and roofing on the building and such, is our team doing exactly this kind of engineering work, looking at costs that have come up - some have. Some have decreased as [they slack] manufacturing capacity out amongst the various suppliers.

We've had, up to the plus side, options open up as more suppliers in developing parts of the world, for example, get qualified to supply major pieces of equipment. We're also looking at the reduction technology, because a lot has changed in the modernity of that reduction technology that was the world's most modern back in '06 and '07 when we signed those technology agreements. But the good news is the world has changed, i.e. that technology from that supplier has become more efficient. And so we're doing a lot of work there.

And so it's a compendium of things. But our team is working on driving that cost down to offset sort of the normal inflation that you correctly referenced over the last 5 years and, hopefully, even do better than that.

Thanks again for taking the questions.

And there are no further questions at this time. Please go ahead.

I think we have nothing further, other than again to thank everybody for joining us, to wish those in the New York and nearby regions well, and to tell you that we'll talk to you again at the end of February, as we normally do to talk about full-year earnings, or certainly before, if we've got anything to say. Thanks again.

Thanks, Kathy.

You're welcome. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.