Century Aluminum Co (CENX) 2014 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Third Quarter 2014 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator instructions). As a reminder this conference is being recorded. Now I'll turn the conference over to Mr. Peter Trpkovski, please go ahead.

Thank you very much Paul and good afternoon everyone and welcome to the conference call. Today's presentation is available on our Web site, www.centuryaluminum.com. We use our Web site as a means of disclosing material information about the company after complying with Regulation FD. I would also 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 involving 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 slide and press release for a full discussion of these risks and uncertainties. In addition, we've included some non-GAAP financial measures in our discussion; reconciliations for the most comparable GAAP financial measures can be found in the appendix to today's presentation and our Web site.

And now I'd like to introduce Mike Bless, Century's President and Chief Executive Officer.

Thanks very much Pete and thanks to all of you for joining us this afternoon. If we could just move along to Slide 4 please I'd like to give you a quick update of the last couple of months since we spoke with you in late July.

We're pleased with the company's progress this quarter and the plants are generally operating well. That having been said, Hawesville did continue to struggle during the quarter with the aftermath of the power modulations that we experienced in the spring and early summer. As you recall, we spoke to you about this during the July call. The good news is that we've seen very good improvement during the last couple of weeks with the situation getting back to very near normal and in a few minutes I'll summarize the operational issues that we've faced during the quarter and Rick will give you some detail on the financial impact that they had during this third quarter.

So quick here now on this slide let me give you a summary of some of major developments over the last couple of months. We were really pleased last week to have announced the signing of an agreement to purchase the remaining interest in Mt. Holly. I'm sure everybody saw that.

As we've said time and time again, this is a superb plant in virtually every area. It's got a great focus on safety first and foremost with a record of excellent results to prove that. The plants got a high-quality group of employees and a great management team and they've been producing excellent production efficiencies at an attractive controllable conversion cost.

Lastly, we've spoken with you about the good value-added mix at the plant and importantly Mt. Holly rests in the great local community and a very pro-business state and I'll make some more comments about that in a moment.

As we've discussed many times, the issue with Mt. Holly remains the cost of electric power. As you remember, we entered into a 3.5 year arrangement [to buy] the majority of our power requirement at Mt. Holly off system and that contract expires in December of 2015.

We've been discussing that post-2015 structure with the power provider earlier in the year but regrettably at that time we were unable to reach an agreement and thus we were forced to five the post-2015 termination notice in June and you'll recall we spoke about that to you, with you, in July.

Despite all of its positive attributes, the plant simply isn't viable under the terms that were being proposed at the time. Just to put it in perspective under those terms, Mt. Holly will be paying by far the highest power rate of any smelter in the U.S.

We firmly believe that structure exists that should satisfy all of the constituencies. The plant is obviously very important to the local community and to the regional economy. It should be amongst the most competitive smelters in North America. As in Kentucky, we're absolutely committed to running this plant for the long-term. We're not interested in settling for a short-term patch here.

We've been working on a variety of structures over the last couple of months and in the coming time we're going to be sitting down with all of the relevant constituencies and, again, I'll make some more comments about that in a few minutes.

As it was in Kentucky, we think the work will be hard here but we're confident in finding a path forward. Mt. Holly benefits from strong state and local political and business leadership who understand the relevant issues and this was one of the attractive attributes of the plant as we've assessed it over time.

We think this will be a really good transaction for Century. Rick will provide some detail on the terms of the deal itself but let me just give you a little bit of perspective at a high level. As you've seen, the base purchase price is $67.5 million in cash. Based on the metal price over the next 14 months, that amount could go as high as $90 million or as low as $55 million.

To give you a sense of the profitability, 50% of the plants that we're buying would have added about $11 million of EBITDA to our Q3 results so obviously $44 million on an annualized run rate basis based on Q3 performance.

To give you a little bit of further perspective, based on current natural gas prices and current forward metal prices, over the coming 14 months, or I should say the 13 months from the projected closing date of the transaction at the end of November through the expiry of the power contract at the end of December 2015, that 13-month period, we've earned well over $100 million of EBITDA, again, from 100% of the plant. Of course though we're taking the risk of the post 2015 power situation as we did at Sebree.

Okay, let's move along a little bit, I'll make some more comments as I said about Mt. Holly in here in a few moments. As expected, power prices in the U.S. Midwest generally and at our plants, in particular, continued to moderate that closer to historical norms during the quarter. The weighted average delivered price at our two plants, that's the average of the two plants, went down 10% Q3 over Q2 to under $37 a megawatt hour, that's fully delivered price. We obviously continue to watch these markets very closely.

Moving along, as we expected, we spoke with you last time about this we've finalized the decision now to move forward with the rebuild of the second big furnace at Vlissingen, that's our anode plant in the Netherlands obviously.

Just to give you some, a reminder here, we paid $13 million for the plant when we first bought it out of bankruptcy. We spent about $35 million in addition to refurbish and modernize the plants infrastructure and we also rebuilt one of the two baking ovens. Before moving forward with the investment to rebuild the second oven we wanted to ensure that we could, A, make a quality product and, B, do it at the forecast conversion cost. We've been doing those two things successfully since the beginning of the year so we've now taken the decision to rebuild the second furnace. This will be a $15 million project, obviously much smaller than the first project given that we don?t have to upgrade any of the infrastructure anymore, that was all done in the first project.

The incremental production will come online in late 2015 and at that time the complete plan will have an annual capacity of 150 tons of carbon anodes that will be sufficient for almost all of (inaudible) [County's] current requirement.

The investment will lower the plants conversion costs by over $100 per metric ton thus producing an annual benefit of $15 million at least thus producing a simple payback for this investment of about a year.

Lastly, the new value-added production has come on stream at both Sebree and Grundartangi; we've spoken with you about this through the year-to-date and we're on track to produce commercial quantities at both plants in 2015.

We're looking at about 50,000 tons in each product family at each plant in 2015. we experienced during the quarter some normal small [run-in] issues but we believe we've worked our way out of this, all the kinks out of the system. They're very different products, obviously different plants, different circumstances and all of that but coincidently each investment was about the same magnitude about $2.5 million each and the simple payback on each investment is less than six months so we're excited about that.

Okay, if you could turn to Slide 5 please just a couple of quick comments about the market environment. The cash LME price first saw a rapid rise from the end of June it was about $1850 at the end of June to a high of over $2100 per ton at the end of August. So in just those two months we saw a 14% increase in the cash commodity price.

Based on obviously amongst other things, the sentiment which we believe is now turning solidly towards a growing perception of building deficits in the primary aluminum markets.

You've obviously seen the turbulent period in all financial markets since late July with aluminum obviously subject to the same trends as other asset classes especially so-called risk assets.

Cash price promptly feel straight back to almost the 30th of June level making a low of $1870 a ton in early October and as you've seen, assuming you follow these markets, its come back nicely since then with the unofficial price this afternoon closing at $2030. Bottom line, the average cash price during the quarter was $1987, that's up 11% from the average cash price in Q2.

A couple of comments on the fundamental picture of the market which we think continues to look good; year-to-date global consumption is up about 3.5% ex-China with North America finishing especially strong well over 4% and that rate should be increasing nicely into 2015. You'll obviously continue to see strong trends in sectors like automotive and aerospace.

China opposite picture, we're seeing a decreasing rate of growth yet the pace is obviously still well in excess of GDP and underlying industrial production. The last couple of quarters we've seen consumption growth in the mid teens; part of this, of course, is based on the governments [continuous] programs. The forecast going into 2015 show that without any incremental government programs this rate of growth could fall into the mid to high single digits [sort of] in the 6% to 8% rate going into 2015.

This contrasts with the supply picture in China. If you recall we talked last time when [we thought] about two million tons of capacity had closed by the end of last year and the forecast showed that about two-thirds of that has come back to date and that has helped produce a net production growth year-to-date in China of about 8%.

Forecast called for that rate to accelerate potentially into the low double-digits in 2015, kind of the 10% to 12% rate. Supply growth in the rest of the world is quite different. The current pace and the forecast pace for the next couple of quarters is for 1% growth or below and that includes some small bits of curtailed capacity that we've seen coming back online principally in Europe.

All of these data yield a mixed balance picture in the world excluding China. We see a 2014 deficit approaching a million tons and this trend continuing into 2015.

In China based on the data that which I just talked, you're seeing a risk of supply growth outrunning demand growth in 2015 and perhaps this confirmation of that we're seeing some reasonable quantities of semi-fabricated products currently coming out of China.

A couple of comments on the physical markets, the global LME stocks are down about a million tons year-to-date and the physical markets themselves remain tight as you've seen delivery premiums in the EU and the U.S. are at $500 a ton and above. We think conditions remain in place for these levels to be sustained for at least the next couple of quarters but as we've said, we believe that at some point in the future they've got to start coming down.

In addition, product premiums continue to strengthen; give you an example in Europe billet premiums are now at $900 a metric ton or even a little bit above.

Just a couple of quick comments on alumina before I move on; the index price has traded up substantially over the last month or so with the Australian price now at about $355 per metric ton with a discount in the Atlantic market.

With some short-term factors at play here we've seen some reasonably large refinery outages in China but we're also carefully watching the impact of the longer-term trends; perhaps things like (inaudible) supplies in China due to new Indonesian resource rules.

Okay, if we can move along to Slide 6 please, just a couple of quick comments on the operations before I turn you over to Rick. As you can see, most importantly we had a pretty good safety performance this quarter. Sebree brought just a few more incidents than Q2 but this was somewhat related to the law of small numbers, thus, importantly none of these incidents was severe in any way.

You see here the impact of the upset condition at Hawesville with production down due to the larger than normal number of cells out of service due to the instability from the power modulation.

Rick will also talk about our increased spending to ramp up our pot rebuild capacity to get those cells back into service and address some of the other related issues.

As I said a few minutes ago, the number of cells offline is now significantly reduced over the last couple of weeks and we're now very close to our normal level. We also saw a fall-off in high purity metal production during the quarter and this has now come back nicely over the last couple of weeks. We believe we're out of the woods but Hawesville's condition did have a meaningful impact on Q3 results and, again, Rick will give you some details here in just a moment or two.

The other plants look good as you can see Grundartangi is back to full production after the Q2 power curtailment that we experienced due to the low reservoir levels in Iceland. Also at Hawesville as you see right here, production metrics were generally off across the board and, again, they're now recovering. And with that I will hand it over to Rick.

Thanks Mike. Before we get into our third quarter financial performance let's review some of the details of the recently announced acquisition. I'm on Slide 7 of the presentation.

As Mike noted, we're acquiring 50.3% interest in Mt. Holly, so $67.5 million subject to certain adjustments with the deal anticipated too close in the fourth quarter at the end of November.

There's an earn-out provision that could result in an adjustment to the purchase, up or down, based on the movement in the Midwest transaction price from July 2, 2014 through December 31, 2015.

The maximum adjusted cash price under this provision of the agreement is $90 million and the minimum adjusted price is $55 million. The acquisition also includes an adjustment to put the parties in the economic position as if Century had owned 100% of Mt. Holly as of October 1. The cash adjustment will be based on the results of the business over the measurement period from October 1, 2014 through the closing date. The calculation and settlement will happen post-closing as detailed in the agreement.

Lastly, there is a working capital adjustment mechanism related to the partnership however, this mechanism excludes aluminum, alumina sorry, and the related liabilities, finished good and trade receivables.

It's important to remind everyone that this partnership has historically operated as a tolling business so we are anticipating a net working capital investment post closing. Pursuant to the agreement Alcoa fund served current existing liabilities to the partnership at closing estimated at $11 million. We anticipate additional working capital needed of approximately $10 million to fund alumina and other costs in the months following the close.

Both parties have agreed to fund their respective share of the GAAP pension liabilities for Mt. Holly. In addition, we will provide the incremental funding required by law to get to the PBGC fully funded status of a terminated plant. The amount of this funding will be determined by actuarial calculations based on the existing plant assets performance due to closing date.

Under the agreement we have an option to defer these payments for about 12 months. Alcoa funded share of the Mt. Holly OPEB liability estimated at $2 million at closing.

The deal will result in approximately 150 tons of incremental annual capacity had we owned 100% of the business in the third quarter our reported EBITDA would have increased by $11 million as Mike previously discussed.

However, given the timing the closing of the transaction, the deal was expected to have a minimal impact on our 2014 results but should be accretive to our results in 2015.

So now let's turn to Slide 8 of the presentation and I'll provide some additional details on the third quarter financial performance.

Our net sales were up 9% from the second quarter reflecting the combined impact of continued favorable market conditions as well as the increased volumes quarter-over-quarter.

Looking at the market impact on a one month lag, the average cash LME and Midwest premium transaction price were up approximately 10%. Realized prices in the U.S. were up 9% in the third quarter just a little bit lower than the market prices reflecting an unfavorable mix of lower priced products sequentially, specifically hospital saw reduction in high purity metal quarter-over-quarter as we dealt with the impact of power modulations in early spring and summer as previously discussed.

This resulted in a loss production volume of just over 2000 tons consistent with our discussion on the last [quarter]. The instability during this time also resulted in increased cost as we rapidly moved to get all pots back online. I'll talk more about that impact later.

As Mike noted, this effort has continued through the last few weeks and we are currently close to normal production level. The European duty paid price increased 12% in the third quarter while realized prices in Iceland increased only 8% quarter-over-quarter. This is reflective of our remaining tolling contracts and reduced direct sales on increased volume resulting in a heavier weighting of lower priced tolling shipments quarter-over-quarter. As a reminder, we only receive a portion of the premium on our tolling sale.

Iceland have direct shipments of approximately 38,000 tons in the third quarter, a decrease of almost 4% from the second quarter.

With the shift to direct sales, as we've previously discussed, title transfer for revenue recognition occurs at the port versus at our facility. As a result, almost 3500 tons were awaiting title transfer at the end of the third quarter resulting in a quarter-over-quarter decline in direct sales volume.

Iceland production volume, however, increased 4000 tons in the quarter and tolling sales were up 3800 tons or 12%. On a consolidated basis, global shipments were up 1% in the third quarter versus the second quarter of 2014 with U.S. shipments flat and Iceland shipments up 3% sequentially.

Turning our attention to operating profit; we're reporting an adjusted EBITDA this quarter of $80 million, an increase of $36 million when compared to the $44 million adjusted EBITDA in the second quarter of 2014. The drivers of this [improvement in our] favorable impact of market conditions on pricing and power costs partially offset by increases in other operating costs and selling general administrative expenses.

Higher all-in pricing including arising LME, regional premiums, value-added product premiums, net of the impact of the LME on our alumina and power costs all combined to improve operating profit by $37 million.

Now let's briefly visit our power cost discussion from the last quarter as prices have stabilized nicely. Taking a look at Slide 9 lower power prices improve operating profit by $9 million quarter-over-quarter. Hawesville power costs were down $3 million and Sebree power costs are down $4 million from the second quarter; both consistent with our discussions last quarter so our average [delivered] price to Kentucky in the third quarter was approximately $37 per megawatt hour and that's down from the $41 occurred in the second quarter.

Slide 9 includes, again, the historical and forward pricing information for the Indiana hub which is the closest liquid [node] to our Kentucky operations. So you need to add another $3 to $4 per megawatt hour to get to the delivered price.

The graph shows average Indiana hub prices year-to-date of $42 per megawatt hour, the forward view of undelivered prices for Indiana hub would suggest fourth quarter 2014 undelivered prices of approximately $34 per megawatt hour and this is consistent with what we are currently experiencing in the fourth quarter to date.

2015 through 2016, 2017 rather, forward prices are at approximately $36 per megawatt hour. As a reminder, every dollar per megawatt hour impacts EBITDA for our Kentucky operations for approximately $8 million per year.

Mt. Holly power costs were down $2 million driven by a decline in natural gas prices with average prices in the low fours during the third quarter versus the mid to high fours experienced in the second quarter of 2014.

Natural gas prices are currently under $3.75. Operating costs increased $10 million in the third quarter of 2014, the cost associated with getting Hawesville pot line stabilized and the resulting impact of lower production volumes on fixed cost absorption collectively increased operating costs $5 million during the quarter.

The cost element of this increase consisted primarily of increased pot relining costs including outside labor, materials and supplies. Sebree incurred an incremental $1.3 million in costs associated with finalizing its new labor contract. Lastly, Sebree and Grundartangi both incurred start-up costs during the third quarter (inaudible) the new small [form foundry] and alloy capacity online.

SG&A costs increased approximately $2 million and this is attributable primarily to an increase in stock compensation expense drive by the rise in our stock price during the quarter as well as transaction costs associated with the Mt. Holly deal.

So, favorable market conditions partially offset by increased operating costs and SG&A expenses drove a net operating profit improvement resulting in adjusted earnings per share of $0.52 for the quarter, an increase of $0.30 from the second quarter of 2014.

Moving on to liquidity let's turn to Slide 10. Cash increased during the quarter by $72 million, the increase in adjusted operating profit being the obvious driver. As projected, capital spending in the third quarter increased to $15 million, up $6 million from the second quarter. This increase reflects the plan spending on our anode facility in the Netherlands and continued investment in our smelters including the expansion [project] at Grundartangi.

We expect our spending in 2014 to come in at approximately $60 million at the top end of our previous range of $50 to $60 million. Taxes during the quarter primarily reflected temporary withholding taxes in Iceland. The working capital increase is driven by favorable accounts receivable payment terms negotiated during the quarter and timing of liability payments.

There were no outstanding borrowings under our revolver other than the letters of credit and available liquidity increased by $69 million. During the quarter [we retired at] maturity the remaining 2014 senior unsecured notes carried at $2.6 million.

Now let's take a look at our fourth quarter and the impact that we expect Mt. Holly to have on our liquidity position. We expect to fund this acquisition using a combination of available cash in the revolver. Slide 11 provides a forecast view of the liquidity post acquisition holding LME and power price at Q3 levels assuming no significant movement in working capital.

With those assumptions we should generate another $80 million in EBITDA in the fourth quarter. As previously discussed, the purchase price for the transaction is $60.5 million subject to several adjustment mechanisms of which likely none will be finalized by the end of the fourth quarter.

As noted earlier, we will have to invest in working capital as we move away from the historical tolling structure but believe the majority of this investment will happen [under] the first quarter of 2015.

We expect favorable withholding tax refunds in Iceland and we'll make our semi-annual interest payment in the fourth quarter as well. We also see capital spending at $20 million.

With these assumptions we would end the quarter with cash just a little bit under where we ended the third quarter while there may be an increase in our outstanding lines of credit. As we take our business, as we take on, this new business we don?t believe the acquisition will have a significant impact on our liquidity.

With that I'll now turn the call back to Mike to discuss the fourth quarter [power read].

Thanks Rick very much. If we could turn to Slide 12 please as Rick said, I just want to give you a quick sketch of what we'll be working on these next couple of months and then we want to get right to your questions.

Obviously the finalization of the Mt. Holly transaction is at the top of the list. We expect the closing at the end of November or certainly by the end of the quarter. We're currently engaged in discussions with customers and suppliers regarding 2015 business as you would expect. We're preparing for the normal integration activities relating to employees, finance and business systems and other matters. Most important during these next couple of months will be keeping the folks at Mt. Holly working safety and motivated during this period of uncertainty due to the power contract.

I don?t want to make light of this, this is a real, real challenge; we faced the exact same issues at Hawesville and Sebree before those power contracts were approved the year before last.

The emphasis also will now be on restarting discussions, as I said, on the post 2015 power contract. The complex series of issues with which we're dealing, it's a different situation than Kentucky but many of the underlying concepts are the same. Though the expiry date is 14 months away, we think it's in the best interest of all parties to get this done with a real sense of urgency and in that respect we'll begin meeting with all the key constituencies in the near future.

Difficult for us to gauge at this point exactly what the successful structure will look like, we've done a lot of work and firmly believe that a solution exists that should satisfy all parties. As I said before, the plant simply isn't viable at the levels that were being discussed earlier in the year; do we need to roll up our sleeves and find a different path?

Moving along we'll be finalizing our business planning process during the next couple of months. As you'll recall, we've talked to you in the past that we're considering some significant investments in both the U.S. and in Iceland in value-added product capacity. These kinds of investments require pretty long-term planning especially given the key, the attractive nature, of the key markets; the important equipment had some significant lead times.

If we do decide to move forward the capex process would take about 18 months. 9Thusly] we'd see some production in late 2016 but no full-scale production until 2017. We'll update you on where we are when we give you the highlights of our 2015 plan when we speak with you in February.

Obviously any proposed project would be compared to an alternate deployment of the excess cash flow that we're generating. Around the current market conditions, the company should be producing very good cash flow in 2015 and thus our capital allocation policy will be an area of major focus as we enter 2015.

A couple of other comments; the local transmission bottlenecks remain an issue for the Kentucky plants. This is more cued for Hawesville which sits in a relatively weak load pocket. The specific transmission weaknesses are well known and several potential solutions exist (inaudible) working.

This is only a risk on days with unusual conditions; a couple of examples obviously the very high demand that we saw in the very cold months of January and February and number two, during the shoulder seasons in the spring and fall when the utilities proactively take generation and transmission out of service for regular maintenance.

We obviously saw the negative results of that in May which, of course, have lead to the power issues with which we've been dealing at ? or the pot issues with which we've been dealing at Hawesville but we saw pretty benign conditions in September. We need to find a long-term solution here, as we've said, Hawesville's viability is an issue with this long-tail risk going forward.

This very real issue also effectively prevents any major economic development from occurring in this region in Kentucky and thus we believe it will have the attention of the local, political and business leadership.

Lastly, at Ravenswood we've continued in an active dialogue with the power company and we continue to have the very real goal to have a structure to present in Q4 for the power.

And with that Pete, I think we can move along to Q&A.

Thanks Mike and Paul, can you facilitate the Q&A session?

Thank you very much. (Operator instructions.) And our first question will come from Sal Tharani with Goldman Sachs, please go ahead.

Thank you. Can you just give us a little bit of color on how to model the minority interest going forward?

The minority interest in -- are you speaking about Mt. Holly or I --

No, no, I mean, what you have been -- since last quarter are we seeing a minority interest in the PNL and the income statement?

Oh, I'm sorry Sal. That relates to our investment in our anode affiliate in China, BHH and that's kind of a hard one to model Sal because BHH basically has two businesses; one is a supply to Grundartangi, to our [cells], and the other is a supply to the local China market and, of course, the supply to Century, to (inaudible) has been relatively constant but the China market, as you well know, is a much shorter term market, it goes up and down and up and down. I'm not sure I got the question. That is a tough one here. I wouldn?t -- I can't, we can't, give you any sort of parameters to model in there.

Okay. Also the electricity contract at the Mt. Holly, I understand it is in a different structure which is MISO versus what you had in Kentucky; how -- what are the options you have? Is there, are there, more than one power suppliers in the state or is it like Kentucky where you had only one supplier?

It's the other way around of course. So Kentucky is MISO where you were buying on the market. In Mt. Holly, Mt. Holly is in a, and I'll put quotes around the word market, is in a "market" that's referred to as [VACAR] which stands for Virginia and the Carolinas obviously. It's not an organized market in the true sense but MISO is. You can't go to your Bloomberg screen and look at the price for [VACAR], it's a bilateral market. So the answer to the question is there's lots of suppliers in [VACAR] but you've got to go and do individual deals with them rather than buying from the market.

For example, a deal into which we entered now almost 2.5 years ago that expires in 14 months, that was obviously a one-on-one transaction. The supplier there, the generator, the place from which the power's coming happens to be actually outside of [VACAR], it happens to be coming from a natural gas-fired generator in the State of Alabama and obviously it's transmitted to us by the local power provider.

But it's, to your question perhaps, quite a different situation than is Kentucky which is in MISO.

And your goal is to deal with the same company which is supplying right now?

Oh no Sal, truly it could be one ? it could be the actual power provider, public service company of South Carolina, Santee Cooper and we'd be very pleased to reach a result with them that made sense for both parties.

It could be a third-party like the one with which we're dealing today or different ones. We've had inquiries and contacts from lots or it could be a combination. In fact, today it is a combination I should say. I said majority, we get three quarters-ish of our power from that off system resource and the rest from the historical power provider and a solution like that for the post-2015 could well make sense. It's just, it's too early to tell what it's going to be.

Okay, I have just one more if you don?t mind.

No.

You gave this $11 million EBITDA, if you would have owned Mt. Holly's 50%, what would it be if you had the same electricity price as Kentucky also during the quarter?

Oh gosh, I'm not going to cite that other than to say lower. A good -- pardon me, electricity price is a good deal higher so the EBITDA would be a good deal higher.

Okay, great, thank you.

Yep.

Thank you. Our next question in the queue will come from Jorge Beristain with Deutsche Bank, please go ahead.

Good afternoon guys, Jorge with DB. My question is are you seeing or what is it that's giving you confidence that you would be able to successfully renegotiate the power at Mt. Holly? Could you give us any indication of changing community support or government support or any kind of [green shoots] you could talk to?

No, thanks Jorge, that's a good question. I mean, we think we will have that kind of support but our confidence is based solely in the economics at which we've looked and as we dissected the various analyses that are relevant to trying to come up with what kind of structure makes sense and from what type of sources, as I just said to Sal, it's strictly based on that. It's not based on those kind of extraneous things which could be important but we certainly wouldn't have the confidence that we do if we didn?t believe like the base market economics made sense.

As I said, there's no certainties, we had no certainties in Kentucky when we terminated Hawesville's power contract and when we agreed to buy Sebree but, you know, obviously we wouldn't be moving forward with the acquisition of Mt. Holly if we didn't have a reasonable confidence that there's a way through.

And just given all of the proliferation of natural gas in the U.S., just getting sort of like a onsite independent power producer, is that something that's even legally possible?

Onsite you mean building a generator?

Yes but having a third-party do it?

Yeah, I mean we've had people approach, ITP's, approach us to do exactly that. I guess I'd say that could be a longer-term solution but right now there's excess natural gas-fired powers, Rick said the price, I haven't seen it today, but, you know, the spot price was $367, shy of $370, Pete's giving me a thumbs up here, shy of $370 yesterday and there's capacity and excess generation that are out there and so that's a good idea and we've had some inquiries on that but there's big blocks of available capacity that are out there right now it's just a question of how you obviously structure and negotiate the right deal.

Great and sorry if I could just clarify as well on the EBITDA, just to clarify, the $11 million incremental EBITDA that you would have made, that would be assuming for the full third quarter consolidation of the 50%?

That's correct.

Okay, so the annualized is 44%?

Sure at the third quarter prices, yeah. You got it.

Okay and so just one last question if I may, just on your comments about the supply demand globally, obviously we're aware ex-China, everything's cleaned up nicely, but you know the restart of some of these Chinese smelters is a concern and we're seeing this in the steel market as well but in steels there's been some talk of maybe China taking away export rebates and I understand in the aluminum side there they're moving up the value chain to export semi's. Could you comment? Are the semi's also facing an export rebate and is that something that you've heard if that could be taken away as a way for the government to sort of reign in rogue exports?

You ask an excellent question in my opinion. So, a couple of years ago, I can't remember what the couple was but I'll go back and look, the duty regime on both [unraw], primary and semi-fab on the other hand was the same and then they changed it and this was probably three or four years ago, [put a gun] to my head, and everybody, everybody -- and a lot of the production moved to semi's and a lot of the semi-fab stuff is not semi-fabricated products in the classical sense of the business it's, to be blunt, people getting around playing the arbitrage in the duties and making a very minor "value added" improvement to a primary product to qualify as [unraw], as semi-fab, pardon me.

And so perhaps to your point, Jorge, there's been some rumors that the government obviously is well aware of this that they might move to kind of correct that arbitrage there but we're not, long winded answer, aware of anything sort of in the imminent (inaudible).

Perfect, thanks very much.

Thank you.

Thank you. Our next question in queue will come from Timna Tanner with Bank of America, please go ahead.

Yeah, hi good afternoon guys.

Hi Timna.

So I'm going to ask one question on Mt. Holly and then I'm hoping you can provide us some help on all of the other moving parts but on Mt. Holly, just I want to just clarify that it also adds to your NOL's and can you use your existing NOL's, is that fair?

It wouldn't -- Rick, go ahead sorry.

It wouldn?t add to our existing NOL's. They have NOL's of their own that we can use in Mt. Holly, for Mt. Holly.

But I suppose, Timna, maybe, and I'm guessing at the [inference] in the last part of the question, it will increase the base of taxable income against which we can use the NOL's that we have.

Okay, all right. Thank you.

Sure.

Any idea why -- is there anything you can share with us in terms of why Alcoa decided to, you know, divest its stake, anything you can say on that?

No, we don?t -- as you -- A, we don?t know and B, we would never speak for a partner like them, a very good and long-term partner or any third-party, you have to ask them.

Of course, that's fair. All right and so you have so many moving parts right now between expansion at Grundartangi and the talk still at Helguvik and Ravenswood, so as far as some of these other projects and, you know, you clearly have made the decision to make the investment in anodes but can you help us prioritize or give us a timeline on when to start thinking about potential other projects?

Sure, I mean, as I said, we're hoping to, no promises, and it will depend, we're not going to rush it of course for a February call with you guys but I would, we would, hope as we go through our business planning process here finalizing it over the next 60 days and just including detailed discussions with our board before the end of the year, you know, to conclude on at least one of these value-added investments because we are of a strong opinion that the market is there and so that would -- you know, we'd be able to talk with you about that in February, late February when we release earnings.

You know, there's a couple on the docket right now in size they could range from, in terms of capex, a couple tends of millions to a couple, couple, couple, couple, couple tens of millions. That's kind of the zip code of the capex that we're looking at and you can guess the markets, I think we've talked in the past the markets at which they're targeted.

Okay so but between like value-add or between expanding smelter capacity, restarting --

Oh, I'm sorry Timna to cut you off. Value-add, value-add, value-add. Everything right now we're talking about value-add. There's no -- other than the, I should say, hot metal expansion of project multi-year at Grundartangi that we commenced, gosh Pete, three years ago or so, and that's continuing on pace and we'll have another chunk of new capacity at Grundartangi come online in 2015. Again, we'll give you all of those forecasts in February but other than that there's no -- we, you, shouldn't expect any imminent announcements of any major hot metal capacity expansion.

Okay, helpful, thank you very much.

Thanks.

Thank you. Our next question in queue will come from John Tumazos, your line is open.

Hey Mike, thanks for taking the question.

Hi John.

Could you elaborate on your double digit output growth expectation for China for next year? Some people are concerned that the economy is slowing there or that the Indonesians won't give up their box site?

Yep --

In particular, and I apologize, I'm very na?ve and I just read the IAI data and believe it but I know you guys are smarter; if you take the August IAI data for (INGIT) and multiple it by 1.94, the reported alumina output was 1.7% too little and the September ingot data went up about 2% in output but the alumina output went down a little bit. So September the differential was about 4%. Do you think the alumina supply is more than the IAI reports or the ingot output is less or both because obviously they kind of need to converge to make sense.

Gosh John, I'm the last -- I'm not even going to get to fourth down, I'm going to quick kick on third down. I just -- I don?t know. We haven't done this sort of thing to which you refer there and so I don?t know where you're missing -- I'm going to have to, with apologies [punt] on that. It's an interesting one so we'll go, Pete will go, see if we can track it down but we just don?t now.

On your broader question, I mean, I think the thesis that you're espousing is a good one and if I can repeat it, or at least get, assume I'm right, the thesis is to the extent that consumption, that demand, is going to moderate kind of to the 6% to 8% level that's in the base case forecast at least the ones at which we look, you know, shouldn't production also moderate down to meet it? As you well know John of all people that hasn't necessarily always been the case in China but that's a nice -- we'll [sign up] to your thesis there, it's a nice thought. I mean, who knows? At this point we're giving you what we think is sort of the consensus for what it's worth in the marketplace.

So Mike, if you would bear with me with one more question I talked to a very nice one million ton container [board] company in China, they have very good equipment, speak good English and I can understand them. They pay a dividend on the NYSE. They were told in 2017 for their steam boiler in the province that's just north of Vietnam to switch to natural gas from local coal and, of course, the natural gas only comes from Russia [that year] and the local coal is cheaper, it's like a [3, 4] fold increase.

In your intelligence, do you see any issues about electricity supply and cost?

No -- John, we don?t, again that's -- Our anode plant is, I don?t know if it's in the same province, I think at least two that boarder Vietnam (inaudible) but we haven't heard or come across that kind of information but thank you for the -- we actually have a board meeting in China, it's probably just Gary and I, our general counsel next Monday and Tuesday in China so we'll put that on the table for our partner to --

Thank you for bearing with my confused questions.

Thanks John, appreciate it.

Thank you.

Thank you, our next question in queue will come from Paretosh Misra with Morgan Stanley, please go ahead.

Thank you. I was just trying to see if you could provide, what was it, EBITDA impact because of the operational issues at Hawesville during third quarter?

Sure. So for Hawesville, as we talked, there's about $5 million of negative impact on EBITDA associated with the pot relining effort and the under-absorption there and then we have, you know, we mentioned 2000 tons of lost production as well which could give us an offset of roughly $1 or $2 million of EBITDA as well; those are the two outputs.

The second one is also Hawesville, right?

Correct.

And then, did you say, and I'm sorry if missed that, that there were some direct sales in Iceland that were not included in third quarter results?

Yes, we talked about shifting from tolling to direct, the phenomenon that we saw will happen, the important [news] is going to happen, we're open to that on the quarterly cutoff is that our direct sales panel transfer happened, occurs, at the port and not at our facility and so we're at risk of having cutoff issues and we saw that at the end of third quarter; didn?t happen at the end of the second quarter and is purely due to timing, it was about 3500 tons where the title transferred in the subsequent [month].

Just to give you just a little bit of background, it's just ? it's the subtlest of changes but it's, as Rick said, you have to get the revenue recognition right and so in the tolling contracts the title transfer occurs, occurred, and occurs, i.e., the revenue gets recognized literally the minute that the product is produced as the ingot comes off the casting line and gets palletized the revenue gets recognized because contractually that's when the customer owns it whereas Rick correctly says, and when he says the port it's, trying to visualize it, half a mile away --

Right.

-- is where those pallets get put in containers and shoved on a ship and so it's just literally -- it's just a happenstance of the last day in the quarter and where that all was. So historically before we move to direct sales, production always equaled shipments because of what I just said and now you can just have timing differences.

I got it, okay. This probably will show up, this will show up actually in fourth quarter results?

Sure, sure.

Okay and lastly, on the SG&A side it sounded like there was some one-off items, what's your expectation for SG&A in the fourth quarter?

Sure, generally speaking our SG&A is actually pretty consistent. The one-off items you speak of where we had about a million, roughly, [stock] compensation expense, a little over a million and then some transaction costs associated with the deal. So we expect our SG&A not anticipating any other one-offs should be fairly consistent (inaudible).

As you remember, we've said, and as Rick correctly says, consistent, the GAAP SG&A has been about $10 million bucks a quarter of which about $2 million bucks is non-cash so our cash SG&A is 8, 8.5, 10 is the GAAP. This quarter, as you saw, it was 12 and the $2 million delta versus the $10 is exactly as Rick just said. One is just a vagary of the accounting for our stock compensation here and it just gets marked up and gets marked down based on the quarter end stock price [that's obviously] on cash and then most of the rest, as Rick said, was just spending on getting the transaction without [color ] negotiated. But $2 million is the answer to your question, the unusual or one-off.

Right, okay understood, thank you.

Thanks.

Thank you, we do have a follow-up in queue from Sal Tharani, please go ahead.

Thank you. Can you give us a little color on what advantage do you get, monetary advantage, when you move from tolling to direct sale? Is it just a premium [you don?t share] or is there other benefits in there?

So there's a couple, each moving in different ways Sal. Remember what the tolling fee is, it's simply the metal price minus an implicit negotiated alumina value and so one thing going against us, of course -- and if you negotiated those two things on the same day, we talked about this last fall when we were talking about our approach to tolling versus direct sales as the first toll expired.

If you negotiated those things on the same day putting the premium aside for a second, the economics would be exactly the same because the tolling fee is just the value of the metal minus the alumina. The fact of the matter is, of course, if those tolling deals were put in place a long time ago, that first one in the late 90's when Noroural first started up, when Grundartangi first started up, and thus the alumina prices were a couple hundred BIPS below where they are today. So that, of course, goes against us. That's just like marking on our alumina, you know, a regular [when] alumina costs up or down, in this case up as the market moves.

Going the other direction as Rick correctly said is the premium and so at the time, again, 15 years ago we negotiated with the counterparties a fixed premium that we would get and they would get everything above that and back in those days we didn?t feel like we were giving away very much because what we were getting was pretty close to what the actual number was back in the day. Now, of course, premiums have run and run and run and so, as Rick said, we're only getting a portion of it and so that's the -- those are the two thins you're kind of seeing there as we're moving from the tolls to the direct sale.

Got you. And my guess is that because where the premiums are or all even if you loose them on the alumina side, all economics is beneficial for you to go direct?

That's an excellent question. So as you remember, we said -- can't remember whether this was in the fourth quarter last year or in the first quarter once we had actually [increased] deals but we said at the time it was a complete coincides of course Sal, at the time when we look at the economics of the expiring toll with the economics of the new direct sales, those two offsetting things, the increase in the premium, obviously the premium was much lower at the time, versus a new alumina cost was literally a push, it was like within a million bucks on all of that volume and we did the math.

Now today, you know, alumina prices have continued to rise but premiums have risen proportionately more and so you can draw your own conclusion but it was literally a push at the time a year ago we were negotiating the first -- end to that first new, first toll.

And I have one more question on alumina and I'm sure you have probably spoken about it in the past; just give us color, you buy alumina in Kentucky and you buy alumina in (inaudible) where are, how are these, setup? Are these connected to the alumina price or is it the API index or just alumina price? Can you give us some color?

In --

Prices are rising so we just want to keep an idea of how to [offer] the alumina, increase in our aluminum price versus the alumina price.

No problem Sal, so in the U.S. it's all -- and it's all on just the LME price, not on the final price of course, it's all percentage LME. In Iceland this year that's just concluding was mostly percentage LME. There was a small dose of ingots and I don?t have an answer for you for 2015 yet because we're currently, literally, in the period where we're negotiating with the counterparties what 2015. You know how these deals work, right, they're multi-year deals but there's a re-pricing every year within a put, within a min/max range on the percentage LME and that's what we're negotiating right now.

And --

We'll have some good guidance for you on that in Feb.

Gotcha because most of the aluminum companies, you know, when you listen to Alcoa (inaudible) today trying to move these contracts to the API in [the contract], I'm just wondering is that something you may end up doing eventually?

Yes, we may well, that's an excellent question and we're looking at it hard and so I'll leave it at that. The answer is yes; obviously you lose the, we tend to call it a natural hedge, but you lose the linkage between, let's call it your second largest cost and the value of your, or most of the value, or at least historically most of the value of your finished product but, yes, you could see us moving to more of an index buyer on alumina.

Great, thank you very much.

Thanks Sal.

Thank you, our next question will come from Paul Massoud with Stifel, please go ahead.

Hi, thanks for taking my question. I just wanted to ask a little bit about future investments. Obviously you mentioned that demand has picked up because of both aerospace and autos and on the auto side, I mean, if you (inaudible) third-party estimates that are out there, I mean, we really haven't seen the steep part of the demand curve just yet but over time it seems that a lot of the volumes that's going to be going into the auto industry is going to be coming from packing [sheet]. So I'm just curious, you know, as you look at investments in the future, I mean, is moving into the midstream business something that you'd consider? Has that come across your radar?

No, it's a good question. No, we don?t feel like -- we like to do what we think, where we think, we can add value and that?s not the midstream business. We'll supply those midstream guys so body sheet obviously is one of the markets that's going to be growing. There's a severe shortage of slab which would be the primary product of value-added "product" that's produced that goes to those guys and so that you can reasonably conclude, I'm sure that's one of the markets that we're looking at hard.

Okay, great, and then maybe -- I know you didn?t really mention much about it and I'm assuming there's not a lot to update but if you could just talk a little bit about Helguvik if there are any updates there and, you know, just in thinking about the investments that you have talked about, I mean, should we take from that the assumption that, you know, Helguvik is becoming less and less likely and therefore you're starting to look at other areas that are probably more attractive in growth rather than just sort of sitting on and waiting --

No Paul, I mean, there's not a lot of updates to give just to your specific question on Helguvik right now, there's been a lot of work done, a lot of discussions taking place but rather than just say that to you we prefer to say when there's actually been a development and so there's no material development but they really stand on their own. I mean, Helguvik we consider still to be a superb investment, you know, assuming we can get the power finalized, the quantum of power obviously, and in terms that make sense for us.

So but they're really independent. All you're seeing now is that we've got opportunities on the value-add side, they're there right now because the market is really short of those products and so we're going for it especially in regions where there's not a lot of, I mean, there's not a lot of primary metal capacity that can be converted to these products and that's why that stuff is coming from places like Russia and from the Persian Gulf into Europe and into North America.

Helguvik is totally separate, we still are doing whatever we can reasonably to make that happen we just don?t have any substantive update for you today.

Well, thanks again.

Thanks.

Thanks, we also have a follow-up in queue from Paretosh Misra, please go ahead.

Thank you, one last one on Ravenswood, is there anything to look for over the next few months, any kind of key dates, key meetings?

Well, there are meetings all the time, I mean, the date or the thing that you might see, I suppose, if that's what you're looking for, is at some point in time we would hope to make a filing with the public service, West Virginia Public Service Commission and that's -- I'm ignorant as to whether in most [CFC's] that would be a reasonably public thing they posted on their Web site, one of my colleagues ? Jesse's nodding his head up and down now and so that?s something that you would see if we got to the point where -- which we're hoping to do, as I said, by the, no later than, end of the year that we were in a position to make a filing.

I think that would be the "thing" you would see.

Great, good luck with everything.

Thank you very much, appreciate the question.

Thank you, also a follow-up from Jorge Beristain, please go ahead.

Hi guys, sorry. Just under the worst case assumption that things at Mt. Holly were not renegotiable on the power contract, what would be the shut-down cost and exit cost of that smelter?

Yeah, we don?t have an estimate on that yet. We've look at it, we've, to the best of our ability I suppose thus far, taken a stab at it. It wouldn't be very different from the answer we gave you for Hawesville. The biggest risk would have been, as you remember, Hawesville would have been at Mt. Holly if we hadn't provided the termination notice.

And so there's no [demand], there's no fee payable to the power company after December 2015 if, regrettably as you say, we weren't able to do a -- to reach an agreement with them. So it would be the normal settlement of employee liabilities and some contractual liabilities, you know, Kentucky was in the $10 or $20 million range and you wouldn't see very different we believe here at Mt. Holly but we, as you can tell, we haven't done a lot of thinking about that because we're focused on, in our opinion, where we should be focused which is getting a post-2015 power deal.

Understood, great. Thanks very much.

Thanks.

You also have a follow-up from Sal Tharani, please go ahead.

Hi, one more. Just a housekeeping, if I were to model Mt. Holly and [listed you] buy it at $67 million, what depreciation should we use?

That's a tough one. It depends on the purchase accounting Rick, I guess, and how the purchase price is allocated to the assets. You want to take a stab at that?

No. No! We -- it's to soon for us to give you that especially with this purchase price and the moving parts so I don?t even have a good estimate for you.

It really is, you know, Sal it depends upon how you allocate the price and that's based on appraisal, evaluation that you do and that's a tough one.

Okay, that's fine. Thank you very much.

Thanks Sal.

At this time there's no additional questions. Please continue.

We thank you all for joining us this afternoon and we look forward to speaking with you in February if not before, take care.

Thank you and ladies and gentlemen, that does conclude your conference call for today, we do thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.