Century Aluminum Co (CENX) 2021 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Century Aluminum Company First Quarter 2021 Earnings Conference Call. My name is Bethany, and I'll be coordinating your call for you today. (Operator Instructions)

I will now hand the call over to your host Peter Trpkovski to begin. Peter, over to you.

Thank you very much, Bethany. Good afternoon, everyone and welcome to the conference call. I'm joined here today by Mike Bless, Century's President and Chief Executive Officer; Craig Conti, Executive Vice President and Chief Financial Officer; and Shelly Harrison, Senior Vice President of Finance and Treasurer. After our prepared comments, we'll take your questions.

As a reminder, today's presentation is available on our website at www.centuryaluminum.com. We use our website as a means of disclosing material information about the company and for complying with Regulation FD. Turning to Slide 1. Please take a moment to review that cautionary statement shown here with respect to forward looking statements and non-GAAP financial measures contained in today's discussion.

And with that, I will hand the call over to Mike.

Thanks, Pete, and thanks to all of you for joining us this afternoon. If we can just flip to Page 3, please. And before we start on the review of the quarter, I'd like to just provide a brief overview on our various efforts supporting and advancing the sustainability of our business. Hopefully, at this point, most of you have had a chance to go through our sustainability report. If not, it's up on our website. So, I encourage you to have to look when you have a couple of moments.

First, those of you that have long followed the company are well familiar with our focus on safety, and this will always remain our highest priority. Our new corporate safety director has made great progress reinvigorating our systems and processes. We're now engaged in delivering enhanced safety leadership training to all the U.S. plants, and the early returns are really encouraging. We'll have a lot more to report to you as we go forward. In addition, we're making very good progress in our various decarbonization efforts. As we reported to you back in February, we're in discussions with multiple potential customers regarding our low-carbon Natur-Al products, and this follows the agreement that we recently signed with [CMR] industries.

In addition, again, as we've discussed, we're looking very closely at adding billet casting capacity at Grundartangi, and this development would allow us to provide the European market with much desired green billet. As you also know, we've made recent investments at Sebree to enable us to buy scrap from the market and reprocess it. We're seeing increased interest from customers looking for recycled content in their billet. And we're now looking at incremental scrap processing capacity at Sebree as well as on Mt. Holly as we turn that plant closer to its full capacity. I'll talk about Mt. Holly in just a couple moments.

We've also made good progress finalizing the terms for the solar fields to be constructed by a third-party that'll be adjacent to Sebree. As a reminder, we'd be the sole contractual off-taker and thus enabled this investment. This is really exciting for us from multiple vantage points, and we intend to pursue similar structures. Bottom line, we have a lot of exciting stuff going on and we look forward to updating you regularly.

In just a couple of minutes, Pete will provide some detail on the industry environment, but let me make a couple of points just to put the rest of my comments into context. Conditions in the sector remain favorable from multiple vantage points. Global inventories are now falling, that's including in China, as you've seen, looked at the data. Stocks are now at their -- at pre-COVID levels and are historically tight, especially when considering the pace of current demand. Forecast for the next couple of quarters show a basically balanced global market, and we see potential upsize as the pandemic continues to abate, especially in developing economies.

We're obviously closely watching the supply side. The current metal price provides an environment for consideration of potential capacity additions. However, in most of the Western world, we think it's very unlikely that we'll see new greenfield projects. We believe the industry has learned the lessons of the past. We could see some small restarts or more likely perhaps the deferral of closures, either ones that have been announced or that are being contemplated. But we're confident these would likely be around the edges.

It goes without saying the swing factor remains China. That market is currently just in balance. If you look at the data, they're importing some months and not others. You've obviously seen the discussion of a major policy shift driven by the central government's climate goals, and we do believe that illegally added capacity that puts provinces above their emissions targets will need to be curtailed before new capacity is added. It's hard to know at this point exactly where all this shakes out, but we do think this development will put some governor on rate of net capacity additions in China. And again, Pete, will give you some data in just a moment just a moment.

Just to move on, we've made good progress on the operations during the last couple of months. Just to give you a couple of examples, as you remember, we suffered 2 major equipment issues at Hawesville during the last days of December. One was a freeze up caused by some very cold weather, and the other was failure of some key high-voltage equipment. These events resulted in the loss of some production. In addition, we took a number of cells offline in February and March to mitigate any further risk and, importantly, to hasten the plant's return to stability. That stability was achieved in early April, and we're now in the process of bringing all the cells back online and get back to the full 4-line operation. We're also completing some maintenance projects aimed at providing further long-term stability to the plant.

We also reached a new agreement with the local union in Hawesville that was ratified by the membership on the 16th of April. 5-year labor contract provides good stability for the plant. We've got a great young workforce at Hawesville. It's required some extra near-term effort and investment in training and skills development. That said, we're really encouraged by the potential of this group.

At Mt. Holly, the new power contract was approved by the Santee Cooper Board as well as by the appropriate state authorities, and the contract commenced as scheduled on the 1st of April. As a reminder, it's a 3-year deal. It goes through to the end of 2023, and it gives us the opportunity to build back the 75% of the plant's capacity and get some very much needed high-quality billet back into the U.S. market. It also gives us a chance to work with Santee Cooper on longer-term structural alternatives for power supply.

As a reminder, we've been talking about this for quite some time, no cells at Mt. Holly have been rebuilt since 2015. And thus, cells constituting the entire 75% of production need to be rebuilt. This process is well underway, and Craig will remind you of the schedule for the forecast spending as well as, importantly, the incremental production we see coming on later in the year. We're really excited to be bringing back this capacity at a time when the market demand is so robust. Those of you who know Mt. Holly know that it has (inaudible) reputation as a high-quality billet producer, and we're convinced customers are anxious for the incremental supply.

As we ramp up here through the year, we'll have more billets to that casting capacity than we currently have with hot metal production, obviously. And thus, we're being opportunistic in buying some scrap and primary metal to melt and mix with Mt. Holly's own prime in order to begin to deliver incremental production to the market as quickly as possible.

Lastly, very quickly, Craig will take you through the specifics of the recently completed debt refinancing, so I won't go into any detail here. The rationale was obvious, to lower the company's weighted average cost of capital and also came with a decrease in current cash interest expense. We lengthened the maturity and increased the company's near-term liquidity. Of course, the company's liquidity will otherwise improve markedly beginning in Q2 as we begin to realize recent metal prices. And Craig will be able to give you detail on this and our expectations for cash flow in the coming quarters in just a moment.

And with that, I will give you back to Pete for a quick look at the industry.

Thanks, Mike. If we can move on to Slide 4, please, I can give a couple of comments on the global aluminum market. In the first quarter of '21, global aluminum demand was up 16% as compared to the first quarter of 2020 when the pandemic had begun to slow down the economy. In the world, excluding China, we saw demand up 5%, and in China we saw demand growth of 27%. Global production was up 6% in the first quarter of 2021 as compared to the same quarter last year. However, global supply growth was flat sequentially. We saw 10% production growth in China versus the same period last year, but no additional supply growth sequentially.

In the world, excluding China, we saw a 1% supply goes versus the same period last year and less than 0.5% growth sequentially. As demand continues to outpace supply growth around the world, the global aluminum market is now projected to be imbalanced for 2021. Along with falling stock inventory levels to prepandemic levels, the aluminum price looks to be supported by strong fundamentals going forward.

Okay, turning to Slide 5, please. You can see the major improvement on pricing for LME and premiums here. The cash LME price averaged approximately $2,100 per tonne in the first quarter, which was up 10% or $175 per tonne sequentially. Currently we are at a 3-year high LME price of $2,450 per tonne. In the first quarter, regional premiums average $0.16 per pound or approximately $350 per tonne in the U.S., up 25% sequentially and $165 per tonne in Europe, an increase of 23% sequentially. Current spot price for the U.S. Midwest premium is at a record high of just over $0.26 per pound or approximately $575 per tonne, a growing demand in tight supply. Prices in Europe are approximately $240 per tonne. Finally, pricing for value-added products have also continued to improve. An example here is the U.S. Midwest spot billet prices are also at record highs of approximately $700 per tonne.

And with that, I'll hand the call over to Craig.

Thanks, Pete. Let's turn to Slide 6, and I'll take you through the results for the first quarter. On a consolidated basis, global shipments were about flat quarter-over-quarter. Realized prices increased substantially versus prior quarter as a result of higher-lag LME prices and delivery premiums driving a 14% increase in sequential net sales.

Looking at operating results. Adjusted EBITDA was a loss of $19.7 million, and we had an adjusted net loss of $52.5 million or $0.54 a share. In Q1, the adjusting items were $92.7 million for the unrealized impacts of forward contracts, $3.9 million for the net realizable value of inventory and $1.4 million for the historical Sebree equipment failure. Liquidity at the end of the quarter was $90 million via a mix of cash and credit facilities. This amount increased $50 million to $140 million by the end of April.

As we forecast on our last call, the Q1 realized LME of $1,940 per tonne was up $210 per tonne versus prior quarter while realized U.S. Midwest premium up $330 per tonne were up $45 per tonne over the same period. Realized alumina was $325 per tonne or $32 per tonne greater than prior quarter. As we discussed previously, the majority of our alumina contracts are priced with an LME reference, and the realized prices will track largely in line with lagged aluminum pricing trends.

As expected, the negative impact of power price, primarily driven by the domestic February polar vortex pricing spike was $33 million unfavorable versus Q4 globally. Realized coal prices of $300 per tonne were up $50 per tonne or 20% versus prior quarter. Restart-related spending, as forecast, at Mt. Holly and slightly lower production volumes drove about $12 million of reduced EBITDA sequentially, while a noncash mark-to-market of stock compensation drove $5 million of reduced EBITDA over the same period.

Our Q1 results came in a bit lower than expected. This was largely driven by market price and noncash accounting impacts occurring at the very end of the quarter. During the last week of March, our share price increased roughly 20% to about $18 per share, causing a sizable negative noncash mark-to-market impact on our stock compensation plan. Coke and LME linked power began escalating as well. On balance, in totality, the linked Q1 market moves are favorable to Century over the mid- and long-term, however, the immediate impact to the first quarter was a reduction and impacted EBITDA.

Looking ahead to Q2 specifically, the lagged LME of $2,150 per tonne is expected to be up about $210 per tonne versus Q1 realized prices. The Q2 realized U.S. Midwest premium is forecast to be $485 per tonne or up $155 per tonne, and European delivery premium is expected at $175 per tonne or up $35 per tonne versus the first quarter.

Realized alumina is expected to be $330 per tonne or up above $5 per tonne versus prior quarter. Taken together, the LME alumina and delivery premium pricing moves are expected to increase Q2 EBITDA by about $55 million to $60 million versus Q1 level. On power cost, with the Q1 polar vortex related spike behind us, we're seeing a return to more seasonally normal pricing levels. As a result, we expect a $15 million to $20 million increase in Q2 EBITDA from declining power prices quarter-over-quarter. As I noted earlier, in late Q1 we experienced an increase in carbon cost, notably in petroleum coke prices. We expect realized coal prices to be $370 per tonne in Q2 or about $70, 7-0, per tonne greater than in Q1, driving a $5 million EBITDA decrease versus prior quarter.

Finally, we continue to make significant progress on the Mt. Holly restart and the fixes on the year-end equipment issues in Hawesville. As we discussed previously, Q2 will be our largest investment quarter for both of these projects. This investment will be partially offset versus prior quarter by incremental reduction in Q2. The net impact of sequentially increased production and project spending will decrease EBITDA by about $10 million.

In sum, we expect all of these items taken together will equate toward approximate EBITDA increase of $55 million to $65 million from Q1 levels. As we have discussed in the past, we, from time-to-time and largely in support of long-term investments, manage our exposure to various commodities by entering support contracts. Based on our current spot prices, we expect a $30 million to $35 million realized loss for the quarter on our various hedges in Q2. This result will be below EBITDA geographically and will impact adjusted net income. We will continue to call this impact out on a quarterly basis as warranted.

Let's turn to Slide 8, and we'll take a quick look at cash flow. We started the quarter with $82 million in cash and ended March with $26 million. A few notable outflows for the quarter included $7 million for CapEx, the vast majority of which was Mt. Holly restart related and our normal semiannual note interest payment. Working capital was an outflow of about $12 million, driven by increased receivables from higher sales prices on rising LME levels and a modest inventory build to support the ongoing restart work.

Shifting gears to Q2 and beyond, in early April, as Mike mentioned and as you may have seen, we effectively refinanced our $250 million 5-year 12% note, which was due to mature in 2025, for a new $250 million 7-year 7.5% note due to mature in 2028. In addition, we have further enhanced our liquidity by executing a 7-year $86 million convertible note at 2.75% also due to mature in 2028.

From a diluted EPS modeling standpoint, it will be important to include additional $4 million outstanding shares for Century from Q2 onwards. While we can settle this convert and either capture shares at our option, our accounting method will require reporting new instrument on a fully diluted basis. From an interest cost standpoint, adding both of the new $250 million note and the $86 million convertible together resulted in annual interest savings of $9 million versus the old note.

From an operations standpoint, we continue to make solid progress on the ongoing Mt. Holly restart. As a reminder, we will invest about $75 million over the course of the next 2, 3 years to bring the smelter to a 1.5 line operation, which will allow us to produce at 75% of capacity or about 170,000 tonnes per year. This project will be completed in 2 phases. For phase 1, which occurs throughout 2021, we will invest about $50 million of restart capital over half of which will be spent in second quarter, and expect total year production of about 140,000 tonnes as we ramp up the facility. This outflow will be about 20% greater than 2020. By the end of 2021, Mt. Holly will be running the full 1.5 line complement. Phase 2 begins in 2022, and the remaining $25 million of capital will be deployed to rebuild continuously operating legacy components, which will be beyond their useful lives. We expect 2022 and 2023 production to be around the 170,000 tonne per year level.

Finally today, I'd like to provide some perspective on what the second half of 2021 will look like for Century at current spot prices. As both Mike and Pete detailed earlier, the conditions in our industry are favorable, and Century's ability to add capacity, particularly in the U.S., is a key differentiator for the company. Using the revenue and cost items we detailed on our last call, adjusted only for the reduced interest cost from our refinancing, provides a good look at the earnings power of our business at current spot pricing levels. At the spot LME of $2,450 per tonne and spot Midwest premium of $570 per tonne, Century will generate about $270 million of second half 2021 EBITDA and above $160 million of second half 2021 cash flow.

This concludes our prepared remarks. Thank you for your time and attention. I'd like to turn the call back over to Bethany to begin the question-and-answer session.

(Operator Instructions) The first question comes from David Gagliano from BMO Capital Markets.

Okay. You covered a lot of things there. That's very helpful, I think. But some of them went pretty quickly, so I'm going to try and just hone in on a couple of them. Just, I guess, on the hedges, there's some disclosure in the 10-K about the hedges, and I know it was referenced kind of in passing, I would say, on the last call. And I was wondering if you could just give us a little more information on when the hedges were put in place, how much you have hedged as of now on both on LME and Midwest premiums, the duration of those hedges. And in terms of the cash flow comment for the second half, $160 million, is that before or after hedge? And is that a free cash flow number before or after hedge? And what is the hedge impact associated with that number?

Okay. David, so this is Craig. I understand the question. I'm going to start with the back half first, and we'll go back to the beginning, okay? So when we look at spot prices today, again, just so we're all on the same page, that's $2,450 of LME. That's $570 of Midwest premium, right? So to go back to what we said on the call, that's $270 million of EBITDA for the second half for the company, and $160 million of cash, right?

Free cash flow.

Free cash flow, right? To answer your question really directly, that $160 million does include the impact of hedges, okay? Now when we go back and you think about how to use that go forward, what we put in the appendix are sensitivities, which will allow you to do what you've always done in terms of sensitizing the business for moving commodities for EBITDA also from -- for cash. So what you would do for the second half of the year is start with that construct I just gave you, and you could sensitize that impact for any hedge assumption -- for any market assumption that you want to make.

Now let me go back to the first part of your question. You're correct, it is disclosed in our K, and it will be there again in our Q. When we talk about what we're doing for the company, we have really 3 commodities that we're talking about. The first is LME. Well, 4, I guess, if you include FX, which I will in this explanation. So you've got LME, you've got Midwest premium, you've got Nord Pool, and then we've got the Euro, right? So our LME hedges are primarily to support the linking of our Nord Pool costs to an LME length contract. We've talked about doing that. We've done that sporadically over the last year and a half. So that's one part of the LME.

The second part of the LME is when we take a fixed alumina costs and link those synthetically to an LME price, and we would do that by buying -- selling alumina and then also selling forward the LME, we've talked about that in the past as well. That's the LME portion. On Midwest premium, the vast majority of that is in support of the Mt. Holly restart that we talked about on the last call. And then of course, Nord Pool the other side of what we talked about on LME, linking that to LME predominantly for 2021 and for 2022.

David, it's Mike. I'll let you -- we'll let you redirect, but just let me have one other comment that may be helpful on Craig's walk from the second half EBITDA at spot price $270 million down to your point, A, free cash flow; B, net of hedges at spot prices, of course. Of that Delta there, the $270 million down to $160 million, about half of it is the hedge impact, and the rest is just normal stuff that comes between EBITDA and free cash flow, CapEx, interest expense, small amount of taxes we pay in the U.S., normal taxes in Iceland, that kind of sort of normal...

Mt. Holly restart, right?

Thank you. Yes, CapEx Mt. Holly spending, all that stuff.

It all of those items. David, to round out -- that was a good add, Mike. So to round that up, those are the same items that we talked about in the last call at pretty much the same levels.

Yes.

Does that help you?

Okay. Yes, it helps. That's helpful. Then just to drill down a little bit further, I see the 10-K according as of December 31, 2020, there were 194,000 tonnes sold forward, I guess, at fixed pricing on LME contracts, and then 318,000 tonnes on Midwest premiums. And those contracts extend on the LME through December 2024, and Midwest premiums, I think, extend through December 2022. So my question is, so obviously, as you extend into the out year, how much is hedged for this year versus the out years? And are you continuing to hedge and have those numbers increase, now that it's April, whatever, May, whatever? So we'll get into disclosure for March, but what are the hedge positions as of now, and how do they flow through in the next few years?

Right. So let me get to crux of the first part, and I'll turn it over the maybe the second part on go-forward to Mike. So when you're looking at the difference between the LME and the Midwest premium hedges, let's start with Midwest premium. The 318,000 was the correct number that came off the K. It'll be a little bigger in the Q, you'll see it. But again, that Midwest premium, the vast majority of that was for the Mt. Holly restart, right, when we sold for that production.

Now let's go back up to the LME, and I think the crux of your question is why aren't those numbers more similar? The reason for that is when we sold forward the LME to protect the Mt. Holly investment, we sold that forward on a physical basis, so that's going to transact outside of our hedge book. That's why it appears there's a little bit of a mismatch there. So the part that we've sold forward physically for Mt. Holly is already captured in EBITDA sensitivities, and it's not going to be captured in the hedge book.

Again, David, just to maybe infer part of your question on a perspective basis, I think Craig hit it on a perspective basis. I mean all that stuff that he described, the hedging to protect the Mt. Holly spend, we also did sell on that Midwest last year just as sort of COVID was in its uncertainty. But prospectively, if we're going to be most likely selling additional LME, it's going to be for the purposes that Craig described that we've been talking about for some time. If we can win the Nord Pool price in relation to the LME price, as such, we can book a second quartile with power costs, when we say power cost -- we mean power price as a percentage of LME, we'll do it. Slowly and gradually, but we're going to continue to do that. And then same thing on the ala side. Although, as Craig has told you before, we're basically set for ala in 2021.

Okay. I'll turn it over to somebody else. But just if I can just really quickly -- is there a way just to give a percentage of -- like a framework of how much you plan to hedge relative to your total volumes as you go forward?

That's a tough question. I mean the Nord Pool amounts don't aggregate to a whole lot. You're not selling a lot of metal to create that position.

But on the Nord Pool side, as we talked about last time, that's 80% hedged for 2020. It has served us really well.

Yes. But there's not much to come there. On ala in '22, it's kind of tough to answer that at this point in time. It depends what the ala market looks like during the mating season in the fall when everybody's negotiating alumina contracts and what kind of percentage LME contracts are available, if any, and where the API is and all that kind of stuff.

Yes. I mean just one other comment here, and consistent with what I just said on Nord Pool, and sorry to belabor it, David, and in alumina. The real vast majority of what's on the books right now that you're seeing and that Craig talked about relates to Mt. Holly. I mean -- and frankly, just thinking about it, that kind of might help you get to your question on -- I don't know if we answered it fully enough, around when the hedges were put in because as you guys -- as you know, we didn't know whether we had a new contract or not from Mt. Holly until some time kind of mid-ish December. So it definitely wouldn't have been before then. And then we signed it up and we were in that transition period before we finished the documentation for the new contract that I talked about a couple minutes ago. So that's kind of framework for when a lot of that LME got laid in.

The next question comes from Lucas Pipes of B. Riley Securities.

Lots of moving pieces there, as evidenced by the preceding discussion with David. I'll try to take another stab and kind of pick a real high-level view. But just kind of maybe if we look out to 2022, could you give us a sense for what EBITDA and cash flow would look like with those assumptions of, I think it was $2,450 for LME and $470 for the Midwest premium?

Yes. So I think EBITDA would be relatively easy. When you get the cash flow, especially when we're talking about the hedge book, it's materially different 2022 to 2021, so I wouldn't attempt that. But I think using our items today, if we have $270 million of EBITDA in the back half of this year and we're running at very near our capacity, especially with the restart work that's going very well in Hawesville and Mt. Holly, you could double that, That'll give you a 12-month running average for EBITDA, Lucas.

And the other thing I would note, Lucas, I agree with Craig's comment that, that would be the starting point, and it should only get better, obviously subject to other items like coke prices and others, but that's small potatoes in the grand scheme of things.

The other thing is the difference between EBITDA and cash flow, or let's just say it in plain English, the impact of the hedges will be much less because, as Craig said, the vast majority of the big company LME and the vast majority of Midwest, as David Gagliano correctly cited from the disclosure in the K, most of that is in '21 and starts to come off in '22. And so that delta there is going to -- between to EBITDA and cash flow, the delta produced by the hedges is going to shrink up meaningfully.

That's helpful. And I guess what I'm trying to get at is if -- because if I understood you correctly earlier, this is -- both EBITDA and cash flow are reflecting the impact of the hedges. And so what I'm trying to get at is in a world with no hedges, what would EBITDA and cash flow look like?

Right. So the answer is the same to what we just said. So irrespective of what hedges reflect where the bottom line is, the answer, what we just gave you, is the right answer. But now Craig talk about the fixed price contracts, let's call them, and where they some reflect "in EBITDA," meaning they go through cost of sales or sale -- and sales, I should say, and some are settled in that gain or loss in forward contracts.

Yes. Again, I think you did give most of it there, but just to double down on that, right, is all that would go through the EBITDA, at this point, that wouldn't hit that hedge impact line, if you will. Walking to total cash in my comments from earlier would be the Mt. Holly revenue piece. So to think about what that size is we talked about 140,000 tonnes this year, getting to then 170,000. And we sold forward the majority of that, and I think Mike gave you a time frame for about what we sold that forward, so that'll be coming through EBITDA.

Everything else that we talked about though, the Midwest premium, the LME that the other side of our LME linked alumina contract LME with Nord Pool, and Nord Pool itself and then, of course, the Euro on those Nord Pool hedges because that's the currency that those contracts will settle in, all of that will be going through the hedge impact line. That helps?

That helps. I appreciate that. And then I'll turn to my second question, and that's in regards to alumina. Obviously, LME has been outperforming alumina prices a little more recently. And I just wanted to get your perspective on kind of your medium to long-term strategy on alumina pricing. Would it be to kind of keep the current format? Rethink it? Any evolution probably thinking in regards to alumina input cost?

Thank you, Lucas. It's Mike. That's a great question, and the answer is, I hope it doesn't sound like a nonanswer, is it really -- let me give you a short-term answer first and then sort of a more philosophical one, so a little bit longer term, structural perhaps an answer. So short-term, it's really going to depend upon market conditions, call it, in September, October. If the current -- percentage LME contracts don't necessarily price with direct reference to the then current relationship between the API divided by LME, but they certainly have some reference to it that influences the market. And so we'll see if your very appropriate way of saying it whether alumina continues to underperform LME or whether to sort of revert to more normal relationship.

On a longer-term basis, we still believe that the right way to run this company, given our balance of opportunities; the growth opportunities that we have; all the risks, obviously, that are evident in the business that we face, just like every other participant in the business; the size of our company; and all the rest, capital structure. We still think that running the company, not fully but mostly, all else being equal, on a percentage LME basis is the right way to run this company. This can be heavily influenced by market conditions each year when the big ala -- pardon the jargon, the big alumina contracts are struck in the fall.

Very helpful. And to tie this commentary maybe back to my earlier question, if in the fall, LME has continued to outperform alumina, what is the right level of -- $570 million EBITDA, would that still be accurate? Or would we be looking at a much higher level as maybe alumina prices get lower?

Yes. Gosh, that's a great question. I guess the one way to answer it is, yes, it would be still applicable, it's going to, again, sound like a nonanswer, for which I apologize in advance, if our aluminum contracts were of a similar nature, but if we were -- fixed price. But if we were API, the course, then I think where you're heading is correct. It -- there could be upside. It's all about a balance of risk and opportunity. It's like any hedging decision.

And you would have the flexibility to make that decision once again.

Yes. For sure. Yes, I'm sorry because I missed your question. Absolutely, 100% flexibility.

The next question comes from John Tumazos from Very Independent Research.

Aside from debt reduction, could you give us an idea of the big-picture priorities? There's lots of wonderful alternatives trying to expand in Iceland, modernizing or expanding your U.S. smelters, raw materials or building a new smelter or adding power, although people seem to be doing the solar for you. Just tell us what the priorities are.

Thank you very much, John. And yes, I'll quickly -- that is the case. And we believe from a capital structure and balance of risk, we prefer to let the folks who are expert in designing and building, installing and maintaining, running those things. It's not our expertise. Building a new smelter would be, where you -- appropriately where you put it, at the bottom of the list.

We just -- without sounding overly enthusiastic, but we really are. When we look at the opportunities we have in the markets that we have hot metal today and have choices as to how -- into what kind of product we cast it in the markets we serve, there are a lot of really interesting opportunities that don't come -- that come with a fraction of the price tag of a new smelter or even a new pot line to build out our value-added products, specifically, I'll use the jargon with apologies, fully green or with green content, i.e., scrap we processed for our customers or for the general market.

And so that's why you're hearing us talk about opportunities at Sebree, opportunities at Mt. Holly and a very large opportunity at Grundartangi. And we think that markets, our customers -- we're convinced, interest and demand for that kind of product is only going to grow. And so this is the right time. I think, to your point maybe, we've got the capital structure sort of in the right place for the next 7 -- 5 to 7 years, and that sets us up pretty well.

In terms of the -- just coming -- whipping back to your new smelter to maybe scratch that itch just a little bit. I'll stick with my first answer, but we do have, as you know, some incremental hot metal capacity that we can bring back on with reasonably limited or modest investment. And right now the easiest one, meaning we don't need any additional power contracts is the pot line at Huntsville. That's a purity line, 100% purity line. And then we're hopeful, bordering on pretty optimistic, that we can find a way to get to that last 100 megawatts of power at Mt. Holly to bring eventually, in the not terribly distant future, that last bit of pot line back on.

So you want to run full and run green in your current of assets.

I like it. We're writing that down now. Maybe we'll put that up on the website. We'll give you the TM.

So Mike, if I can ask another, and I'm thinking back long term, I think when I was at DLJ, we were a co-manager on the IPO in ‘95 or ‘94.

Gosh, that's prehistory.

There's ancient times when crazy spikes were made in commodities markets or different markets. My hero, Julian Robertson, assured the internet in 2001 that it was killing him. And in March '01, he covered his internet shorts and shut his firm down. That was in front of the NASDAQ. I'm thinking of July '07 when aluminum peaked at $149.7 on the LME, around the same day that crude oil peaked at $150 and Century issued stock around $50 to cover your metal shorts.

Yes, sir.

I don't know if it's fair to blame a little bit of the peak in that aluminum market to covering the shorts. And I don't care about the details of how many contracts you have this week or the 10-K, but could you give us some comfort that Century isn't going to make a top in the aluminum market by covering your shorts and you're not going to have to issue equity?

That's the easiest question that you or anyone has asked. I think we can give you full comfort. Thank you, John, and that bit of history. But yes, that's a straightforward question to which we can give a straightforward answer, yes or no. Yes, we can give you comfort there.

So is it your tactic to not hedge anymore? Or are you going to shell out a little bit of money to close out some contracts?

No. I mean I would say on the first, as we said, we -- Mt. Holly was a tactical thing, fancy word. And I'd hedge any more to create second or first quartile ala or our European power parties, absolutely, all day long. But that's why you don't have to sell a lot of LME to do that structurally. I'm sure you know the math. We close our hedges. That's not something that we've spent any time here talking about, and I think you should not sit around and wait for that eventuality. It'd be a long wait.

If you just delivered, when would your hedge book be erased right now? If you didn't put on new positions and you just delivered, when would it all go away?

Yes, John, the short answer is 2024. There's a small tail that goes out that far for LME.

Very small.

Very small tail.

But the vast majority of it -- and that stuff is just Nord Pool -- it must be the Nord Pool. It’s small potatoes. The vast majority of it is gone in the next 6 quarters.

Yes. That's right.

So Mike, my concern is that politicians are overstimulating everywhere and that the biggest fraud in the history of markets are near zero interest rates, but they have to keep them down because the debts are greater than GDP now. And if they paid 5%, they'd all go broke and there'd be a big -- I'm just worried about things being too strong in the near term, and someday it's all going to blow up. Who knows when that's going to be?

Yes. That's -- I mean, John, we just -- I can't personally pick apart your thesis there, obviously. You've got some…

So if we know you're going to be right by being conservative, but the -- sometimes if you sell short, you do it a year early and you get wiped out before you're right.

Yes. That's not going to happen. The beauty of it is that it's not going to happen here because the vast majority of our production is exposed to market prices. So yes, we've got some downside protection, but the vast majority of that upside, we're enjoying there. You see it in the…

I was looking at the 2007 chart of your stock and wincing a moment ago.

Thank you for that history. You've got more Century history than I do. I've got only back to '06.

(Operator Instructions) We have another question from David Gagliano of BMO Capital Markets.

I remember those times, too, by the way. So I do have a follow up on the hedge, again. But for my first question is really just near-term, just to help us calibrate a little bit. I just want to clarify one thing. A lot of push and takes obviously for the second quarter. And sort of a -- I think $55 to $65 million net increase versus 1Q, but there are also some one-offs in 1Q. So I'm really trying to figure out, like, what's the right starting point for 1Q? Is it the minus $20 million? Or are you talking about excluding some of these one timers that happened in 1Q?

Yes. That's a very good question.

Yes. It's a great question. And the way I think about that is what we anticipated was going to happen in Q1 up until the last couple of days, and Q1 was what actually happened. So there were a couple of things. Number one, that noncash market is going to go away, right? So that $5 million is in there. I think that's number one. But the other things that happened are going to stay. I think we talked about those. LME-linked power costs is going to stay.

So you're seeing in the second quarter the absence of the Q1 polar vortex, or you're only getting another $5 million, at least at our current view, on top of that for seasonal power prices. And then I think the third piece is something that was a trend that really emerged and that gave the Q1 that's continuing, which are coal prices, right? So that was a couple million dollars that we saw very, very end of Q1, which has expanded to about $5 million this time.

But David, you're right. There were some bad things that happened in Q1. Craig pointed out the polar vortex with cash, of course. And the share plan mark-to-market is just accounting, there's no cash there up or down. Those aren't likely to repeat. So maybe there's some things going the other way, but your point is well taken.

No. I'm sorry. I'm not trying to make a plan. I'm just trying to figure out what the answer is still. I don't understand. Can we take -- is it the minus $20 million? Or I heard a minus $5 million.

I'm sorry, David. That was a much different question. I apologize.

So what's the right starting point for Q1? That's what I'm trying to figure out..

I'm sorry, you were answering something different. Okay, yes, we would absolutely start with a negative $20 million to build out everything that we went through, I gave you all the pieces, would be about 55 to 65 increase from that.

Okay. Got it. Perfect. Again, sorry to come back to the hedge, but just, I guess, philosophically or whatever, I mean you're talking about sort of hedging ala and the first and second quartile and kind of what that could mean for aluminum hedges. And frankly, I don't know what it means. So can you just tell me what kind of hedge volume you're thinking about on a forward-look basis? Again, I asked the question earlier, but just like a framework of how much do you think you'll be hedging on aluminum rolling forward, if any, metal and LME?

On -- well, Midwest is totally different, right? There's no LME there. So Midwest right now, I would say, we look at the forward years, but very limited. On LME, the only time that you -- so on alumina, it's only if you have a fixed-price alumina contract that you can convert into LME. And we have -- our fixed-price ala over the next couple of years is very small. So those will be very small LME tones.

Same thing on Nord Pool. I mean if you were to fix -- probably fix is wrong. If you were to convert the Nord Pool price into a percentage LME power contract, first and second quartile, as you say, you're stuck in small contracts, each of those are in the tens of thousands. I want to emphasize one more time, the vast majority of the stuff on the books right now was done in -- was done for Mt. Holly.

Okay. That's helpful. And just last question from me. CapEx in total 2021 and early read on 2022?

Yes. It's about $75 million in total, that includes Mt. Holly.

Of which is...

Of which $50 million is Mt. Holly, right? I would say you would take that $25 million -- now this is -- we haven't made a decision, just to be really clear. I just want to make sure this answer applies for changes in a quarter or 2. We haven't made a decision on Hawesville -- specifically Hawesville. So let's take that. $75 million for this year, $50 million of that is Mt. Holly. We'll probably do another $20 million to $25 million next year between sustaining and investment return, and we've got another $25 million coming from Mt. Holly.

We have another question from Lucas Pipes of B. Riley Securities.

Dave just asked the crux of what my follow-up was about, the bridge from Q1 to Q2. But I wondered if we can maybe expand on that and go to Q3 from here as well. Obviously, you've provided detailed commentary, but it just would be helpful to maybe get a little bit of a bridge here given the big moves in pricing, et cetera.

Yes. I would keep it at the second half level for now, Lucas. I understand the question. I think we got to do a little bit more work and see the market return. It's been moving really, really quick, as you know. But a good place to stick it in the ground, right, is to say if we take the second half outlook I gave you for EBITDA and cash, it's relatively level loaded between the third and the fourth quarter. There's a little bit more incremental production coming on in the fourth quarter as we finish up Mt. Holly and as Hawesville comes fully back online. But I think it's divided by 2 is a good place to start until we get a little more clarity.

Got it. So we have the, I think you said, $55 million jump in Q2 versus Q1. We'll call it $35 million or so, and then it goes from there to $180 million something, right?

It would be...

$270 million.

Yes, $270 million. I'm doing the math on the fly, here, Lucas. But it would be half of $270 million and half of $160 million. So if my math is correct, that would be $135 million and $80 million for the third quarter, given the assumption, all else being constant, that we talked about here. And back to the second quarter, the first part of your question, (inaudible) and reverse on you, the range is $55 million to $65 million that we see right now. So $55 million would be the low end of that.

And again, back to the other question to make sure we're all clear, that's adding from a negative $20 million. This is just an EBITDA number, adding from negative $20 million for Q1.

We have no further questions in the queue, so I'll hand it back to you guys to conclude.

Thanks, Bethany. Thanks, as usual, everybody for tuning in. Great questions. We appreciate the dialogue, and we look forward to being in touch in a couple of months, if not sooner. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect your lines.