Monterey Aug 7, 2015 (Thomson StreetEvents) -- Edited Transcript of Century Aluminum Co earnings conference call or presentation Thursday, August 6, 2015 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Peter Trpkovski Century Aluminum Company - Senior Corporate Financial Analyst * Mike Bless Century Aluminum Company - President and CEO * Shelly Harrison Century Aluminum Company - VP, Finance and Treasurer * Rick Dillon Century Aluminum Company - EVP and CFO ================================================================================ Conference Call Participants ================================================================================ * Timna Tanners Bank of America Merrill Lynch - Analyst * David Gagliano BMO Capital Markets - Analyst * John Tumazos John Tumazos Independent Research - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2015 earnings call. At this time, all lines are in a listen-only mode, and later we will conduct a question-and-answer session. (Operator Instructions). And as a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Peter Trpkovski. Please go ahead, sir. -------------------------------------------------------------------------------- Peter Trpkovski, Century Aluminum Company - Senior Corporate Financial Analyst [2] -------------------------------------------------------------------------------- Thank you very much, Terry, and good afternoon, everyone, and welcome to today's conference call. Today's presentation is available on our website, www.centuryaluminum.com. We use our website as a means of disclosing material information about the Company and for compliance 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 involve important known and unknown risks and uncertainties, which could cause our actual results to differ materially from those expressed in our forward-looking statements. Please review the forward-looking statements disclosure in today's slides and press release for a full discussion of these risks and uncertainties. In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most comparable GAAP financial measures can be found in the appendix to today's presentation and our website. And now I'd like to introduce Mike Bless, Century's President and Chief Executive Officer. -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [3] -------------------------------------------------------------------------------- Pete, thanks very much, and thanks, everybody, for joining us this afternoon. If we could turn to slide 4, we can get going. It goes without saying that we are going through a very difficult period in the sector at this point, and I'll address that just a moment, but first I'd like to talk about a few key areas of focus that have occupied us over the last couple months. First, as you are well aware, we settled our Hawesville labor contract in mid-June. The disruption was regrettable, but necessary for the long period health of the plant. It was a difficult process, but it produced a contract at the end of day with which we and the union can both, obviously, live. During the several-day transition after the contract was ratified, we ran into some operational difficult at the plant. We faced a very difficult situation during the transition, and that was the three days between the contract ratification and our employees returning to work and then the several days after that. During this period, we experienced a significant deficiency in the personnel required to run that plant, and the result of this by the end of June was about 25% of the plant's capacity was off-line. We have a plan in place to get back to full capacity over the next couple months, and frankly, we are proceeding on pace or even a little bit better, and we are now down to only 20% of the cells offline. However, given the industry environment, we've come to a different decision on this, and I'll detail that in just couple minutes. Moving on -- at Mount Holly, as you know, the current power contract expires at the end of this year. As a reminder, we've been bringing in 75% of the plant's power requirement from a third party suppliers since mid-2012. We've recently signed a letter of intent with a different high-quality supplier, under which we will purchase 100% of Mount Holly's power requirement for the next five years. We're now in discussions with the power company in South Carolina regarding the final transmission of that power to the plant. We believe that it should be a straightforward process to deliver that power to Mount Holly. The power company has been doing exactly that for 75% of the power requirement for the last three years with no problems. Recently, some issues have been raised, which we're now working through. Some of these are pretty fundamental, and in the worst case, will make our structure not feasible at all. We need to find a way forward on this very soon. There is absolutely no time to spare at this point. As we've said before, Mount Holly is an excellent plant with a truly engaged, energized and very able group of employees. It would be an absolute tragedy if a solution couldn't be found for reasons that simply make no sense. Let me move now to talk a little bit about the industry environment, and Shelly will provide some more detail in just a couple minutes. We've obviously seen a precipitous decline in the selling price of the commodity over the last few months. As you know, the delivery premium has dropped. This is as we predicted, but it's come down even a little bit further and certainly faster than we had expected. What was really unexpected was the drop in the LME price itself. There are obviously some factors at work there that aren't specific to our industry. Chief among these perhaps are the strength of the US dollar and general risk aversion in the financial markets. Obviously, in this kind of environment, all commodities are bid down. In our sector specifically, we're continuing to see good consumption growth in all key markets, excluding China. The US continues strong. We're seeing continued improvement in the EU. Some key markets in Asia are doing better. The issue, of course, is China. It begins with the continued slowing of consumption growth in their economy generally, and this has obviously been well reported and discussed, so I won't go into detail here. The issue specific to our sector is the growing excess of supply. This put together with the weak demand environment has led to a significant increase in the exports of both prime and semi-fabricated products. And again, Shelly will give you some specific detail. It's very clear to us that the authorities in China must take action at this point. Various components of the cost structure of the primary aluminum sector in China are heavily subsidized, the duty and fiscal regimes are increasingly encouraging export, and there is very clear evidence of significant and growing flouting of regulations and even laws. The situation represents a real threat to orderly, competitive and strong markets for all participants, in our view. We're increasingly convinced that only a policy response in China and-or in Western markets will change inappropriate and, in many cases, blatantly illegal behavior. The harm does to the markets is seen at this Company and at others. We don't see fair conditions returning to these markets at least in the foreseeable future, and thus we've taken some very regrettable, but what we consider to be at the same time, very necessary actions, and I'll detail those in just a moment. These market conditions were also the final input in the very difficult decision we've recently made with respect to our Ravenswood plant. You saw this, as we announced it last week. We had come really close to an acceptable power contract. A gap definitely remained, but we thought it might well have been solvable. We were contemplating how to address this last gap around the end of the first quarter, when the bottom fell out of the market, and it's obviously continued to worsen. The issue at the end of the day was simply that we wouldn't be able to say exactly when the plant would be able to restart even if the gap on the power could be solved, and given the market environment, this could have been a very long time away or perhaps even worse. Thus, it simply became untenable for us to pursue the restart of the plant. We'll be working to dispose of the plant and the site in the most practical and efficient manner possible, and we'll obviously do this consistent with the interests of our shareholders and also in concert with economic development in the state. This is a huge disappointment for us given the very real and long-term support that we've had. State leadership and West Virginia's federal delegation remain absolutely committed to getting that plant running again. These people were truly dedicated to this cause. We greatly appreciate their efforts, and we know they share in our disappointment. And with that, can we move on to slide 5, please? As I said, given the market conditions, we've now moved quickly to reduced costs and preserve cash. The objective of this program is to set up the Company to operate in this weak pricing environment. If you look at the top of the page, you'll see the committed improvements thus far in operating costs, and as you can see, these are stated on an annualized basis. The most significant of these is the regrettable requirement for a significant number of layoffs. About half of these come from the decision that we've made to maintain Hawesville's production at where it is today at about 80% of capacity. The remainder of these actions are spread throughout the US plants, largely in Kentucky. Again, this is a very difficult, but at the same time, very necessary decision. We've also reduced budgets throughout the Company. This comes with an annualized cost reduction of a further $20 million. At this point, we haven't stopped one area or abandoned one project completely. These reductions are across the board. Of course, something like that might be necessary, depending upon future market conditions. You see, moving down the page, we've negotiated some price concessions with suppliers thus far. And last, you'll see the avoided annual cash costs of holding Ravenswood in a ready state. These will be fully realized only upon the completion of the disposition process, and as you see there in the footnote, these numbers don't include the value to be realized upon the sale of the equipment and of the land itself. On the bottom half of the page, you'll see the CapEx reductions we've committed to thus far. Let me back up here and review where we are on CapEx, so go back to our budget for the year that we talked about in the February call, and that was $85 million. If you've had a chance to look at the cash flow statement thus far in the -- since the press release went out about an hour ago, you'll see that we've spent $31 million year-to-date through the first two quarters, so that would've left us with about $54 million remaining for the second half. So you can see we've taken out roughly half of that $54 million. Of the remaining amount, about $10 million is for two projects that would be very difficult to stop at this point, and further, that are key to the operational stability of the Company. The first of those is we need to finish the rebuilding of the second furnace at the Vlissingen anode plant, and the second is the completion of the upgrade at the Hawesville rodding shop. We're looking to take out more of the remainder, and Rick will have some further comments. We can turn to slide 6, please. As I've said, we're looking at additional actions in addition to the ones that I just described. These are in the areas of both operations expense and CapEx. In addition, we believe we can get a significant amount of working capital out of the Company over the next two to three quarters. This will be in the tens of millions of dollars. We're continuing to look at curtailing additional capacity in the US. Some of this will come from -- simply from attrition, so we'll cease relining cells as they fail on a normal schedule, and we're also analyzing more substantial actions, if necessary. The situation, it goes without say, is very fluid. We believe strongly we know here what needs to be done, and we intend to stay ahead of industry conditions and set the Company up to prosper when the environment improves. And with that, I'll turn it over to Shelly to give you some more information on the industry itself. Shelly? -------------------------------------------------------------------------------- Shelly Harrison, Century Aluminum Company - VP, Finance and Treasurer [4] -------------------------------------------------------------------------------- Thanks, Mike. We can move along to slide 7, please. I'll provide some comments here on the industry environment. The cash LME price averaged $17.65 per ton in Q2. That's about a $35 decline from Q1 prices. Regional premiums continued to fall throughout the quarter, but it appears to have found some stability around $0.08 per pound, or $175 on a per-ton basis. Premiums have been trading around these levels since early to mid June. Just to give you a sense of how massive the decline in prices has been, in February of this year, the Midwest transaction price, which includes both the LME price and the premium for delivery into the US and West, was around $2400 per ton. Today, that price is roughly $1750 per ton. That's a $650 decline in six months. Despite good demand growth in the US and an improving picture in Western Europe, several factors have weighed on aluminum prices and premiums. These include a strong dollar and macroeconomic concerns such as the Greek default, but we believe the largest factor driving down aluminum prices is China. At the same time, the Chinese economic growth and aluminum consumption are slowing. Producers in China are continuing to invest in aluminum projects. This over-investment has pushed China well into the surplus position for 2015. Excess metal is being exported to the West and more than wiping out the aluminum deficit in the world, ex China. We continue to hear of (inaudible) circumventing Chinese taxes and finding their way into regions such as Mexico, Vietnam, Malaysia and ultimately over-supplying North American and European markets. The aluminum market is expected to generate surplus of approximately 1 million tons this year, which is entirely attributable to excess capacity from China. While we expect a challenge near-term market environment, we continue to believe that there remains a good fundamental story for aluminum. In Q2, North American demand was up 6% year over year, driven by automotive and aerospace sectors. And European demand is showing some signs of life. As we've said on past calls, we believe the appropriate long-term position for China is a net balanced aluminum market. Aluminum smelters are highly energy intensive and don't produce the kind of job creation that can be achieved in activities further downstream. As a result, we believe the Chinese government must ultimately take more punitive measures to enforce the current tax regimes, and further actions, either from China or possibly in Western markets, may be necessary to bring that market back in balance where it should be. With the Chinese market back in balance, we would be looking at a global market that is net short aluminum with growing intensity of use and a shrinking number of regions that can produce the massive amounts of competitively priced, long-term power which a smelter requires. This combination of strong demand growth and a constrained supply should be supportive of higher aluminum prices long term. Okay, just a couple quick comments on the aluminum market before I hand it back to Mike. Australian aluminum prices continue to trade down, along with the broader commodity sector, from $335 per ton in March to the current level, just north of $300 per ton. Pricing for Atlantic aluminum traded at discount to the Australian price of $5 to $10 for most of Q2. Overall, the global aluminum market is expected to see a modest surplus in 2015. With that, I'll hand it back to Mike. -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [5] -------------------------------------------------------------------------------- Thank you, Shelly. And if you could turn to slide 8, please, I'll give you a quick rundown on the operations before I hand it over to Rick. The highlight, as you can see, of course this quarter was the difficult time at Hawesville as we prepared for and then went through the labor disruption. I would note that those safety data are misleading. Remember here, we compare Q2 with the quarter that just ended to the prior quarter sequentially, and in Q1, the safety performance at Hawesville was excellent, truly at world-class levels. On an absolute basis, Q2 was better than average. Our folks at Hawesville did a fantastic job in keeping people safe during a very difficult period, and we're proud of them and thankful to them for doing that. As you can see, the safety performance at the other plants was good. We see the production decline at Hawesville solely as a result of production inefficiencies during and after the labor disruption. And as I've said, we have now made the decision to maintain the plant at about 80% of capacity until conditions change. You see the production at Sebree and Grundartangi were flat to Q1, and that slight decline you see in Mount Holly's production was wholly as a result of our decision to crank down the line current just a little bit here to maintain stability in the reduction runs during the summer season. As you can see, the production metrics were good at the plants, other than Hawesville. The increase in the conversion cost you see at Hawesville is completely the product of events during the labor disruption. The majority of that is the result of a heightened need for security at the plant and in the community during that period, and Rick will give you some further detail. As you can see, the performance at the other plants was roughly flat. That improvement in Sebree that you're seeing was all due to commodities coming down a little bit, so controllable expenses were flat quarter to quarter. The opposite is true at Grundartangi. Controllable expenses were still flat at Grundartangi, and that slight increase you see there was solely due to a small inventory draw down. And with that, I'll hand it over to Rick. -------------------------------------------------------------------------------- Rick Dillon, Century Aluminum Company - EVP and CFO [6] -------------------------------------------------------------------------------- Thanks, Mike. Let me start by providing a few details on the Ravenswood impairment charge. As Mike discussed, we made the decision to permanently close our Ravenswood facility. During the quarter, we recorded impairment charges of approximately $31 million. The breakdown of these charges is as follows -- approximately $22 to write down the plant and equipment to its estimated salvage value, approximately $8 million to write down the inventory to its estimated net realizable value, and approximately $2 million for employee severance and other cash exit costs, which we expect to pay out in the back half of 2015. The entire charge was included as one of the adjustments for non-recurring items and arriving at our adjusted EBITDA and adjusted earnings per share, which we'll discuss further in a few minutes. Now, let's turn to slide 9 of the presentation. I'll provide some additional details on our financial performance for the second quarter. Our net sales were down 11% for the quarter, reflecting unfavorable market conditions and lower sales volume at our North American operations. From a market perspective, and as a reminder, our fiscal 2015 pricing is on a two-month lag basis. The average cash LME price was down 6%, and the Midwest transaction price was down 8% sequentially. Realized prices in the US were down 5% in the second quarter, reflecting the two-month lag pricing. It is important to note here again that the Midwest transaction price actually declined approximately 12% since the end of the first quarter, and the balance of this decline will show up in realized prices in our third quarter results. Our Iceland direct sales are also on a two-month lag basis, as they have been historically. The all in two-month lag LME and European duty pay premium decreased approximately 10% in the second quarter, consistent with the decline in our realized prices. On a consolidated basis, global shipments were down 5% in the second quarter of 2015 versus the first quarter. Iceland shipments were up 1% in the second quarter, with approximately 4000 tons of finished goods awaiting shipment in Iceland at the end of the quarter. North American shipments were down 7% from the first quarter of 2015. Just under half of this decrease is attributable to approximately [5400] tons recognized in the first quarter due to timing of the title transfer at the end of 2014 at both Sebree and Mount Holly. (Inaudible) shipments were down approximately 5000 tons, and this is attributable to reduced production as a result of the labor disruption and the timing of revenue recognition at the end of the quarter. Turning our attention to operating profit, we reported an adjusted EBITDA this quarter of $51 million, a decrease of $50 million when compared to the $101 million adjusted EBITDA in the first quarter of 2015. As discussed, the adjustments to EBITDA include Ravenswood impairment charges as well as the cash cost associated with the Hawesville labor disruption and a non-cash adjustment to the carrying value of our inventories, which reflects the sharp decline in market prices at the end of the quarter. The Hawesville labor disruption cost of $12 million includes the net incremental cash costs for contract labor and overtime premiums, travel and temporary living expenses, security and other operating supplies and materials during the period. Lower all-in prices, including the impact of a declining LME, declining regional premiums and net of the impact of the LME on our power and certain aluminum costs, all combine to reduce operating profit by $36 million during the quarter. As we noted on our last call, unfavorable raw material prices, primarily alumina, which we moved to spot index pricing in 2015, resulted in an increase in raw material costs of approximately $10 million during the quarter. As Mike discussed, increased operating costs, including more fixed-cost absorption at Hawesville on lower production, resulted in increased costs of $9 million during the quarter. Partially offsetting these cost increases was $5 million in favorable US power prices when compared to the first quarter of 2015. In summary, lower market prices during the quarter, increased raw material costs and increased operating costs partially offset by reduced power costs drove a $50 million decrease in EBITDA, resulting in adjusted earnings per share of $0.25, a decrease of $0.47 from the first quarter of 2015. Moving on to liquidity, there were no outstanding borrowings under our revolver other than letters of credit. During the quarter, we amended our existing US revolver, extending the term by two years to 2020. While the maximum borrowings under the amended revolver remained at $150 million, we decreased the minimum liquidity trigger from $35 million to $15 million. If our fixed cost coverage ratio, as defined by the agreement, is less than 1.1-to-1, we must maintain at least $15 million of available borrowing capacity. As of the end of the quarter, our available liquidity was at $290 million, a decrease of $58 million, and our fixed coverage ratio was greater than 1.1-to-1. Now let's turn to slide 10 and talk about cash. Cash decreased during the quarter by $80 million after consideration of an additional $51 million of adjusted EBITDA. During the quarter, we paid an additional $38 million weighted to the Mount Holly acquisition, primarily associated with the required funding of the Mount Holly pension plan, pursuant to the agreement. Capital spending, as Mike discussed, during the second quarter was $19 million, with year-to-date spending at $31 million. As Mike noted, we've taken action to reduce our anticipated capital spending in the back half of the year by $25 million. This will result in annual spending of between $55 million and $65 million, down from the $80 million to $90 million previously communicated. During the quarter, we purchased an additional 1.2 million shares at $17 million. As noted earlier, we incurred $12 million in cash costs to the -- related to the Hawesville labor disruption, and paid cash taxes of $11 million primarily related to temporary withholding taxes, which should be refunded in November of 2016. We used cash on working capital, primarily attributable to timing of the (inaudible) and revenue recognition cutoff at the end of the quarter partially offset by increased receivable turnover in the quarter. Given the recent decision noted by Mike to maintain pipes offline at Hawesville and certain contractual obligations, it will take at least two or three quarters before we see meaningful reductions in inventory quantities to more reasonable levels given reduced production. Cash flow break even for the back half of 2015 at current premium levels is now at approximately $1800 per metric ton, which is a direct comparative to the LME. This is cash flow after sustaining capital expenditures, cash taxes, interest expense, SG&A and pension contributions, pretty much everything excluding discretionary capital spending. It does not take into account any of the cost-reduction efforts under way, as Mike previously discussed, or any additional actions under consideration. With that, I'll turn the call back over to Mike. -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [7] -------------------------------------------------------------------------------- Thanks very much, Rick. If we could just turn the slide 11, please, I'll give you a quick rundown of the items on which we'll be focusing over the next couple months, and then we can get right to your questions. As I've said before, the most urgent task now before us is to reach a conclusion on the post-2015 power contract for Mount Holly. As I said, we've got an agreement on all principle terms with an excellent third-party power supplier. Only detail documentation remains with this company, and this will be ready to go well before the first of January. The issue now rests squarely with the power company in South Carolina and with the state itself, and we need to see some real progress here during the next month, so we'll be working hard on that. We'll continue our discussions with the national power company in Iceland regarding the extension of the original Grundartangi power contract. That contract is for 30% of the plant's power requirement. As a reminder, the remainder of the power contracts for the other 70% expire between 2026 and 2036. This particular agreement expires in late 2019, but the contract terms say that the parties are supposed to agree on the terms of an extension in 2015. We'll obviously spend significant effort on the cost-reduction activities that I've described. We'll spend time implementing the actions that have already decided and, as I said, analyzing additional actions. The environment really does call for swift and decisive decision-making and then action, and we intend to stay ahead of the curve here. Lastly, we'll begin work on the disposition of Ravenswood. We're starting reasonably at the beginning of this process. As I said, until very recently, we were focusing solely on trying to solve the last gap on the power. This process will most likely take some time to resolve fully. It could be well over a year until we're through. And with that, Pete, I think we can move to questions. -------------------------------------------------------------------------------- Peter Trpkovski, Century Aluminum Company - Senior Corporate Financial Analyst [8] -------------------------------------------------------------------------------- Thanks, Mike. And Terry, if you could go ahead and kick off the Q&A session, please. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Sure. (Operator Instructions). Timna Tanners, Bank of America Merrill Lynch. -------------------------------------------------------------------------------- Timna Tanners, Bank of America Merrill Lynch - Analyst [2] -------------------------------------------------------------------------------- Thanks for all the great details, and the cost reduction help here is great. I wanted to just follow up. I know on the first quarter, you said that there was a delay in your plans to add more value-add capacity that we had started to model in, so I just wanted to get an update on your shift there. -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [3] -------------------------------------------------------------------------------- Thank you, Timna. No change at all, so we've done nothing further to what we -- the status that we described in the first quarter call hasn't changed, and so, as you remember, the additional actions at which we were looking was a reasonably major investment at Grundartangi for billet capacity. That investment, in our opinion, still looks good long term, but as I said, that's a reasonably major one, and in this environment, we just can't responsibly -- as regrettable as it is, and it might be short-term thinking, but just with a mind towards liquidity, we just can't take on responsibly something like that. Now, the one would be some additional investments at the US plants for additional billet and other capacity, both at Hawesville and at Mount Holly, and again, those are analyzed, ready to go, even begun to be engineered, but are on hold pending an assessment that things are going to be changing here. -------------------------------------------------------------------------------- Timna Tanners, Bank of America Merrill Lynch - Analyst [4] -------------------------------------------------------------------------------- Understood. When you talk about a lot of things that are on hold for better market conditions, how do we assess what those better market conditions would equate to? Because I know in the past, you hadn't been giving credit to the premium going up, and so that wouldn't be as much of a hit coming down, so it's the broader LME, I imagine. But should we go back to what you've told us in the past about kind of your break-even numbers and assume a return on that, or how should we be thinking about the market conditions that would allow you to proceed on some of these projects? -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [5] -------------------------------------------------------------------------------- Yes, great question, and you're quite right on the premium, and so if you just -- I mean, now I'll roll in the premium. If you look at, for example, what CRU now have, they've just adjusted all their forecasts in their most recent report that came out just recently, in the last couple days, Pete, and I think they had actually done it in July as well. So if you look at what they're calling for now for the final selling price -- i.e., the Midwest transaction price in the USA and the European duty paid price -- they're looking for something in 2016, 2017 and 2018 going kind of from the high teens -- total price now, selling price before product premiums -- to the low 2000s, and that's the kind of environment still where, given the cost structure that we had even before these cost-reduction actions and certainly after, the Company, in our opinion, if you've modeled it out, would be -- would make nice cash flow, nice returns, and we'd be able to take on something like that. So if you're looking at an environment like that, if we became confident -- we as an industry and we as a Company -- that we were heading towards an environment like that, you'd see us move out. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- David Gagliano, BMO Capital Markets. -------------------------------------------------------------------------------- David Gagliano, BMO Capital Markets - Analyst [7] -------------------------------------------------------------------------------- I just have a couple of questions. First of all, I was wondering if your comments regarding the cost reductions, if that factored in the impact of the decline that we've seen in alumina prices lately. And if not, can you quantify what that impact would be and how we should expect that to flow through as a result? -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [8] -------------------------------------------------------------------------------- Hi, David. Thanks. Great question. The answer is no. We don't want to take credit for something that we had nothing to do with. These are only actions that we are creating here, but in fact, our alumina prices -- our costs are coming well down, so it was just -- we can detail that for you quickly here. So just on a broad -- really broad brush, here's one way to think about it. We've got about 1 million tons, as you know, of final capacity, and so we need just shy of 2 million tons of alumina, and as we've said before, we buy a portion of that on an LME reference basis, and that portion is about a quarter or a little bit under that -- yes, so about 20%, Shelly said correct. And so that's come down -- that'll come down directly with the LME. The rest, we buy on the index, and you can track the Atlantic price. It was really sticky -- we buy it on the Atlantic price, so at discount from the so-called API. As you know, it was really, really sticky, and we were scratching our heads, and other market participants I think were doing the same for a period of months, and you've now just finally seen it -- I shouldn't say finally, but over the last, I'd say, six weeks or so begun to come down with some conviction. And so that's a dollar-for-dollar -- as that API minus Atlantic comes down, that other -- as Shelly correctly says, 1.6 million tons of annualized alumina comes down dollar for dollar. -------------------------------------------------------------------------------- David Gagliano, BMO Capital Markets - Analyst [9] -------------------------------------------------------------------------------- Okay. And there are no lags or anything like that associated with the timing there? -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [10] -------------------------------------------------------------------------------- There's a month, right, Pete? Thanks, Pete. One month we buy our alumina on, so not much. -------------------------------------------------------------------------------- David Gagliano, BMO Capital Markets - Analyst [11] -------------------------------------------------------------------------------- Okay. And then my second question, just regarding the decline in production at Hawesville -- is it reasonable to assume that the second quarter production is at a decent run rate moving forward now for everything, with a slight uptick given a bit of improvement at Hawesville? Is there anything else going on that we should be thinking about in terms of -- -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [12] -------------------------------------------------------------------------------- No. No, so the other -- the question -- the other plants, the answer is easy -- yes. At Hawesville, remember, we were pretty good -- we were good up until -- in fact, we went into the labor dispute with only four or five cells up, so less than sort of a normal number of cells out. As cells fail and you get them back online, you have the normal lag there, and so we built to the worst, obviously, as we went through the quarter, and so the impact that you saw Q1 to Q2, it'll be the percentage comparison. Q3 over Q2 will be more severe, and so it's simply -- you can just -- one way to look at it would be just take Hawesville's production in Q2 and assume that we stay at 80% of the capacity, what the final capacity is, 255,000 tons. It's right in our 10-K, and that's the level that we'll -- that you should maintain in your model going forward. -------------------------------------------------------------------------------- David Gagliano, BMO Capital Markets - Analyst [13] -------------------------------------------------------------------------------- That's helpful. Thank you. My last question -- the $55 million to $60 million of annual CapEx run rate now, is that sustainable into 2016? -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [14] -------------------------------------------------------------------------------- Not a run rate, so that -- good question. Thank you for asking it. Rick was just summarizing what the 2015 number will be. Going into 2016, as we've told you before -- and this hasn't changed -- the maintenance CapEx for the whole Company is roughly $25 million, and even that in times of severe industry conditions can be squeezed. We did it before. And so going into the end of this year, as we're putting together our capital budgets for next year -- we're going to be starting it here over the next month or so. If you see these similar industry conditions, it'll come way down. It'll be half or less than that -- of that $55 million to $60 million. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- (Operator Instructions). John Tumazos, Very Independent Research. -------------------------------------------------------------------------------- John Tumazos, John Tumazos Independent Research - Analyst [16] -------------------------------------------------------------------------------- There were reports in the trade press this week of -- questioning the solvency of a Chinese entity that supposedly holds over 1 million tons of inventory in Mexico, and of course there is the discrepancy between the reported 18.1% gain in Chinese smelter output this year and 2% gains in auto sales and declines in construction activity. Do you have any guesses or theories as to where 3 million or 5 million or more tons of extra Chinese inventory might be sitting, how much is in the Pacific, other side of the Pacific versus closer to where you compete, et cetera? -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [17] -------------------------------------------------------------------------------- Hi, John. Thanks. Yes, I mean, the company to which you're referring is called Ginlang, and their shares were suspended as of late last week. I haven't even checked in the last couple days to see if they're trading again. But the answer to the question is the industry has -- well, a couple comments first. The industry, from the (inaudible) association in the US to other groups both formal like that and informal, have known about this for some time. That's number one. Number two, you asked about locations. I think the consensus of people who follow these markets and who participate in these markets, as that report that you're citing, I believe, said, the three principle locations are Mexico, as you cite, then Vietnam and Malaysia. I don't know if those last two are in strictly descending order. And I'm -- John, I wouldn't even begin to apportion or guess as to how many tons are in each of those locations, but the industry, for what it's worth, clearly believes that the stock is there, and it's been building there for not even quarters and quarters and quarters -- years, so this is not a new phenomenon. It's just -- now it's, I think, being talked about in the public a little bit more. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- All right. Thank you. We have no more questioners in queue. Please continue. -------------------------------------------------------------------------------- Mike Bless, Century Aluminum Company - President and CEO [19] -------------------------------------------------------------------------------- We thank you much -- very much for your attention this afternoon and for your time, and we look forward to speaking with you in October. Thanks very much. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
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