Key aspects of Century’s Mt. Holly transaction

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Dynamics of Mt. Holly acquisition

As discussed previously, Alcoa (AA) has sold its stake in the Mt. Holly smelter to Century Aluminum. The companies structured the deal in a very interesting way. This deal marks further consolidation in the U.S. aluminum industry. Last month Constellium N.V. (CSTM) completed the acquisition of Wise Metals. Let’s now analyze the dynamics of the Mt. Holly transaction in detail.

mt holly dynamics

Understanding the transaction price of Mt. Holly

The previous chart shows the dynamics of Mt. Holly transaction. The transaction price is not fixed, and is dependent on Midwest aluminum prices. The base price has been fixed at $67 million, but the final transaction price could be $55 to $90 million.

Higher aluminum prices over the next year will lead to a higher purchase price for CENX. On the other hand, Alcoa will receive a higher price for the Mt. Holly plant if aluminum prices go up.

How will the companies divide pension liability prices?

Under the terms of this transaction, both Alcoa and Century Aluminum will fund their share of GAAP (generally accepted accounting principles) pension liability. Alcoa will also fund its share of other post-employment benefits (or OPEB).

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This plant added $11 million in earnings before interest, taxes, depreciation, and amortization (or EBITDA) to Alcoa’s 3Q earnings. The Mt. Holly plant is the first primary aluminum plant in the world to be registered under ISO 9001 quality system standards. With such strong credentials, why did Alcoa sell its stake in this plant? The next part of this series will answer this question.

Please note that Rio Tinto (RIO) and the SPDR S&P Metals and Mining ETF (XME) can also give investors desired exposure to the metal industry.

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