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Are Century Aluminum’s Valuations Looking More Attractive?

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Nov. 20 2020, Updated 1:52 p.m. ET

Century Aluminum’s valuations

Previously in this series, we’ve looked at various cost-cutting initiatives at Century Aluminum (CENX). Other mining companies, like Rio Tinto (RIO), are also aggressively cutting costs. In this part, we’ll look at Century Aluminum’s valuation multiples after its 2Q15 earnings release.

Together, Century Aluminum and Reliance Steel & Aluminum (RS) form ~9.4% of the SPDR S&P Metals and Mining ETF (XME).

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Valuations have corrected

The chart above shows the trend in Century Aluminum’s forward EV/EBITDA[1. Enterprise value to earnings before interest, taxes, depreciation, and amortization] over the last year. As you can see, its valuations have corrected sharply over this period. Falling valuations are attributable to the steep fall in Century Aluminum’s share price.

In a previous series, we expressed apprehension over Century Aluminum’s soaring valuations. We noted that the market was factoring in every possible positive aspect of Century Aluminum. The company faced certain challenges, specifically with regard to securing crucial power and labor agreements.

Are Century Aluminum’s valuations attractive at their current levels?

Century Aluminum has not addressed all these challenges. Nor have aluminum industry fundamentals shown any major signs of improvement. However, there seems to be excess pessimism surrounding Century Aluminum—just like there was too much optimism last year.

Century Aluminum currently trades at a discount to its five-year EV/EBITDA. It also trades at a discount to other aluminum producers, including Alcoa (AA).

Century Aluminum has comfortable leverage ratios. Moreover, the company’s capex cuts should help it conserve cash for future needs. This should act as a cushion for CENX if aluminum industry fundamentals deteriorate further.

Key risks

The aluminum industry faces several headwinds in terms of falling all-in aluminum prices. China’s aluminum exports have risen at a steady pace this year, pressuring aluminum prices. China’s slowdown is turning out to be worse than what analysts were expecting.

China’s slowdown should continue to dampen sentiments surrounding companies in the metals and mining space.

You can learn more about this industry by visiting Market Realist’s aluminum page.

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