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The Fine Balance of Century Aluminum’s Financials

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Financials

In our October 20 series, we had noted that short term, aluminum looks the weakest in the base metals space. Although aluminum demand is still growing at a higher pace as compared to most other industrial metals, Chinese aluminum exports have subdued this spirit.

Discussing the Chinese aluminum industry, Mike Bless, Century Aluminum’s president and CEO, noted during the 3Q15 earnings conference call, “It’s actually meaningfully weaker than it’s been publically reported. Capacity is not coming off nearly fast enough.”

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Alcoa

Interestingly, in its 3Q15 earnings conference call, Alcoa’s (AA) management noted that it expects the Chinese aluminum surplus to be 2 million tons in 2015, 0.2 million tons lower than its earlier forecast. A surplus represents production in excess of demand.

According to Alcoa, there have been some capacity curtailments in China that should help bring down the country’s aluminum production. Together, Alcoa and Ball Corporation (BLL) form ~4% of the Materials Select Sector SPDR ETF (XLB).

Mounting losses

Century Aluminum (CENX) has generated losses for two consecutive quarters. More worrisome is the fact that in 3Q15, Century Aluminum posted a loss at the gross profit level. The chart above shows the progression in Century Aluminum’s gross profits and margins. Generating a gross loss means that the company is not generating sufficient revenues to cover the cost of goods sold, let alone to meet overhead costs and interest expenses. This is a delicate situation for any enterprise.

This is where low-cost aluminum producers have a competitive advantage. Rio Tinto (RIO) is among the lowest-cost aluminum producers. Norsk Hydro (NHYDY) also generated a net profit in 3Q15.

Century Aluminum (CENX) has been burning cash for the past two quarters. In the next part, we’ll explore how the company plans to manage its operations in the current downtrend.

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