What Really Drove Century Aluminum’s 2Q16 Profitability?



Century Aluminum’s 2Q16 profitability

There are several metrics that you can use to measure a company’s profitability, but for companies in the commodities space (GNR), EBITDA (earnings before interest, tax, depreciation, and amortization) is generally used. Century Aluminum (CENX) generated an adjusted EBITDA of $21 million in 2Q16. To put this in context, the company posted adjusted EBITDA of $2 million in 1Q16.

The above graph shows the trend in Century Aluminum’s adjusted EBITDA. The company’s 2Q16 EBITDA was the highest since 2Q15. Let’s see what factors drove Century’s 2Q16 EBITDA.

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Higher aluminum prices

We should note that commodity producers’ earnings are sensitive to aluminum prices. Average aluminum prices were ~3.6% higher in 2Q16—compared to the previous quarter. Higher aluminum prices helped Century Aluminum in 2Q16. Also, Century Aluminum has been proactive in curtailing its high-cost capacity to survive in the current pricing environment. Along with curtailing high-cost facilities, Century Aluminum has streamlined its other operations to survive the current slump in commodity prices.

Lower raw material costs

Alumina is a key raw material in aluminum’s production process. Companies such as Rio Tinto (RIO), Norsk Hydro (NHYDY), and Alcoa (AA) have alumina refining as well as aluminum smelting operations. However, Century Aluminum produces aluminum by sourcing alumina from outside parties. According to Century Aluminum, lower raw material costs had a positive impact on its 2Q16 EBITDA by $16 million. The company attributed lower alumina prices as a key driver of lower raw material costs.

In the next part of the series, we’ll look at the other key takeaways from Century Aluminum’s 2Q16 call.


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