What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-07 · 80 added, 80 removed, 161 unchanged (50% of the section changed)

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• our production volume.

Recent Developments

Holly Restart

We have finalized and received all necessary approvals for a new power contract with Santee Cooper for the Mt.

Holly aluminum smelter.

The contract was effective April 1, 2021, and runs through December 2023.

It is expected to provide sufficient energy to allow the Mt.

Holly smelter to increase its production by 50% (resulting in total production of 75% of Mt.

Holly’s full capacity once the restart project is completed) at cost of service based rates.

Restart work at the Mt.

Holly smelter is already underway and is expected to be completed in the fourth quarter of 2021.

Hawesville Restart Activity

Our Hawesville facility experienced several equipment issues in late December 2020 that partially reduced the plant’s production level;

however, we began the process of returning to our planned operating level of 80% of production capacity early in the second quarter of 2021.

We expect the various major maintenance and other projects associated with these equipment issues will result in approximately $10.0 to $12.0 million of one-time additional operating costs during the last three quarters of 2021, with over half of this amount anticipated to be spent during the second quarter of 2021 and declining amounts in each of the third and fourth quarters.

Refinancing Activity

On April 14, 2021, we issued $250.0 million in aggregate principal amount of our senior secured notes that will mature in 2028 (the "2028 Notes") and used a portion of the proceeds to purchase $195.9 million of our 12.0% senior secured notes due 2025 (the "2025 Notes") pursuant to a cash tender offer for any and all of the 2025 Notes.

We also called for redemption on May 14, 2021 of all of $54.1 million aggregate principal amount of the 2025 Notes not tendered in the tender offer.

On April 9, 2021, we issued $86.3 million in aggregate principal amount of convertible senior notes due 2028 (the "Convertible Notes").

The remaining proceeds from the issuance of the 2028 Notes and a portion of the net proceeds of the Convertible Notes will be used to redeem the remaining 2025 Notes on May 14, 2021.

With these transactions, we have effectively extended the maturities of our principal debt obligations, reduced the interest rate on these obligations, and raised additional liquidity through the issuance of convertible senior notes.

COVID-19 Update

In response to the COVID-19 pandemic, we have taken a number of actions to protect the health and well-being of our employees and to prevent the spread of COVID-19 within our operations.

As a result, our plants have not experienced any disruption in operations as a result of the pandemic, and we continue to sell all of our metal essentially as it is cast.

Since the outbreak of the COVID-19 pandemic in early 2020, we have seen disruptions to the global economy and the COVID-19 pandemic created significant volatility in the primary aluminum industry;

however, in recent months, we have seen some measurable improvement in the global market for primary aluminum along with an increase in the price for our product and continued stability in the market in which we operate.

The LME price for primary aluminum averaged $2,192 per tonne for the three months ended March 31, 2021, as compared to an average of $1,702 for calendar year 2020, due in part to the impacts that the COVID-19 pandemic had on the LME price for primary aluminum during 2020.

Because we sell our product on a one-

to three-month lag to current prices, our results reflect the LME price on this one-to-three month lag basis.

Generally, customer demand for value-added aluminum products and, in turn, the product premium we receive for such products have returned to first quarter 2020 levels after having been negatively impacted by the COVID-19 pandemic throughout the last three quarters of 2020.

Since early 2020, we have taken actions to mitigate the financial impact of the COVID-19 pandemic, including reducing discretionary spending, optimizing working capital and deferring non-essential capital projects.

The potential further impact of the COVID-19 pandemic on our business, results of operations and financial performance is difficult to predict and will depend on future developments, and such effects could exist for an extended period of time.

Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for additional information on the potential risks associated with the COVID-19 pandemic.

Pricing of aluminum

The overall price of primary aluminum consists of three components:

(i) the base commodity price, which is based on quoted prices on the LME and other exchanges;

plus (ii) any regional premium (e.g., the Midwest premium for metal sold in the United States ("MWP") and the European Duty Paid premium for metal sold into Europe);

plus (iii) any product premium.

Each of these price components has its own drivers and variability.

The aluminum price is influenced by a number of factors, including global supply-demand balance, inventory levels, speculative activities by market participants, production activities by competitors and political and economic conditions, as well as production costs in major production regions.

These factors can be highly speculative and difficult to predict which can lead to significant volatility in the aluminum price.

Increases or decreases in primary aluminum prices result in increases and decreases in our revenues (assuming all other factors are unchanged).

Information regarding financial contracts is included in Note 13.

Derivatives and risks affiliated with such financial contracts are disclosed specifically in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

We have seen increases in the pricing of aluminum throughout the first half of 2021.

The average LME price for primary aluminum was $2,004 per tonne for January 2021, increasing to an average LME price for primary aluminum of $2,324 in April 2021 and then to $2,439 in June 2021.

The average MWP price was $330 per tonne in January 2021, increasing to $517 in April 2021 and then to $608 in June 2021.

The average European Duty Paid premium was $152 per tonne in January 2021, increasing to $231 in April 2021 and then to $251 in June 2021.

Results of Operations

The following discussion for the three months ended March 31, 2021, reflects no change in production capacities at our operating facilities.

The following discussion for the three and six months ended June 30, 2021 reflects no change in production capacities at our operating facilities.

Our net sales are impacted primarily by the LME price for aluminum, regional and value-added premiums, and the volume and product mix of aluminum we ship during the period.

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In general, our results reflect the market cost of alumina on an approximately three-month lag reflecting the terms of our alumina contracts and inventory levels.

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

(in millions, except per share data)

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Tonnes Net Sales (in millions) Tonnes Net Sales (in millions) Tonnes Net Sales (in millions)

2nd Quarter 112,792 $ 314.0 78,102 $ 180.1 190,894 $ 494.1

1st Quarter 116,437 $ 275.6 79,260 $ 164.2 195,697 $ 439.8

Total 229,229 $ 589.6 157,362 $ 344.3 386,591 $ 933.9

2nd Quarter 130,645 $ 246.6 79,664 $ 145.9 210,309 $ 392.5

1st Quarter 129,114 $ 273.8 73,791 $ 141.0 202,905 $ 414.8

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Net sales (in millions) 2021 2020

Three months ended March 31, $ 444.0 $ 421.2

Net sales (excluding alumina sales) increased by $25.1 million for the three months ended March 31, 2021, compared to the same period in 2020, primarily driven by favorable LME and regional premium price realizations of $40.0 million, partially offset by unfavorable volume of $15.0 million.

Three months ended June 30, $ 528.0 $ 401.9

Six months ended June 30, $ 972.0 $ 823.1

Net sales (excluding alumina sales) increased by $101.6 million for the three months ended June 30, 2021, compared to the same period in 2020, primarily driven by favorable LME and regional premium price realizations of $130.6 million, partially offset by unfavorable volume of $29.4 million.

Net sales (excluding alumina sales) increased by $126.6 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily driven by favorable LME and regional premium price realizations of $171.2 million, partially offset by unfavorable volume of $47.2 million.

Gross profit (loss) (in millions) 2021 2020

Three months ended March 31, $ (20.7) $ 4.8

Gross profit decreased by $25.5 million for the three months ended March 31, 2021 compared to the same period in 2020, primarily due to unfavorable power price realizations of $41.6 million, primarily related to extraordinarily cold temperatures in the U.S.

Midwest and South during February 2021, unfavorable alumina price realizations of $10.7 million, and unfavorable volume impacts of $10.9 million.

These unfavorable impacts were partially offset by favorable LME and regional premium price realizations of $40.0 million.

Three months ended June 30, $ 20.9 $ (13.0)

Six months ended June 30, $ 0.2 $ (8.2)

Gross profit increased by $33.9 million for the three months ended June 30, 2021, compared to the same period in 2020, primarily driven by favorable LME and regional premium price realizations of $130.6 million partially offset by unfavorable power price realizations of $42.1 million, unfavorable alumina price realizations of $18.2 million, unfavorable volume impacts of $8.1 million and increased operating costs.

Gross profit increased by $8.4 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily driving by favorable LME and regional premium price realizations of $171.2 million, partially offset by unfavorable

power price realizations of $81.5 million, unfavorable alumina price realizations of $26.4 million, unfavorable volume impacts of $23.2 million and increased operating costs.

Selling, general and administrative expenses (in millions) 2021 2020

Three months ended March 31, $ 16.1 $ 8.9

Selling, general and administrative expenses increased by $7.2 million for the three months ended March 31, 2021 compared to the same period in 2020 primarily driven by an increase in share-based compensation costs.

Three months ended June 30, $ 8.7 $ 11.8

Six months ended June 30, $ 24.8 $ 20.7

Selling, general and administrative expenses decreased by $3.1 million for the three months ended June 30, 2021 compared to the same period in 2020, primarily driven by a decrease in share-based compensation costs due to differences in fluctuations of the stock price period over period.

Selling, general and administrative expenses increased by $4.1 million for the six months ended June 30, 2021 compared to the same period in 2020, primarily driven by an increase in share-based compensation costs.

Net gain (loss) on forward and derivative contracts (in millions) 2021 2020

Three months ended March 31, $ (98.1) $ 3.8

For the three months ended March 31, 2021, net loss on forward and derivative contracts increased by $101.9 million compared to the same period in 2020 primarily due to increases in LME and MWP prices.

Derivatives .

Three months ended June 30, $ (64.4) $ 3.7

Six months ended June 30, $ (162.5) $ 7.5

For the three months ended June 30, 2021, net loss on forward and derivative contracts increased by $68.1 million compared to the same period in 2020 primarily due to increases in LME and MWP prices from March 31, 2021 to June 30, 2021.

For the six months ended June 30, 2021, net loss on forward and derivative contracts increased by $170.0 million compared to the same period in 2020 primarily due to increases in LME and MWP prices in the first six months of 2021.

Derivatives to the consolidated financial statements included herein for additional information.

Income tax benefit (expense) (in millions) 2021 2020

Three months ended March 31, $ 2.3 $ 2.8

Three months ended June 30, $ 48.3 $ (0.9)

Six months ended June 30, $ 50.6 $ 1.9

We have a valuation allowance against all of our U.S.

and certain foreign deferred tax assets.

The period to period change is primarily due to improved operational results at our foreign entities that are not subject to a valuation allowance.

The period to period change is primarily due to a discrete tax benefit of $49.8 million in the current quarter tax provision related to the recognition of certain foreign deferred tax assets.

Income Taxes to the consolidated financial statements included herein for additional information.

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We believe that cash provided from operations and financing activities will be adequate to cover our operations and business needs over the next twelve months.

As of March 31, 2021, we had cash and cash equivalents of approximately $26.3 million and unused availability under our revolving credit facilities o f $63.8 million, r esulting in a total liquidity position of approximately $90.1 million.

On April 14, 2021, we issued $250.0 million in aggregate principal amount of our 2028 Notes and used a portion of the proceeds to purchase $195.9 million of our 2025 Notes pursuant to a cash tender offer for any and all of the 2025 Notes.

We also called for redemption on May 14, 2021 of all of $54.1 million aggregate principal amount of the 2025 Notes not tendered in the tender offer.

On April 9, 2021, we issued $86.3 million in aggregate principal amount of Convertible Notes .

The remaining proceeds from the issuance of the 2028 Notes and a portion of the proceeds from the issuance of the Convertible Notes will be used to redeem the remaining 2025 Notes on May 14, 2021.

As of June 30, 2021, we had cash and cash equivalents of approximately $9.0 million and unused availability under our revolving credit facilities of $99.6 million, resulting in a total liquidity position of approximately $108.6 million.

On April 9, 2021, we issued $86.3 million in aggregate principal amount of convertible senior notes due 2028 (the "Convertible Notes").

The remaining proceeds from the issuance of the 2028 Notes and a portion of the proceeds from the issuance of the Convertible Notes were used to redeem the remaining 2025 Notes on May 14, 2021.

The remaining proceeds from the Convertible Notes offering were used to repay borrowings under our revolving credit facilities and to pay for the cost of the capped call transactions in connection with the issuance of the Convertible Notes.

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Available Cash

Our available cash and cash equivalents balance at March 31, 2021, was $26.3 million compared to $81.6 million at December 31, 2020.

Our available cash and cash equivalents balance at June 30, 2021, was $9.0 million compared to $81.6 million at December 31, 2020.

Sources and Uses of Cash

Our statements of cash flows are summarized below:

Three months ended March 31,

Six months ended June 30,

(in millions)

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The changes in working capital are primarily attributable to timing of receivable collections and timing of raw material receipts.

The increase in net cash used in investing activities was primarily due to higher spending on capital projects during the three months ended March 31, 2021, driven by capital investments in the Mt.

The increase in net cash used in investing activities was primarily due to higher spending on capital projects during the six months ended June 30, 2021, driven by capital investments in the Mt.

Holly restart project.

The decrease in net cash provided by financing activities was primarily due to lower net borrowings on our revolving credit facilities.

The decrease in net cash provided by financing activities was primarily due to increased repayments of borrowings on the revolving credit facilities, offset by the issuance of the convertible senior notes in April 2021.

Availability Under Our Credit Facilities

revolving credit facility, dated May 2018, provides for borrowings of up to $175.0 million in the aggregate including up to $110.0 million under a letter of credit sub-facility, and also includes an uncommitted accordion feature whereby borrowers may increase the capacity of the U.S.

revolving credit facility, dated May 2018, as amended, provides for borrowings of up to $175.0 million in the aggregate including up to $110.0 million under a letter of credit sub-facility, and also includes an uncommitted accordion feature whereby borrowers may increase the capacity of the U.S.

revolving credit facility by up to $50.0 million, subject to agreement with the lenders.

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decreases in the price of aluminum and/or curtailments of production capacity would decrease our borrowing base by reducing our accounts receivable and inventory balances.

As of March 31, 2021, our U.S.

As of June 30, 2021, our U.S.

revolving credit facility had a borrowing base of $173.5 million, $39.6 million in borrowings and $84.4 million in letters of credit outstanding.

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compensation commitments.

As of March 31, 2021, our Iceland revolving credit facility had a borrowing base of $50.0 million an d no outstanding borrowing s.

As of March 31, 2021, our credit facilitie s had $63.8 million of net availability after consideration of our outstanding borrowings and letters of credit.

As of June 30, 2021, our Iceland revolving credit facility had a borrowing base of $50.0 million and no outstanding borrowings.

As of June 30, 2021, our credit facilities had $99.6 million of net availability after consideration of our outstanding borrowings and letters of credit.

We may borrow and make repayments under our credit facilities in the ordinary course based on a number of factors, including the timing of payments from our customers and payments to our suppliers.

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Our Iceland revolving credit facility contains a covenant that requires Grundartangi to maintain a minimum equity ratio.

As of March 31, 2021, we were in compliance with all such covenants or maintained availability above such covenant triggers.

As of June 30, 2021, we were in compliance with all such covenants or maintained availability above such covenant triggers.

Senior Notes and Convertible Senior Notes

On April 14, 2021, we issued $250.0 million principal of senior secured notes that will mature on May 1, 2028, unless earlier refinanced in accordance with their terms.

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The Hawesville Term Loan is not secured by any collateral.

As of March 31, 2021, the outstanding balance of the Hawesville Term Loan was $15.0 million.

As of June 30, 2021, the outstanding balance of the Hawesville Term Loan was $10.0 million.

Supplemental Guarantor Financial Information

The Company has filed a Registration Statement on Form S-3 (the "Universal Shelf Registration Statement") with the Securities and Exchange Commission pursuant to which the Company may, from time to time, offer an indeterminate amount of securities, which may include securities that are guaranteed by certain of the Company's subsidiaries.

As of March 31, 2021, we have not issued any debt securities pursuant to the Universal Shelf Registration Statement.

The Company has filed a Registration Statement on Form S-3 (the "Universal Shelf Registration Statement") with the SEC pursuant to which the Company may, from time to time, offer an indeterminate amount of securities, which may include securities that are guaranteed by certain of the Company's subsidiaries.

As of June 30, 2021, we have not issued any debt securities pursuant to the Universal Shelf Registration Statement.

However, the securities that we may issue in the future may limit our ability, and the ability of certain of our subsidiaries to pay dividends or make distributions in respect of capital stock.

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The following summarized financial information of both the Company and the Guarantors Subsidiaries ("Guarantors") is presented on a combined basis.

Intercompany balances and transactions between the Company and the Guarantors have been eliminated and the summarized financial information does not reflect investments of the Company or the Guarantors in the Non-Guarantor Subsidiaries ("Non-Guarantors").

Intercompany balances and transactions between the Company and the Guarantors have been

eliminated and the summarized financial information does not reflect investments of the Company or the Guarantors in the Non-Guarantor Subsidiaries ("Non-Guarantors").

The Company’s or Guarantors’ amounts due from, amounts due to, and transactions with the Non-Guarantors are disclosed below:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Current assets $ 304.9 $ 252.4

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Non-current liabilities 608.8 483.7

Three months ended March 31, 2021

Six months ended June 30, 2021

Net sales $ 624.1

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Net income (loss) (175.1)

As of March 31, 2021 and December 31, 2020, an intercompany receivable due to the Company and Guarantors from the Non-Guarantors totaled $13.2 million and $14.6 million, respectively, and an intercompany long term loan due to the Parent from the Non-Guarantors totaled $555.7 million and $554.9 million, respectively.

As of June 30, 2021 and December 31, 2020, an intercompany receivable due to the Company and Guarantors from the Non-Guarantors totaled $18.8 million and $14.6 million, respectively, and an intercompany non-current loan due to the Company from the Non-Guarantors totaled $544.2 million and $554.9 million, respectively.

Contingent Commitments

We have a contingent obligation in connection with the "unwind" of a contractual arrangement between Century Aluminum of Kentucky ("CAKY"), Big Rivers and a third party and the execution of a long-term cost-based power contract with Kenergy, a member of a cooperative of Big Rivers in July 2009.

We have a contingent obligation in connection with the "unwind" of a contractual arrangement between Century Aluminum of Kentucky ("CAKY"), Big Rivers Electric Corporation and a third party and the execution of a long-term cost-based power contract with Kenergy, a member of a cooperative of Big Rivers in July 2009.

This contingent obligation consists of the aggregate payments made to Big Rivers by the third party on CAKY’s behalf in excess of the agreed upon base amount under the long-term cost-based power contract with Kenergy.

As of March 31, 2021, the principal and accrued interest for the contingent obligation was $27.0 million, which was fully offset by a derivative asset.

As of June 30, 2021, the principal and accrued interest for the contingent obligation was $27.4 million, which was fully offset by a derivative asset.

We may be required to make installment payments for the contingent obligation in the future.

These payments are contingent based on the LME price of primary aluminum and the level of Hawesville’s operations.

Based on the LME forward market at March 31, 2021, we believe that we will not be required to make payments on the contingent obligation during the term of the agreement, which expires in 2028.

Based on the LME forward market at June 30, 2021, we believe that we will not be required to make payments on the contingent obligation during the term of the agreement, which expires in 2028.

There can be no assurance that circumstances will not change thus accelerating the timing of such payments.

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Under certain circumstances, in periods of lower primary aluminum prices relative to our cost of operations, we are able to defer one or more of these payments, but would then be required to provide the PBGC with acceptable security for deferred payments.

We did not make any contributions in the three month periods ended March 31, 2021 and 2020.

We did not make any contributions in the three month periods ended June 30, 2021 and 2020.

We have elected to defer certain payments under the PBGC agreement and have provided the PBGC with the appropriate security.

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Our Hawesville facility experienced several equipment issues in late December 2020 that partially reduced the plant’s production level;

however, we expect the process of returning to our planned operating level of 80% of capacity will begin early in the second quarter of 2021.

however, the process of returning to our planned operating level of 80% of capacity began in the second quarter of 2021 and continues to progress.

The rebuild of the fifth and final potline and the completion of the technology upgrades is expected to be completed over the next several years subject to market conditions .

In May 2018, we temporarily curtailed one potline at our Sebree aluminum smelter due to an equipment failure.

Sebree was returned to full capacity by the end of the third quarter of 2018.

As of March 31, 2021, the claims process was concluded and we received all $21.3 million in insurance proceeds to offset against such losses.

Our new power contract with Santee Cooper for the Mt.

Holly aluminum smelter began on April 1, 2021 and runs through December 2023.

It is expected to provide sufficient energy to allow the Mt.

Holly smelter to increase its production by 50% (resulting in total production of 75% of Mt.

Holly’s full capacity once the restart project is completed) at cost of service based rates.

Restart work at the Mt.

Holly smelter is progressing on schedule and is expected to be completed in the fourth quarter of 2021.

In 2011, our Board of Directors approved a $60.0 million common stock repurchase program and subsequently increased this program by $70.0 million in the first quarter of 2015.

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We made no repurchases during the years ended 2018, 2019, and 2020.

As of March 31, 2021 we had $43.7 million remaining under the repurchase program authorization.

As of June 30, 2021, we had $43.7 million remaining under the repurchase program authorization.

The repurchase program may be expanded, suspended or discontinued by our Board, in its sole discretion, at any time.

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Upon approval of the settlement, we paid $5.0 million to the aforementioned trust in September 2017 and agreed to pay the remaining amounts under the settlement agreement in annual increments of $2.0 million for nine years.

At March 31, 2021, we had $2.0 million in other current liabilities and $7.7 million in other liabilities related to this agreement.

At June 30, 2021, we had $2.0 million in other current liabilities and $7.8 million in other liabilities related to this agreement.

We are a defendant in several actions relating to various aspects of our business.

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We intend to finance our future capital expenditures from available cash, cash flow from operations and if necessary, borrowing under our existing revolving credit facilities.

For major investment projects we would likely seek financing from various capital and loan markets and may potentially pursue the formation of strategic alliances.

For major investment projects we would likely seek financing from

various capital and loan markets and may potentially pursue the formation of strategic alliances.

We may be unable, however, to issue additional debt or equity securities, or enter into other financing arrangements on attractive terms, or at all, due to a number of factors including a lack of demand, unfavorable pricing, poor economic conditions, unfavorable interest rates, or our financial condition or credit rating at the time.

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and international markets and economies may adversely affect our liquidity, our ability to access the debt or capital markets and our financial condition.

Capital expenditures incurred for the three months ended March 31, 2021 were $2.3 million, excluding expenditures of $5.1 million associated with the restart project at Mt.

Capital expenditures incurred for the six months ended June 30, 2021 were $6.3 million, excluding expenditures of $22.4 million associated with the restart project at Mt.

We estimate our total capital spending in 2021, excluding the Mt.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis