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Century Aluminum Company (NASDAQ:CENX)

Q2 2010 Earnings Call Transcript

July 27, 2010 5:00 pm ET

Executives

Shelly Lair – VP and Treasurer

Logan Kruger – President and CEO

Wayne Hale – EVP and COO

Mike Bless – EVP and CFO

Analysts

Kuni Chen – BofA/Merrill Lynch

Brett Levy – Jefferies & Company

Chris Doherty – Oppenheimer & Company

John Tumazos – Very Independent Research

Mark Liinamaa – Morgan Stanley

Tim Hayes – Davenport & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions being given at that time. (Operator instructions) I would now like to turn the conference over to Shelly Lair. Please go ahead.

Shelly Lair

Thank you, Rocko. Good afternoon, everyone, and welcome to the conference call. Before we begin, I would like to remind you that today’s discussion will contain forward-looking statements related to future events and expectations, including our expected future financial performance, results of operations, and financial conditions.

These forward-looking statements involve important known and unknown risks and uncertainties, which could cause our actual results to differ materially from those expressed in our forward-looking statements. Please review the forward-looking statement disclosure in today’s slides and press release for a full discussion of these risks and uncertainties. In addition, we have included some non-GAAP financial in our discussion. Reconciliation to the most comparable GAAP financial measures can be found in the appendix of today’s presentation and on our website at www.centuryaluminum.com.

I’d now like to introduce Logan Kruger, Century’s President and Chief Executive Officer.

Logan Kruger

Thank you, Shelly. Good afternoon, everyone, and thank you for joining us. We welcome the opportunity to report on our progress. So let’s move onto slide number four. I’d like to make some brief introductory comments at this point and then turn to an update on the market. We will get into this in more detail in just a moment, but at high level, we would characterize the market as somewhat sentiment-driven at this point in time.

Physical activity is reasonably good across the globe, and I think this is a positive indicator. Demand is exhibiting healthy growth in most of the developing regions. At worst, it is drifting sideways in developed economies that seem to have the most persistent structural issues. Supply growth is constrained.

And just as important, we believe there is a fair amount of existing capacity that is cash flow negative at and around current metal prices. Underlying this, of course, is the fact that aluminum, like all commodities, is subject to often volume strengths produced by changes in investor sentiment. I’m sure you have seen it as we have in the last couple of months.

I’m pleased to report that the teams at Grundartangi and Hawesville have maintained their excellent performance. As Wayne will detail, the team at Hawesville is very focused on pulling every cost lever it can identify as we prepare for the step-up in power prices in the year 2011. He will also report on the operating issues at Mt. Holly.

As you all are aware, we continue to negotiate with the local unit at Hawesville for a new labor agreement. There are clearly some issues pending, but we are hopeful that the presses can conclude in the near future. Most importantly, during this entire period, the plant is operated in a safe and efficient manner. And this, I believe, is the real testament to all of the employees. We have continued to spend significant time and effort on the completion of the task required for a restart of major construction at the Helguvik project. I’ll provide some additional detail at the end of our presentation.

So we move on to slide number five. The LME cash price has reached approximately $2,100 per ton for the second quarter of this year. Aluminum prices fell from their peaks in 2010 of some $2,450 per ton in April to $1,830 in June. Since then, prices have recovered and are currently in the $2,000 per ton. Aluminum prices have moved lower over the past month to currently stand at about $325 per ton. Alumina spot activity is variable in the wake of a decline in aluminum prices and the uncertain outlook for the second half of this coming year.

Global aluminum demand was reasonably strong in the second quarter, mostly as you would know, driven by China’s yesterday increase of approximately 35% due in part to the government stimulus measures. When you look at China, the economic growth slowed in the second quarter of 2010 to only 10.3%. This moderation still reflects impressive growth and follows on a very strong first quarter growth of some 11.9%.

It was recently noted by an economist that the Chinese economy has grown at an average of more than 9% for over 30 years. It is also noted that this can’t go on forever, only another decade at the most. I’m sure you will agree these are massive numbers. And even moderate growth rates in China will have a significant impact on all areas of global demand. Additionally, another significant area of growth is India, with an 8.6% year-on-year rise on the first quarter GDP and industrial production growth of 11.5% year-over-year in May.

Let’s take a look at slide number six. LME stocks declined again in the second quarter and are down approximately 220,000 tons year-to-date. This is a meaningful improvement for significant additions to the warehouses, as we saw in the first three quarters of 2009. That being said, there is still some concern that metal is being delivered out of the LME warehouses and slightly new warehouse in deals on a basis, which involves less expense as rents.

Nearby availability of physical metal units remains light and premiums holding in the 6.5 cent range for the Midwest. The European duty-paid premium is currently $180 to $190 per ton, and the premium in Japan is in the low $120. All of these represent multi-year highs, highlighting the shortage of accessible metal from warehouses and stock parts.

Let’s move on to slide number seven. With the alumina from $1,925 per ton at the end of the quarter and inventories of about 56 days of global demand, as you can see, the relationship between price and days inventory is moving more toward normal levels, but still appears to be out of sync based on historical correlation between these two data points. Only time will tell, but this could be indicative of a structural shift in pricing as global cost pressures increase.

As I mentioned in my opening remarks, we see this market as somewhat sentiment-driven as evident by significant market volatility without any meaningful fundamental drivers. Outside of China and perhaps India, demand growth continues to lack conviction and large global inventory levels remain a concern. We as a company will continue to focus on running the business prudently in this uncertain environment.

Now I’d like to pass it on to Wayne.

Wayne Hale

Thanks, Logan. I have a bit of cold today. So please bear with me. Let’s move on to slide eight. When we spoke to you last quarter, you may recall we were close to finalizing a new multi-year labor agreement at the Grundartangi smelter in Iceland. I’m pleased to say the five-year agreement, which includes a one-year wage reopener, was ratified with a majority vote by the represented employees. Kudos to all employees at the plant for the excellent safety and operational performance during these extended negotiations.

As you recall from our discussions last quarter, I gave you an update on the problem and repair timeline for one of the rectifier transformers in Grundartangi line one. The rectifier was delivered back to Iceland this month by a schedule. Regrettably, the internal linings have been damaged during transport as a result of rust seeds. We have returned it for additional repair, which is expected to take four to five months. The original impact to the plant output, as we relayed last quarter, is a couple of thousand tons. This additional repair will impact production another couple thousand tons. We anticipate a significant portion of this additional loss will be covered by our transport insurance.

Logan discussed the labor contract negotiations at Hawesville in his opening remarks. So I will not provide additional comment here. However, I would like to underscore the points Logan made about the stability of the plant during this protracted negotiations. The team in Hawesville continues to work diligently on reducing cost at the plant. This is a challenging process, as we successfully removed a significant amount of structural cost during late 2008 and 2009. The hard work is necessitated by the effective step-up in power prices that we will see after this year and the support we received from EON ends.

Put into perspective, all else being equal, the plant’s cash operating cost will increase by approximately $250 to $300 per ton without the credit. In addition to our own resources, we are using some outside experts with fresh eyes to make sure no stone is left unturned. We also continue to speak with Hawesville’s historical major customer about the future of that relationship. As you know, the current contract concludes in early 2011. Considering the status of the current discussions, we believe we will be able to conclude a new contract in the coming months.

Logan spoke about the operational issues that have impacted Mt. Holly since late last year. As noted previously, operational issues associated with (inaudible) cathode failures and supply chain challenges have affected production, quality and cost. We continue to work with our partners to return the plant to normal operations. Continuing on with Mt. Holly, we and our partner have detailed discussions -- held detailed discussions with the power supply about the future of this relationship.

And as we have said many times, Mt. Holly is relatively modern plant. However, this favorable attribute is more than offset by a power price that will not support competitive long-term plant operations. To bring the situation to an acceptable conclusion, we continue to speak with the incumbent supplier as well as investigating all alternatives.

Let’s move on to slide number nine. At Ravenswood, from an operational standpoint, really there is not much to report other than we remain on or better than expected trajectory for the various curtailment cost items. As you recall, at Ravenswood we have been working on objectives that would be required for a restart where market conditions permit.

First amongst these is the formulation of a new power contract. We have told the various constituencies that we would require a contract that protects Ravenswood’s viability and low metal prices. As we have mentioned previously, the state of West Virginia passed legislation that enables power in the state to be sold to specific customers under this type of structure.

Given this development, we have recently begun discussions with the power supplier around this concept. Enabling power contract will need to be followed by a new labor contract. Clearly, there are a number of complex issues that need to be resolved prior to a restart.

Logan also spoke about the markets on a more macro level. So I will just focus on a bit more local flavor on what we are seeing. Availability of scrap has been increasing, indicating some underlying activity. That market remains reasonably tight lending support to the strong local premiums we continue to enjoy.

The construction sector is not showing any signs of improvement, which is reflected by depressed demand for rod and cable. The strength in the automotive sector continues to drive demand for billet and foundry. I would also like to note that while destocking appears to be slowing, customer and distributor inventories remain at historically low levels.

With that, I’ll hand it over to Mike to discuss the financials.

Mike Bless

Thanks, Wayne. We could turn to slide 10, please. And as usual, I’m referring my comments to the financial information that comes after the earnings release. So if you could have that handy, they will make my comments easier to follow on. Before we go into the results, just take a look at the market movements during the quarter to put the results into context. The cash LME price quarter-to-quarter -- all my comments, as usual, will reflect comparisons between the quarter just ended and the one directly prior. So Q2 versus Q1.

The cash LME price Q2 versus Q1 was down 3% on average, and with the one month lag, was up 1.5%. As you know, we price some of our sales in the US on a 12-month basis and some sales on a one month lag basis. So the weighted average of those drove a realized price in the US per unit absolutely flat quarter-to-quarter. In Iceland, realized prices were up 2.5% Q1 to Q2.

Shipment volumes were flat in the US and also flat in Iceland. And at Grundartangi, we produced at an annualized rate of 273,000 tons for the quarter, a couple thousand tons below the rate over the last couple quarters prior, as Wayne said, due to the transformer repair. Putting the price and volume data together, net sales on a US dollar basis were up 1% Q2 over Q1.

Moving down the income statement, talk about gross profit, it was up $12.5 million Q2 over Q1. As you saw in the first paragraph of the earnings release, the lower of cost or market inventory charge due to the falling prices towards the end of the quarter took a $7 million charge from the quarter’s gross profit or cost of sales. The aggregate of global raw materials costs, US power costs, and US other operating costs improved $4 million Q2 over Q1. And overall operating expenses were up or unfavorable about $2 million Q2 over Q1, largely due to the planned pot relining program that we have instituted, consistent with global best practices.

Just to remind you one more time, again as detailed in that first paragraph in the earnings release and the charts we are about to look at, $16 million this quarter of our cost of sales related to power at Hawesville or cost that we actually didn’t pay on a cash basis, cost that EON paid on our behalf based on the arrangement that was entered into about a year ago now. And as Wayne reminded you, that relationship -- that contract or relationship with EON terminate at the end of this year.

Moving down the income statement, other operating expense that obviously relate wholly to the curtailment at Ravenswood, $5 million for the quarter. Were Ravenswood to remain curtailed in 2011, those costs would step down next year. SG&A expense, $11 million for the quarter, of which cash was about $9 million. Gain on forward contracts, we’ve talked about that, that’s obviously the value of the put options that we hold, which obviously increase in value as the market goes down. So it’s $9 million in non-cash gain this quarter.

Moving down, tax provision, no changes there. US, we provided a zero percent rate due to our fully allowed deferred tax assets in the US. Iceland at the statutory rate of 18%. All of the taxes were deferred this quarter. We paid no cash taxes. Just lastly, on share count, common shares average for the quarter, diluted basis, 93.3 million. Also 8.3 million preferred shares. As you know, the preferred shares are largely common stock equivalents.

To talk about some of the earnings items that we noted in the first paragraph of the earnings release itself, if you could just take a quick look at slide 16, the reconciliation chart that we normally show you, as you can see there, going back to the financial information on the income statement information, we reported $0.05 of GAAP EPS on a diluted basis. That’s on the common share count, and that’s obviously the net income that’s eligible to those common shares we allocated on a pro rata basis so that when you spread all of the net income over all the shares, you obviously get the same amount, $0.05 a share over a total share count of 101.6 million shares.

And again, the items that we’ve already talked about, the non-cash gain on the put options, $0.09. The EON amount that they paid for our Hawesville power was $0.16. And the LCM inventory adjustment, a cost of $0.07 a share this quarter.

Okay. Before we move back to slide 11, just going to make a couple comments on the balance sheet if you had a chance to take a quick look. Cash, as you’ve seen, is up to $266 million as of June 30. That includes $10 million of restricted cash. Just to remind you, most of that restricted cash, about three quarters of it related to the security deposit that we were required to post for the new power contract at Hawesville that we entered into last July.

In addition, again to remind you, we are required to post about another $20 million, little over that, during the fourth quarter of this year. What we will likely to do instead of posting that cash for our contractual rights is to post a letter of credit. And what we will likely do again is to post an LC for the entire amount to take back that $7 million of cash. That LC will be backed by our new revolving credit facility.

As you may have seen, we announced just after the quarter closed that we have entered into a new four-year facility, replacing the facility that was set to expire in September, largely the same structure as the facility that just expired. Notably, we negotiated a larger supplement for letters of credit, which is really the only use that we use -- the only item that we use the revolver for. So we’re happy to put that behind us as a successful process.

No other change in debt on the quarter, as you’ve seen. I’ll just note as well around this subject of the capital structure. Just a quick update on the Helguvik debt financing. We continue to make very good progress with both the European and Icelandic bank groups on putting together that facility. Again to remind you, the structure there is that of a traditional project financing. So when the new plant is up and running and producing product of specifications that alone would have recourse only to the plant itself and not to any of the other members of the Century group.

Okay. If we could turn to slide 11 quickly, just a quick note about cash flow. As you can see, strong cash flow from operations for the quarter. We noted here a couple items that we consider to be somewhat unusual for the quarter versus Q1. Obviously, we bought the put options, paid for the put options in the quarter. And we received a good size tax refund, as we disclosed in early April just after the quarter, of $16 million. So when you adjust for those two, again as you can see, a nice growth in cash flow quarter-to-quarter, cash from operations on a slightly higher LME price.

And finally, if we can just turn to slide 12, as we’ve shown you in quarters past, just a trace of the movements in cash from quarter-end to quarter-end. As you can see, nice growth in cash. Most of these items, we’ve spoken about tax refund, the cost of puts. The interest on our senior notes obviously paid semi-annually and are paid this quarter, so $9 million. Sustaining CapEx per our estimates, $2 million, and again per our estimate, spending at Helguvik, about $5 million for the quarter.

And with that, I’ll give it back to Logan.

Logan Kruger

Thanks, Mike. We have continued, and this is on slide 13, the low intensity construction and engineering work at the help of the Greenfield sites. The capital estimates have completed the first phase remain on and for the overall budget. We are spending significant asset on completing the final task required to support a major restart of construction activity. These efforts primarily relate to the finalizing negotiations of the power companies over amendments to the contract signed in the year 2007. These are long-term agreements and most significant operating cost component of the project.

So we as a company must take the time necessary to conclude these arrangements successfully. After such a restart, the plant would begin to produce metal in approximately 24 months. Mike mentioned in his statement of the financing of the plant. So I won’t repeat his comments. What he did mention is that through the outside experts of the banks looking at the financing have retained on their behalf, we have again confirmed the new plant’s attractive position on the global cost curve. We continue to believe that Helguvik will provide attractive growth for our shareholders for many years.

And with that, Rocko, we’d like to take questions now. Thank you.

Question-and-Answer Session

Operator

Okay. (Operator instructions) And the first question comes from the line of Kuni Chen with BofA/Merrill Lynch. Please go ahead.

Kuni Chen – BofA/Merrill Lynch

Hey, good afternoon, everybody.

Logan Kruger

Hi, Kuni.

Mike Bless

Hey, Kuni.

Kuni Chen – BofA/Merrill Lynch

Hi there. I guess just first off, I want to ask you guys again, on the potential delinking of alumina and aluminum prices, can you just talk about how that may impact the Grundartangi situation longer term with your partners there? If we’re looking at kind of structurally higher alumina prices down the road, what would that imply for kind of the toll in relationships?

Logan Kruger

Okay. Kuni, it’s Logan. I’m going to have a first part at this and maybe Mike will want to add in some comments. First of all, in Grundartangi, you’re really looking at 213, 216 before the total contracts roll off anyway. But the whole debate is will there be suitable tail-in arrangements or with regard to purchase alumina contract prices like we do at Hawesville. Over time, we’ll see. We’ll obviously have to tell this as we move forward. The broader debates, which I think your question is, Kuni, if I’m not incorrect, is the debates about delinking the alumina price to a percent of LME. And there is a lot of debate going on that and a lot of this is stimulated from the discussion going on within and a practice in some parts for the iron ore business.

One of the big differences I think is a reputable, reliable index will make it possible for us to actually relate to this. So from our part, I think it’s pretty unclear where this is going to go. And existing contracts with long-term uses and supplies exist anyway, and these are all going to roll off instantaneously in one year. They are going to roll off over a number of years. Obviously from the producer of aluminum site, they see an opportunity to perhaps increase their margins and their revenues. So again it’s going to be a balance of how this shapes up. But one of the biggest questions to be answered is whether you can actually find a suitable index that everyone can actually relate to. And there is a lot of discussion going on around that. Mike, do you want to add any comments?

Mike Bless

No. Thanks.

Kuni Chen – BofA/Merrill Lynch

Okay, great. And then just as a follow-up, this is a little bit off-the-wall type of question. The Katla volcano in Iceland, can you just talk about a contingency plan you have in place or kind of what your thought processes there? I’ve seen more headlines around this recently. What’s going on in Iceland? How is the country sort of preparing or thinking about the potential for an eruption there?

Logan Kruger

Well, the good news first of all is the volcano subsided and has gone off. Obviously, it’s very much remote from the existing plant and its infrastructure. It’s about 125 miles to the southeast of the existing Grundartangi facility. One of our concerns obviously is that potential interference with the electrical grid. And obviously the Iceland power company operators have experienced some of the things over the years and found that their system is rugged and robust enough to take quite a lot of the impacts of fly ash that you will get from a volcano. There is very little that we could do from a control point of view other than prepare for a potential disruption. But, it’s low risk from a potential happening and the experience in the last incident has shown that the system is pretty robust. It disrupted more of Europe in terms of the wind directions. And fortunately, from the way the system is set up, power plants are on the west side of the island. And most of the volcanic activity seems to be related more to the central and to the east.

Kuni Chen – BofA/Merrill Lynch

Great. Thanks. I’ll turn it over.

Logan Kruger

Thanks, Kuni.

Operator

Thank you. Our next question comes from the line of Brett Levy with Jefferies & Company. Please go ahead.

Brett Levy – Jefferies & Company

Hey, guys. Can you talk about sort of your plants, increasing the amount you could hedge in 2011 in the United States in terms of your hedging aluminum prices?

Mike Bless

Sure, Brett. It’s Mike. I mean, as you know, you’ve seen it in the 10-K and Q that we did -- and as we talked about during the last call, I believe, that we did purchase some protection for 2011 in the form of production, as you said. As you saw during the quarter, we didn’t make any further purchases. We did pay for the tranche we just bought in the -- just put their turns, the way they settled in early April. That’s why the cash flow for those options in April in the quarter that just ended. And I would say that, Logan, our strength on this doesn’t change. We are opportunistically interested in protecting a higher amount of production volume in 2011 and for watching the market. We don’t like the price versus the risk protection right now. But as we all know, these markets and the cost of the options based on volatility of the other things to move reasonably quickly. I don’t know, Logan, if you have --

Logan Kruger

No, Mike. I think just our strategy is to protect the downside and to maintain all the upside. I think that’s the only additional that I’d add.

Brett Levy – Jefferies & Company

Okay. Thanks very much, guys.

Mike Bless

Sure. Thanks, Brett.

Operator

Thank you. Our next question comes from the line of Chris Doherty with Oppenheimer & Company. Please go ahead, sir.

Chris Doherty – Oppenheimer & Company

I was just wondering if there is also -- I know you gave a little bit of an update in terms of project financing for Helguvik. What about thoughts on equity? I know there has been some discussion in the past about maybe selling an interest in it or finding a JV partner. I mean, can you give any more update on that?

Mike Bless

It’s Mike. Thanks, Chris. We’re still looking at all of the possibilities there without being to coy. And at the end of the day, there is going to be some additional non-debt financing required for the plan. Then we will have cash flows coming from the operations and such. And we’re continuing to think about all those options. And when we get closer to the timing of a natural restart, we’ll start to think more tactically about that. Logan?

Logan Kruger

No, fine. I think just if you have to balance all of these options against the value of the project, I think that’s the only other comment I’d add to Mike.

Chris Doherty – Oppenheimer & Company

And then the other thing too is, I think for a while if you look at the directions, it’s down versus Q4. I think you are running above relic passage at that point. Where you are now? Is that a question of being able to run at that level or is it a demand? Are you selling everything that you can produce at this point?

Mike Bless

Yes. I think you’ve got to be careful what -- we've been obviously took a step back. We’ve had line five at Hawesville and all operators would curtail along the $0.44 Q1 of last year for all intents and purposes. We’ve been reasonably flat over the last couple quarters. Really you have to look at it on a per-day basis because small changes get amplified as to whether there is 90, 91, 92 days in a quarter. And I think it’s too detailed. So I don’t think, Wayne, there is really anything in terms of the operations. Sometimes on a per-day basis this past quarter we were down just a smidge, about 1%. That was simply due not to production at all, but just to the timing of shipments at the end of the first quarter versus in the second quarter and when there were cut-offs. And so there is really no -- I can’t give any story, Wayne, related to production.

Wayne Hale

I think just maybe to underline your question is, do we have some metal of the plants that we’re not selling? And the answer is no.

Logan Kruger

This is Logan, Chris. We sell everything that we’ve got. So we’re not carrying inventory of metal at the plant.

Mike Bless

As you know and as you see in every 10-Q, we hold very little finished goods inventory.

Logan Kruger

That’s a good point.

Chris Doherty – Oppenheimer & Company

And then just one last thing, in some of the previous presentations, you’ve talked about other capacity coming on. Can you just give us a little bit of update of maybe industry capacity and if anybody is adding to that, given that you guys are running at full capacity and I think some other guys are too?

Logan Kruger

Yes, Chris. I think the key ones from a global perspective is obviously -- first of all, in the Middle East you’ve got a couple of the plants that are not commissioning. And for example, the Heedro [ph] plant, you are getting that going up. So that’s starting up. In addition, you’ve got a few growth opportunities that are happening in India. I suspect that most of that metal will be consumed locally or domestically. China, obviously brownfield expansions occur, but there is some pressure on because of, as I mentioned in my remarks, cash costs are now looking very much near what the price of the commodity is. Other than that, I think very little restarts, some slowdowns. There has been some incidents with plants in Europe, perhaps some new existing production coming back on. But these are small amounts. The big move is really from a global perspective or really the Middle East, and then you’re looking at perhaps some in India and some in China. The rest of world is pretty stagnant in terms of growth. Shelly is here with us. She could add any --

Shelly Lair

Yes, I agree. It’s really just the small stuffs just like you saw there as well this morning. Anything that would shut down due to pricing, I wouldn’t expect to be coming back on line anytime soon. There is more things that were affected by a flooding or power shortage, and again all small volumes.

Logan Kruger

And just nothing other than perhaps the modern smelter in the Middle East that’s really on the box for some execution in the next three to four years.

Chris Doherty – Oppenheimer & Company

Great. Thank you.

Logan Kruger

Thank you.

Operator

Thank you. Our next question comes from the line of John Tumazos. Please go ahead.

Logan Kruger

Hi, John.

John Tumazos – Very Independent Research

The puts that you did in the first quarter were well timed. And by the beginning of June, you might have been up, I don’t know, $0.10, $0.20 easily. Could you explain if your philosophy is to just hold them in expiration in case the world comes to an end or whether you are willing to take a $0.10 or $0.20 a pound profit and put those moneys toward a couple weeks of Helguvik construction?

Mike Bless

Thanks, John. It’s Mike. It’s the former. We purchased insurance. That was the philosophy. It’s still there for insurance. It’s like insurance on your house. You never need it. But we are not of a mind to trade in and out of obstacles. You’re buying for insurance and need to put them away, to say simply.

John Tumazos – Very Independent Research

You guys could start a pretty good trading fund with your record this year.

Logan Kruger

That’s not our business, John. But your observation is pretty much accurate to what was going on.

John Tumazos – Very Independent Research

Well, thank you.

Logan Kruger

Thanks, John.

Operator

Our next question comes from the line of Mark Liinamaa with Morgan Stanley. Please go ahead.

Mark Liinamaa – Morgan Stanley

Hi all.

Logan Kruger

Hi, Mark.

Mark Liinamaa – Morgan Stanley

In the press release, you talk about Helguvik power supply contract being a primary factor to the timing of the restart for construction. Can you comment a little bit about any of the details regarding that? And is it going to be -- when you get to the production stage, you’re already talking about that, will it be structured similar to Grundartangi? Thanks.

Logan Kruger

I think I’ll just start off with your last part of your question. Yes, similar, not exactly the same, but similar. These contracts were signed in 2007. And obviously, we are updating them now with the potential to restart. But they are 25-year projects. And we have contracts and they obviously are confidential. So we won’t talk about too many details. But essentially we’re working through that with the power producers. And obviously we’ll then take it once we settle that into the constructional sites. And like Grundartangi, I don’t think there is anything particularly confidential about it. It’s a phased production or execution, and the power production is on a similar basis. As you know, this will be mostly due to geothermal, and geothermal comes on in about 50 megawatt patches or pieces.

Mark Liinamaa – Morgan Stanley

Would the LME price linked as well at their low places? There is a benefit, low LME prices?

Logan Kruger

I think, Mark, the answer is confidential. I think you’ve got to take what you know about from our Grundartangi experience and extrapolate that in some way to your own decision.

Mark Liinamaa – Morgan Stanley

Okay. And then on Mt. Holly, you have a joint venture partner. Who is leading the discussions with the --? Is this Santee Cooper that provides the power there?

Logan Kruger

You’re correct. I’ll ask Wayne to handle that if you’d like.

Wayne Hale

Yes. It’s Santee Cooper provide the hour, but it’s a joint negotiation between both owners in the discussion we are having with Santee.

Mark Liinamaa – Morgan Stanley

Has that always been -- it is the younger smelter, but it’s been laden with a bad power contract forever. Is it -- is there some local push at all or local support to get a deal done?

Wayne Hale

Certainly, there is a local push and a local requirement to keep the jobs in place. And so we do have support in that regard.

Mark Liinamaa – Morgan Stanley

Okay. No likelihood on timing or anything like that that we may see something?

Wayne Hale

No, we continue to discuss -- obviously it’s a complex issue that requires detailed discussions.

Mark Liinamaa – Morgan Stanley

Okay. Thanks. Good luck.

Wayne Hale

Thanks, Mark.

Mike Bless

Thanks, Mark.

Operator

Thank you. Our next question comes from the line of Tim Hayes with Davenport & Company. Please go ahead.

Tim Hayes – Davenport & Company

Hello, everyone.

Logan Kruger

Hi, Tim.

Tim Hayes – Davenport & Company

Couple questions. First, with the EU’s cost to review the 3% duty during the second quarter and it’s a trial base (inaudible) view that. And so, was there any outcome from that?

Logan Kruger

Not that I’m aware of. It’s Logan, Tim. Not that I’m aware of. I think it went into committees and then got put aside for more discussion. I think there is obviously a natural tension between those that will benefit from it; primarily those are paying the duty versus the internal producers that obviously see some benefit from it. I think it hasn’t been considered. I’m not aware of any conclusion at this point.

Tim Hayes – Davenport & Company

Great. My other question is back on Grundartangi and the power price that you are paying, has that gone up this year? Because I think a couple of the other smelter producers in Iceland saw the power price at least what’s tied to the LME go up or will be going up. Want to see -- has your price there gone up or will it be gone up as it relates to a percent of LME?

Mike Bless

It hasn’t. But we have seen a tax increase in Iceland. So perhaps that’s part of it.

Tim Hayes – Davenport & Company

And is that tax -- is that function of the LME price or is that just some level?

Logan Kruger

Just direct tax.

Mike Bless

Tim, it’s Mike. I think you may be referring to one other producer in Iceland that negotiated in extension to an existing contract in that guides. It was reported maybe that the price change, we obviously have no knowledge of that. That’s confidential. But our contracts, as you know, go out sometime at Grundartangi. So there is now -- it's not the same contracts there at all. And (inaudible) but there is no change at all. Obviously, they go up and down as the LME goes up and down, but the linkage stays the same.

Tim Hayes – Davenport & Company

Right. And have you disclosed the tax amount that was levied?

Logan Kruger

I’m not sure if we have.

Mike Bless

We haven’t, Tim. And it’s not a material amount of money. It’s more than, say, $1 million, but it’s not more than several, several, several millions of dollars per year over the next couple of years. So it’s a manageable amount of money, but it’s something that I think, again, we and the other producers in the country sort of agreed to in the spirit of contributing to the economical recovery of the country.

Logan Kruger

Absolutely.

Tim Hayes – Davenport & Company

Yes. And what was that tax level?

Logan Kruger

(inaudible) changed from 15% to 18%. And as you know, we have an agreement that caps that 18% at Grundartangi.

Tim Hayes – Davenport & Company

I’m sorry. Can you repeat those? I missed that first part of those figures.

Logan Kruger

The company tax rate in the last six to eight months has gone from 15% to 18%. But you know that we have an agreement, an investment agreement at Grundartangi that caps that 18%.

Tim Hayes – Davenport & Company

Okay. All right. Thank you.

Mike Bless

Thanks, Tim.

Logan Kruger

Thanks, Tim.

Operator

Thank you. (Operator instructions) And at this time, no further question is in the queue.

Logan Kruger

That’s great. Thanks, Rocko. And thanks to everyone for joining the call today. We look forward to speaking to you again soon. Thank you.

Operator

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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