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Century Aluminum Company (NASDAQ:CENX)

Q4 2011 Earnings Call

February 23, 2012 5:00 pm ET

Executives

Shelly Harrison – Vice President and Treasurer

Michael A. Bless – President and Chief Executive Officer

Analysts

Kuni Chen – CRT Capital Group

Brett Levy – Jefferies & Company

Sandeep SM – Goldman Sachs

Timna Tanners – Bank of America Merrill Lynch

Tim Hayes – Davenport & Company

Bridget Freas – Morningstar

Frank Duplak – Prudential

Paul Massoud – Stifel Nicolaus

Operator

Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the Fourth Quarter 2011 Earnings Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ms. Shelly Harrison. Please go ahead.

Shelly Harrison

Thank you, Tom. 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 condition.

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 statements disclosure in today’s slides and press release for a full discussion of these risks and uncertainties.

In addition, we’ve included some non-GAAP financial measures in our discussion. Reconciliations to the most comparable GAAP financial measures can be found in the appendix to today’s presentation and on our website at www.centuryaluminum.com.

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

Michael A. Bless

Thanks very much, Shelly. If we could turn to slide 4 please, we’ll go into a quick review of 2011 and the last couple months. And just a couple of minutes Shelly is going to come back on and take you through our review of the macro environment. So, I won’t be repetitive there.

I guess, I could just suffice to say in summary now at this point, we’re prepared for the volatile conditions in the marketplace to continue for some reason over a period of time, and we’re going to continue to manage the company in that context.

Okay. Let’s take a quick review of 2011. At Hawesville starting off, as you recall we restarted line 5 in February of this past year. As we’ve discussed that (inaudible) plant got away from us a few months into this process upon assessment, we’ve confirmed as we talked you about the past that the issues where primarily related to the management and leadership in the plant. As we’ve looked through the causes we found no purely technical reasons as to what happened in the plant.

Due to the upset conditions in the plant, our safety performance there also fell below our normal standards and again, as we talked to you about in the past, it took us longer than we initially expected to diagnose the problems in the plant and to get the systemic fixes into place, which we’ve now done.

When all was said and done just a bottom line for you, the upset conditions in the plant last year cost us $50 million in last profits. This is a combination on the one hand of unabsorbed fixed costs, did in lower volume and number two, due to higher spending both on materials and outside contractors.

As I said, we think we’ve now got back to a stable condition in the plant. Importantly, we’ve got a terrific management team in place to manage the plant for the long-term. We’ve got a very talented plant manager in place. Dave Whitmore has been at the plant for years. He has been in a variety of positions there. We’ve got great confidence in him. He has filled all the key supervisory and general management positions at this point, and we think we’ve got a great opportunity to improve Hawesville and make the plant more productive and valuable.

The biggest issue at Hawesville as it is at Mt. Holly as well, and I’ll talk about this all later in my comments is power and this will be a key focus area for us in 2012.

Okay. Moving to Mt. Holly, the plant had another good year, this past year in 2011, couple operational issues over the summer are now well passed this and cleared. Mike who serves has been in the plant manager position now for about a year and a half. We think he is doing an outstanding job. Again, we’ll talk about the powers used at Mt. Holley in just a moment.

Grundartangi had a terrific year with record production and very good improvement I should say, over the last couple of years on the plant safety performance. I’ll talk a more about that later in my comments. We’ve got a great management team there as well. Gunnar Gudlaugsson and his team are working very well together. And on this basic Grundartangi, we have the confidence to go forward and invest in expansion of that plant. And I’ll talk about that again in a couple of moments.

Moving on to Ravenswood, we’ve spent quite a bit of time especially in the latter part of the year on the potential restart process. The situation is a complex one, and its now at our reasonably sensitive stage, and I’ll give you a bit more detail in just a few moments.

At Helguvik, the project team continued with modest site and engineering work, obviously the major effort over the year was the arbitration process with one of the two power providers we’ll talk with you about that in the past. We did the panel’s findings in December. The results were favorable to us and again, I’ll give you a bit more detail on importantly what the next steps are there in just a moment. We had an active year on capital management, and as you may remember back in the second quarter, we redeemed the remaining $47 million of convertible notes.

Beginning in the summer, we announced a $60 million share repurchase program that began in August. And under that program, we repurchased $46 million of common stock to date. So we’ve got $14 million to go on that authorization, and we believe we’ll continue to invest prudently in our businesses and Shelly will give you some more detail on our CapEx plans for 2012.

Lastly, obviously, we’ve had some change over in the management of the company. During 2011 and last couple of months, I’ve talked about the plant managers at Hawesville and Mt. Holly.

On the senior management side, we’ve talked about this before, but we were fortunate to have John Hoerner joined us in the third quarter. He joined in late August. John got terrific technical and leadership skills to say he has hit the ground sprinting here as an understatement and he is already affecting great change, positive change in the company.

Obviously, so my own appointment recently and at the bottom line. I and the board are convinced now. We’ve got the right team to move the company forward.

And with that, Shelly is going to give you a couple of comments on the marketplace. Shell?

Shelly Harrison

Thanks Mike. If you please turn to slide five; the only cash price averaged approximately $2,100 per ton in the fourth quarter. this is a significant decline from previous quarters and resulted in an average price of approximately $2,400 per ton for 2011. Prices have strengthened a bit from the $1,900 level we saw year-end, and have traded in a low 2000 so far in 2012.

Price [default] is being driven by global cost pressures and western well producer discipline, but it’s been capped by macroeconomic concerns in Europe, large aluminum inventory stockpiles, and concerns over the lack of action by Chinese producers and taking off-line high cost capacity.

In recent months, there have been several announcements that plant come in actions taken by producers in Europe and Australia as well as supply disruption affecting production in Canada and other parts of the world.

While aluminum markets have been generally strengthened by these announcements. there is an over hanging disappointment from the limited action taken by China, the world’s largest producer of aluminum.

Aluminum inventories continue to reach new record levels, yet local premiums have reversed their pull back from late 2011 and are steadily creeping back towards the record levels we saw earlier last year. No interest rates and a widening contango have reinforced the economics that aluminum financing transactions and lead times to access metal from warehouses continue to grow. Even with the increased load-out rates that are planned to come in to effect over the next few months long lead times for metal are expected to persist and premium should remain strong.

Alumina market have been somewhat soft and recent trades have been completed in the low 300s per ton, U.S. market is expected to remain balanced to slightly over supplied in the near term.

To move onto slide six please; over the next several years most analysts anticipate that the aluminum market will remain in a modest surplus. Even in this environment metal prices are forecast to strengthen as global economies recovered from the financial crisis and producer cost pressures especially power continue to drive up the aluminum cost curve.

Western world supply growth is expected to be limited over the next several years with few large scale projects in construction and those are the Persian Gulf projects having reached or neared full capacity by the end of 2011.

Chinese production is showing no signs of slowing as aluminum project continue to migrate to the less costly regions in the north western part of the country, and production is expected to reach a record level of 22 million tons in 2012.

U.S. aluminum demand continues to grow at a reasonable pace, while European demand is expected to remain somewhat sluggish in 2012. Chinese demand is forecast to grow at a healthy pace of approximately 10% and we continue to believe that China will remain balanced or modest net importer over the longer term.

Overall we expect prices in the near term to remain range bound in the low 2000. Prices will receive support from rising cost pressures and limited access to physical metal units. But we’ll face downward pressure from historically high overall inventory levels and uncertainty in the Euro zone recovery.

Longer term we continue to believe a strong outlook for the aluminum industry. Future supply will be constrained by access to affordable long term power and we believe it will only become more challenging producers designed attractive regions for further development.

Now Mike will take you through our operations and financial results.

Michael A. Bless

Thanks Shelly. Turn to slide seven please; as Shelly said I’d like to just give you a quick review of the company’s operations in the fourth quarter. Let’s start with Hawesville; as I said we returned during the quarter to control the operations and we’re now working to maintain that tradition obviously and into improve the plant.

Moving down here you’ll see that safety was a, we had a good performance in safety during the quarter and in the last couple of months. The incidence rate has come down nicely, one of the areas on which we’re focusing here just to give you a little bit of flavor is on housekeeping for those of you, who have been around industrial plants will know that keeping the plant orderly and everything in its place is key to improving safety performance.

It’s sounds easy, and a complex environment like in aluminum reduction plant it’s not at all, and we’ve had one of our most experience and talented people, he’s actually from Ravenswood plant, on loan to Hawesville to help them put in place the right processes and [Gordon Harper] has been doing a fantastic job there.

Production metrics were improved across the board as Hawesville over the quarter. I’m going to just give you some examples; current efficiency was up 2 percentage points, Q4 over Q3, power usage or efficiency down 3% or our usage down 3%, efficiency up 3%. We had 45 more average parts and service Q4 over Q3, and obviously that improved production, drove labor productivity up 12%.

You see the conversion cost coming down, most of that improvement came towards the end of the quarter and now that we’ve got all the third party contractors out of the plant, the unusual and high usage of maintenance and materials has abated and the volume importantly in the plant is now where it should be. So, we’re no longer under absorbing our fixed costs.

So in that respect, you’ll see the impact of all those actions on the cost base in the current quarter and as we move forward in 2012. Importantly, the product quality at Hawesville was up significantly. We returned back to the purity market this quarter. You’ll see I’ll talk about our net realizable prices, Q4 over Q3 in a moment, you’ll see that impact there and our upgrade production was down.

Turning to Mt. Holly, the safety performance at Mt. Holly was a bit below that plans usual high standards in the fourth quarter. Without a luck there is no pattern in the incidence there, management is very focused, plant management and ourselves and Alcoa are very focused on this and in fact, the performance has improved over the last couple of months.

Production was up about 1% Q4 over Q3, with improvements in KPIs across the board. Quality was excellent this past quarter. We’ll reach multi year highs for (inaudible) total premium production, obviously important for our revenue. You see the conversion cost at Mt. Holly coming down nicely a big chunk of that was power cost, which abated a bit Q4 versus Q3.

Moving to Grundartangi, we had a couple of bumps and safety performance also this quarter that have been said the plant has made terrific improvements over the last couple of years and when we look at the incidence during this past quarter. We know that most of them come from simple, risky behaviors in the plant and I’ll take about behavioral base safety and were we’re heading there at Grundartangi when I think about the items on which we’ll be working in 2012.

Like Mt. Holly, the last couple of month’s safety performance at Grundartangi has come back and has been quite good. Production has been flat, was flattish I should say in Q4 versus Q3 at Grundartangi. For the year, as a whole, we had record hot metal production of 280,000 tons. KPIs were good and improved across the board at Grundartangi from already good levels and as you see, the conversion cost was down.

Okay, if we can move along to slide 8 please. As normal, I’ll give you a review of the quarter that just ended against the quarter immediately prior, so a sequential comparison here. As usual also, I’ll refer to the financial information as far as the earnings release.

Before we dive into the numbers just talk about the market a little bit, Shelly referenced some of these data. The cash LME Q4 over Q3 was down 13% on average, and on a one month lag basis the LME and the U.S. Midwest transaction price was down 12%.

When you look at our realized unit prices in the U.S., they were down only 11%, so there you see the impact of those high margin products at Hawesville coming back very important and that Iceland realized unit prices were down 12%, that’s right on the market.

Turning to shipment volumes, as in past quarters and this will continue going forward, you’ll note that a portion of the shipment volume that we recorded, direct shipments was in fact in Iceland versus the U.S., most of our direct shipments of course are in the U.S. and Iceland is mostly [total].

The fact that Grundartangi is producing so far in excess of the total contracts gives rises to some direct sales in Grundartangi. In this past quarter, the amount of those direct sales was 2,240 metric ton. So when you do the adjustment there, you’ll see that Iceland shipments were flattish, actually off about a half percent Q4 over Q3.

Turning to the U.S., at Hawesville as I’ve said, we were back to near full production by the end of the quarter with about 98% of the sales and service by year end. And that drove a shipment increase versus Q3 at 8% in the fourth quarter. Mt. Holly shipments were up 3% and putting Hawesville and Mt. Holly together that gives a total domestic shipment increase for the quarter of 7%.

Moving on to the income statement data, net sales on a dollar basis were down 8% Q4 over Q3. The price decline drove net sales down by 12% and volume got us back four percentage points.

Gross profit in the quarter was down $25 million versus Q3 that’s on a $27 million sales decline. Let me just give you a couple of the big movers there. The price decline reduced gross profit by $41 million quarter-to-quarter. Going the other way, we had a couple of items U.S. power costs were favorable by $4 million

(Inaudible) costs were favorable by $8 million. Those who know are number one, alumina costs in the U.S. and number two, the price that we pay for power in Iceland.

Raw materials this quarter were flat. This is the first time that we’ve seen in sometime largely carbon-based costs flattening out. We saw some very large increases earlier in the year. I’ll get to that in a moment. Now the other cost across the company where rather flat or favorable in the quarter.

Moving down to the income statement. You see that $2 million unrealized gain on forward contract, that’s obviously the marking-to-market of our put options as the LME fell during the quarter. Continuing down, average diluted shares for the quarter 89.4 common shares. We repurchased 800,000 shares under the repurchase program during the quarter and that brings a total since August to 4.4 million shares. There were 8.1 million preferred shares outstanding on average during the quarter.

If I can ask you to flip ahead to slide 19 just for a moment, I’ll take you through the diluted EPS for the quarter. As you know, we state this generally for you here in this presentation on the base of the total shares outstanding, common and preferred shares.

So again on slide 19, you can see the net loss as reported was $0.32 a share, lower of cost or market inventory adjustment that’s $0.06 a share cost us during the quarter. Again, on the marking-to-market at the productions was a $0.02 gain during the quarter and thus found in adjusted basis $0.28 loss per share.

Okay. If we can move back to slide eight, just a couple quick comments on cash flow and balance sheet and we’ll move along to the full-year. As you can see here CapEx was $9 million for the year, pardon me for the quarter, and helped with expanding or helped with the CapEx $3 million for the quarter both of those numbers as expected. And we ended the year and the quarter of course with $183 million in cash on the balance sheet.

Okay. So move along to slide nine. I’ll give you a couple of comments on the full-year results. First the market again, the cash LME was up 10% year-over-year and on a one month lag basis up 12%. Our realized unit prices came in right on top of that. In the U.S. we were up 12%, Iceland up 13%.

Turning to shipment volumes, the direct shipments for the full-year at Grundartangi were just shy of 10, 5000 metric tons. So again, when you do the math, there you’ll see U.S. volumes where up 4% year-over-year, Iceland Shipment volumes up 2% year-over-year.

Moving on to the income statement, net sales on a dollar basis up 16% 2011 versus 2010; price drove the sales up by 13 percentage points, volume up three percentage points. Moving down, gross profit was down $23 million on a sales increase of $187 million that’s a result obviously that no one here is happy about, and they’ll gave that they (inaudible) there price drove gross profit up by $149 million 2011 of 2010.

And then we had a couple big items going in the other way. First market link cost U.S. Alumina and Iceland Power again were up $43 million year-over-year, raw material cost largely carbon were $58 million year-over-year again all in key quarters one, two and three lower cost of market inventory adjustments cost us $20 million of gross profit in 2011 versus 2010. And as I said, the condition at Hawesville during the year cost us as $50 million in gross profit.

Moving on to cash flow, you’ll note that cash from operations was slightly negative for the year, a couple of big items I’d like to note there that drove that first. We invested $36 million in inventories this year. As you’ll note if you looked at the quarterly progression there, most of that came during the early quarters of the year and was directly related to the restart of the set path line at Hawesville. We invested $35 million in contribution to our pension plans this year, about half of that was to fund our qualified plans to their target levels and the other half was to fund a non-qualified plan due to the board changes that occurred in June.

If we can move along to slide 10 please; just give you a quick walk through with the changes of cash during the quarter. We began the quarter with $216 million of cash on the balance sheet. As s you can see share repurchase cost of $7 million during the quarter. we had a net inflow of $19 million from withholding taxes in Iceland, let me just explain this for a moment, because it can give rise to some large movements in cash quarter-to-quarter.

So we ay these withholding taxes when we move cash back to the U.S. from Iceland. Obviously that cash was moved back this year largely to fund the redemption of the converts earlier in the year and then the share repurchase later in the year.

We make withholding payments when we move the cash back and we get those repaid to us in the fourth quarter of the year. So what happened in the fourth quarter of this year as we received refunds of $27 million that we have repaid earlier in the year – that we have paid earlier in the year pardon me, and we paid an additional $8 million, there’s a net of $19 million that you see there and that $8 million will get back in the fourth quarter of this current year.

Lastly, you’ll see the $14 million repaid in income tax payments in Iceland, those are always made in November that’s during the fourth quarter.

Okay. Just quickly if we can move to slide 11, talk about the same thing movement of cash for the full fiscal year with again $304 million, you’ll see $122 million of adjusted operating income that was at an average cash LME of about 2400 for the year, so you could get some sense of the profitability of the company at that LME level even with the issues at Hawesville.

Iceland withholding taxes, it was a net $20 million outflow this past year, $47 million in payments and $27 million of refunds. Just to give you a sense in the first quarter of this year, we’ll make another $10 million payment and then we’ll get that back plus the net $20 million from 2011 in the fourth quarter of this coming year, [so look for $30 million. That’s of course, if we don’t bring back any more cash into anymore withholding taxes this year.

CapEx of $20 million for the year, at our budget Helguvik $13 million for the year again at our forecast and most of these are other items I’ve already talked about, pension contributions, we purchased the convertible notes, common stock repurchase program, one other item I’d note that in that other categories, see how the way they write $9 million of that amount was related to the direct cost of the land side restarted Hawesville.

And with that, I’ll let Shelly to take you through a couple of our forecast items for 2012.

Shelly Harrison

Sure. So if you’ll turn to slide 12, as we do in the fourth quarter of each year, we’re providing a couple of slides with detailed information on the company’s anticipated financial measures for the coming year. In 2012, we expect all operating facilities to be producing above their rate of capacity levels.

As Mike has mentioned, Hawesville is now operating on its rate of capacity and we (inaudible) production around 250,000 tons this year. We anticipate production out or above record levels for both Mt. Holly and Grundartangi as a result of the efficient programs that have implemented at these facilities. Increased production over 2011 levels will be weighted towards the back end of the year. As in previous years the vast majority of the products we sell both in the U.S. and Iceland, we’ve priced at a one month lag.

For 2012, we provide a cash cost for our U.S. and Icelandic facility, obviously our cost of production is highly dependent on metal prices due to our LME linked alumina and power contract. The indicated ranges for cash costs are consistent with an LME price of $2,200 to $2,400 per ton. For this purpose we’re presenting cash costs in a format that we believe is directly comparable to the LME reported price. To do this either cost of alumina for our tooling operation in Iceland and deducted regional premiums above the LME price for all facility.

In power costs, we are forecasting a 15% year-over-year increase at Hawesville. A portion of this increase is related to the rate case, which was approved in late 2011 and the balance is due to higher producer fuel cost, which do not require PSD approval. As Michael discussed, we are working very hard on the situation in Mt. Holly and hope to have some progress to report soon. For now our forecast call to flat power cost year-over-year.

Carbon plastics have been down from the levels we saw in Q4, but (inaudible) prices rose throughout 2011. We expect the average for 2012 could be comparable to last year. I would note that our joint venture anode facility in China has become our largest supplier anode for Grundartangi.

Moving onto slide 13, we expect the interest will be similar to last year and SG&A for corporate and Helguvik will be approximately $40 million on a book basis. SG&A for the operating plants is included in cash costs on the previous slide.

Pension contributions for our wholly owned subsidiary should decrease from $17 million in 2011 to $10 million to $15 million in 2012 in order to maintain our target funding status. We expect that maintenance capital across all of our operating facilities will be around $20 million in 2012. This includes $6 million for our major overhaul of our rodding facility at Grundartangi to replace some aging assets that were purchased used for the original construction at the plant. We also plan to spend about $1 million per month on average at our Helguvik facility until we are able to issue notice to proceed.

We expect to spend another $5 million to $10 million this year on investment programs to improve efficiencies and increased production, primarily Grundartangi. As is normal we would expect capital spending to be somewhat weighted towards the back end of the year. For both purposes our current year income in Iceland will be cashed at a rate of 18%. Cash taxes in Iceland on a one year lag and we anticipate these will be approximately $15 million for 2012 based on 2011 taxable income.

In the U.S. we continue to expect essentially no book taxes due to our significant deferred tax assets, which are fully reserved against on the balance sheet. From a cash standpoint, we expect to pay some modest amount of taxes in the U.S. due primarily to limitations on state NOL usage.

Now Michael will take you through our priorities for 2012.

Michael A. Bless

Thanks Shelly. We can turn to slide 14, as Shelly said, I’d like to talk with you just for a few moments here, but some of the major items on which we will be working in 2012 and going forward. So first safety is always going to be our first priority and we truly believe here at the senior management board level that this is a commitment to our people and to all visitors in our facilities. And I also believe firmly based upon my experience as an industrial plants that it’s a foundation of a well-run manufacturing plant.

Let me just give you a couple of examples of what we’re doing at both Hawesville and Grundartangi. At Hawesville as I said, the new management team there has a renewed commitment focus in this area. Each department in the plant has their own plan. Each of those plans is modeled up the principles of the plant wide program. We have 30, 90, and 180 day improvement programs in place and each of those have measurable metrics.

We do have some modest capital in the CapEx budget that Shelly described for safety related items. We want to make sure everybody understands that we won’t shy away from spending capital, when it improve the safety in our facilities.

Most of the improvement however, is going to come from leadership and from adherence to standard operating procedures in the plant. And after we get to the right level, our next step at Hawesville will be the implementation of behavioral base safety, which is where Grundartangi is now heading.

Grundartangi is operating from a very good baseline. And so, we know we can improve now to the next level. They’ve got good SOPs and processes in place. And as I said before, when we analyze most of the incidents that are now occurring the plant. They’re occurring due to risky behavior either on the one hand due to deviance from standard operating procedures or quite frankly, on the other hand from just a lack of good old fashion common sense.

So we’re now rolling out this behavorial base safety program. For those are new and aren’t familiar with the concept, there are systematic program that identifying correct, the root causes of unsafe behavior in an industry plant. And we’ve been very excited thus far about the buying of the employees and their commitment to this program.

Capital two, we’re spending here in the interest of increased safety. Shelly talked about the major upgrade at the [riding] room at Grundartangi as a two year program in 2012 and 2013, and it’s got two objectives. The first is operational readiness and the second is the improvement of safe conditions in this key part of the plant.

I can say that senior management and our Board of Directors as I said before are very, very focused in this area. I should note that environmental compliance has also been good at all other plants, but this is a constant effort to keep it there, and we’ve especially had good improvement at Hawesville since conditions in the plant over the summer.

As we noted before the biggest challenge and one of our biggest focuses for this year certainly in the U.S. is on power for both Hawesville and Mt. Holly. These two smelters have two of the highest power tariffs other than U.S. smelter. This is largely for complex structure one other reasons having to do with the power markets and the specific power providers in each of those regions.

As you may know the macro conditions in these areas, in this part of the U.S. have led to a significant increase and the availability of – and the fall in the price of market based power. And in this context, we’re in detail discussions with both power providers to see what can be done. It’s too early to predict at this point in what direction this may go, but I can say we’re making decent headway in both sets of discussions.

Another major, major effort continuing for this year, certainly for the first two months and we believe going forward in the complex process whereby we hope to start – restart their [ratings] with smelter. We’re in detail discussions at this point with the three major constituencies there. Number one, with representatives of labor both the retiree group and active labor. Number two, with the state executive and legislative branches in West Virginia. And number three, with the power company and with the relevant regulatory bodies.

As I said earlier, all of these talks are in reasonably sensitive stages at this point, and thus it’s difficult to predict when we might get to the finish line. Then having being said, we believe we’re ready to go. We’ve made details analysis of the work at the plant that’s required to get a restart done both in terms of capital and the hiring and training of employees.

Continue to believe this will be a good investment for our shareowners and we’re determined to get it done. and we hope to have that positive update for you when we announced earnings in April, if not hopefully sooner.

Turning to the Grundartangi, as I said before, we are embarking on a low-risk multi-year expansion program at that plant. It involves a couple of things amongst which are the upgrades of (inaudible) room that we’ve discussed, larger side anodes beginning this year, and an improvement and an upgrade in our high-voltage electrical equipment, will obviously need additional power as well as we proceed.

The entire program is about five years long, and an aggregate will cost about $90 million. It’s obviously staged in the 2012 amount is relatively modest, about $10 million in that capital budget as Shelly described in 2012. Given the attractiveness of this investment, we’re looking at ways to accelerate it, obviously dependent upon the availability of power.

Ultimately, the program will lead to about 50,000 tons of additional capacity and is already excellent plant. Those new tons will come at a low per unit capital cost and an attractive marginal operating cost. Last major subject on which we’ll be working in 2012 was on Helguvik, and if I could ask you to turn to slide to 15, I’ll just talk about some of the major items here.

As I said before, we made slow, but determined progress in 2011 on Helguvik, but to be quite frank, we remain frustrated at the slow pace of that progress and quite frankly, at the current conditions as well. As you can see here at the pictures of the site the steel frames for the buildings are largely complete, we’ll be putting cladding on and this spring to protect these assets, a civil work, and other activity at the site has continued at a slow pace as has the engineering progress.

We’ve been doing critical work with our vendors for the Helguvik project. This is critical work to make sure that we maintain the contracts in the bids that are in place. We got a strong, but small and experienced team at Hawesville – at Helguvik pardon me, they’ve been doing an excellent job and continue to do an excellent job.

Our major effort here will continue to be on the power contracts. as I said before, we undertook an arbitration process with one of the two power providers, this is HS Orka and that continued for all of last year in fact, we commenced it in the prior year in 2010. We did receive the ruling of the arbitration panel in December, the very detailed document, but the key points we believe were verified in our favor.

A couple of very key ones, number one, the panel rule that’s the contract remains in force subject to the remaining conditions in it. and two, the panel rule that the power company remains obligated for their original intent in the contract to provide us with its portion of the power fitting tier projects, that’s a whole 360,000 ton top line.

The last issue that we have to address is the pricing mechanism. The panel did rule in our favor on some key determinants on how that pricing mechanism should work, but the ultimate mechanism itself is to subject to interpretation and needs to be negotiated with HS Orka.

We’re going to be sitting down with our colleagues at HS over the next couple of weeks to see if we can get to the finish line there and I think usually, we’ll know within the next month or two in what direction we’re heading. Assuming we can get to an agreement there, HS has to finish the minor details in some of its permits and it needs to complete its financing. so its projects to give us power for our space, 90,000 tons at Helguvik.

Moving on, we’ve been talking with our other power provider, OR, their power that they’re going to provide us for Phase I of Helguvik is complete, generating power today, and the discussions now centered around the financings for our new power station to be built by them. That’s required for our Phase II and going forward of our projects.

I’ve already that they are reluctant to take on this obligation and risks for the new power plant, and thus a group of Icelandic pension funds are discussing with a lot of our transaction in which those pension funds would purchase a majority stake in that new to be build power station. We’ve been a part of those discussions, I think I’ve described them absolutely as cooperative and productive and I think here also within the next couple of months we’ll know in what direction that’s heading and what speed.

As Shelly said in the beginning of her comments they aren’t many places in the western world that are conducive to developing the primary aluminum business any more. We believe the economics of this investment continue to look attractive for our shareowners, and we continue to believe that Iceland is an outstanding place to develop our business.

And with that Shelly, I think we can take questions.

Shelly Harrison

Yes, Tom (inaudible) please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from the line of Kuni Chen with CRT Capital Group. Please go ahead.

Kuni Chen – CRT Capital Group

Hi, good evening every body.

Michael A. Bless

Hi, Kuni.

Kuni Chen – CRT Capital Group

Congratulations to you Mike.

Michael A. Bless

Thank you.

Kuni Chen – CRT Capital Group

And good to see all the progress, looks like you guys are doing a lot of good work here.

Michael A. Bless

Thank you.

Kuni Chen – CRT Capital Group

Just first of on Ravenswood, it seems like you appear a little bit more confident on getting this restarted at some point maybe even with some positive, [you still have] near term, can you give us some parameters around capital spending to get the plant back up?

Michael A. Bless

Sure I will give you not only capital, but the total spending to get the plant back up, because the capital quite frankly is a reasonably small part of it, so I’ll give you the bottom line answer first and then dissect it. It will cost around $70 million in cash to get that plant restarted. Of that Kuni about half is working capital as you would expect largely alumina there, of the remaining half $35 million less than a third of that is pure CapEx, most of it is preproduction labor, preproduction power, training programs, material supplies and things like that.

Kuni Chen – CRT Capital Group

Okay. That’s helpful. And then just on Glencore and Xstrata, can you talk about how that potentially would impact essentially just share some of your perspectives there and longer term will that have any impact either your alumina or tolling agreements?

Michael A. Bless

I can imagine those are commercial arrangements Kuni and as it related to Glencore is normally, we don’t and wouldn’t comment on anything that they are doing.

Kuni Chen – CRT Capital Group

Okay, fair enough, I’ll turn it over.

Michael A. Bless

Okay, thanks Kuni.

Operator

Question comes from Brett Levy with Jefferies & Company. Please go ahead.

Brett Levy – Jefferies & Company

Hey guys first one is kind of a math one, it looks like your pension in opening half went from 162 to 216 in about a quarter, can you talk about sort of what drove the change in the unfronted number and whether or not that impacts cash costs going forward?

Michael A. Bless

Thanks, Brett. Yeah, Steve Schneider, who is our Chief Accounting Officer sitting here and he has reported here the right hand these are largely valuation assumptions the most meaningful one is given that you’re on the fixed income side and know exactly what I’m talking about the sudden discount rates. So the answer to your the second part of your question is no?

Brett Levy – Jefferies & Company

Got it kind of just figured that. You’ve said something to the effect of $50 million in bad management related at Hawesville. Is there any way of drilling that – getting anymore specificity, we can say this is an easy fix, this is an easy fix. Can you give me an example of some chunk of that $50 million or stuff that went wrong?

Michael A. Bless

Absolutely, and it’s – the answer is, yes. The fixes are all made and so let me drill down a little bit for you. So as I said, $9 million and what we’ve called in the past, we’ve talked about these numbers in the past, but just to remember you that direct restart costs. So this is purchase of materials and supplies, training of employees, et cetera, et cetera, the direct cost of bringing that top line back.

Of the other $40 million odd about half of it or so is due to a combination of fixed costs under absorption, so very simply put your stats for as Shelly said, full capacity of around 250,000 tons a year and you’re producing much less than that. So that’s bleeding down into gross profit.

And then on the other hand, just direct cost of trying to get the conditions on the pot lines back to (inaudible). So as I said, we had over usage of materials and the third party contractors in the plant that try to help us get back online. And then the remainder is just inefficiency, as you’re using your powerless efficiency, you’re current efficiency is down. You labor productivity of course is down, some of these are repetitive, those in the major items there.

Brett Levy – Jefferies & Company

Okay. And the last one is a fixed income question. As coal prices continue to step down on your (inaudible). Are you contemplating a rebuy or make changes in your capital structure as we approach the spring here?

Michael A. Bless

No, that’s a great question, Brett. In fact Shelly and I was just talking about that the other day, so just for everybody’s edification the coal price on our senior notes, steps down from 104 to 102 in May Shelly?

Shelly Harrison,

May.

Michael A. Bless

Middle of May and therefore potential opportunities to extent out that maturity, the break-evens of all those depending upon one view of the interest rates in the future, get a little bit more interesting. And so, nothing to direct answer to your question, Brett there is nothing on the dock at right now. But we are looking at it as we do all the time, but here with the step down now, we’re going to look at it with some increased emphasis and obviously, we continue to watch conditions out in your markets as we go forward. So we’ll be looking at it.

Brett Levy – Jefferies & Company

Got it, thanks very much and congratulations on the promotion.

Michael A. Bless

Thanks Brett.

Operator

Next question comes from the line of Sandeep SM with Goldman Sachs. Please go ahead.

Sandeep SM – Goldman Sachs

Hey.

Michael A. Bless

Hello.

Sandeep SM – Goldman Sachs

You have given the cash cost guidance for 2012 for U.S. and Iceland. I was wondering if you could give the cash – what was the cash cost in 2011?

Michael A. Bless

That’s a – I understand the question, and what we generally haven’t done is broken those two, we can certainly do it and in fact I think you can get a very good view of it rather than goes to the math right now. We’ll be filing our 10-K here mid next week. The due date is Wednesday, we’ll be filing on that day or before.

And when we talked about this in the past when you go to – as you know, we don’t breakout the U.S. versus Iceland on a segment basis, on a reporting basis, but when you got the guarantor statements in the back of the K, and the back of the financial statements, under the footnotes. You’ll see an (inaudible) in essence there breakout of the U.S. versus Iceland. It’s not perfect, but it’s pretty down close. And by making some estimates of non-cash costs principally deprecation of course you can put together pretty good estimate for 2011 of what the actual cash cost was in the U.S. has distinct from Iceland.

Sandeep SM – Goldman Sachs

Okay. My second question, I was wondering if you could just help me understand matter here, we have seen outside center a lot of major aluminum producers actually shutting down their smelters either because of cost issues or they feel that the market is not supporting, market price is not supporting even us and you are – you’ve actually already started Iceland you are now starting at Ravenswood or bringing a start in Ravenswood. So I what’s changed, I mean is it market or do you think that you have a better cost structure, what...

Michael A. Bless

That’s a very good question as Shelly detailed, we are seeing over the last couple of months and probably prospectively meaningful curtailments and closures of capacity in Western Europe and some in the U.S. I guess as well, the major difference is easy to qualify for you here, it’s a Hawesville of course, it’s a marginal analysis if you will.

so we had a plant running at 80% capacity four or five top lines. And so the economics of bringing that fifth top line back on even with the power cost at Hawesville, which as we said right now is very challenged, made sense. And if you are looking at bringing back a completely curtailed plant under those same conditions, it would have been a very, very difficult analysis and most likely, a different conclusion.

In Ravenswood, the issue will be somewhat different. as we said before, we need a couple of things in order to, for to make sense to bring Ravenswood back online and again, we hope to get to the finish line of the this one, reasonably soon.

as we said, the first and most important, our agreements with our labor constituents both the retiree groups and actively; but then as we’ve said, since we started talking about this over a year ago, but we also need isn’t enabling power contract that would enable us to have the confidence to bring that plant backup and to have a power rate that supports positive cash flow operations and decent return to our shareowners at a range of LME.

so you’ll understand what I’m having here, we need support on the power as to bring that plant backup and that’s part of what these series of discussions over the last year, but intensely over the last couple of months (inaudible).

Sandeep SM – Goldman Sachs

Okay. And the guidance you have mentioned, something like $14 million of Ravenswood curtailment charges that goes in the other operating expense line. So that assuming that Ravenswood remains shut during the year. is that right?

Shelly Harrison

That’s correct. That assumes the plant is curtailed.

Sandeep SM – Goldman Sachs

Okay. Thank you.

Michael A. Bless

Thanks.

Operator

And next we will go to the line of Timna Tanners with Bank of America Merrill Lynch. Please go ahead

Timna Tanners – Bank of America Merrill Lynch

Yeah. Hi, good afternoon.

Michael A. Bless

Hi, Timna.

Timna Tanners – Bank of America Merrill Lynch

So a couple of questions for you just to follow-up on Ravenswood to make sure I understand, is it the case that in your recent conversations with your constituents you’re getting more comfortable with a negotiation in a settlement that would enable you to run the plant even at a lower aluminum price, LME price, because in the past, you had talked about requiring a much higher LME price in order to be profitable. Is that what’s happened?

Michael A. Bless

Yeah. I mean that is the concept Timna with which we’ve been working that that at lower LMEs and obviously, your next question might be lower than a what and that would be a good question, it’s a relative discussion, but yes, that’s the concept that we need to be able to have protection at somewhat lower LMEs. So that’s a long win, did I suppose yes, to your question.

Timna Tanners – Bank of America Merrill Lynch

Because the alternatives that you’ve gotten just more bullish on the aluminum price. So I was just wondering is that a case that you are more bullish on aluminum or more confident that you can run rate and put a lower cost structure?

Michael A. Bless

I think it’s more the former than the latter.

Timna Tanners – Bank of America Merrill Lynch

Okay, thank you. And then if you could talk us through on Helguvik, what your best case or base case scenario would be for start-up because I just I cannot lose track with some of the moving parts and the different steps that are necessary. Can you talk us through again, like what might be the possible timeframe for starting up that in the best or base scenarios?

Michael A. Bless

No problem, don’t blame me for losing track it’s a complex process that ebbs and flows. So, bottom line the answer is try to short windily answer your question. We think here that if we could get agreements on these two parameters here over the next couple of months, based on the additional work that we need to happen to less importantly document all that more importantly how the power companies go out and put in place. What they would need to put in place for us to enable, to have the confidence to restart, you are at looking at late 2000, late this year going in – falling into early 2013. And then as we have said before for this first phase, you add 24 months before you get the first half metal. So extrapolating that all out first half metal you know reasonably best case late 2014, early 2015 for the first 90,000 ton phase.

Timna Tanners – Bank of America Merrill Lynch

Okay, perfect. Thanks so much.

Michael A. Bless

Thank you.

Operator

Our next question comes from the line of John Tumazos [Very Independent Research]. Please go ahead. Mr. Tumazos, your line is open.

Unidentified Analyst

Thank you. You commented that you expect Chinese demand up 10%?

Shelly Harrison

That’s right.

Unidentified Analyst

An first 40 days of this year, the steel outputs down 13%. Did you, we’ve seen the aluminum smelter output cuts, less production, but still more inventory. Do you think that the first quarter is down sharply or that there is just a massive destocking in the wake of the European bank messes.

Shelly Harrison

I would say that the first quarter is probably down a bit from what we would expect for the average for the year, but as you know the first quarter is certainly looking China is always a bit unusual with the Chinese New Year. So, we certainly don’t put too much weight on that we continue to look out for the full year. And continue to expect that on average it will still be a strong year for demand growth in China.

Unidentified Analyst

Thank you.

Operator

Our next question comes from the line of Tim Hayes from Davenport and Company. (Operator Instructions).

Tim Hayes – Davenport & Company

Hello, everyone.

Michael A. Bless

Hi, Tim.

Tim Hayes – Davenport & Company

Just two questions there, what’s your view going forward on using the put options to protect the cost there at, profitability at Hawesville.

Michael A. Bless

At this point in time Tim, as you know we’ve got options purchased that run through the first half of this year. And at this point in time we are holding steady and looking at the markets. So I wouldn’t, we are open minded. I would say as we said in the past we are opportunistic, we are not dogmatic in terms of a policy we must be hedged thus and less percent. And anything we do in the future, I think as we’ve talked about as well anything that we would do would be reasonably short-term in nature. So right now the facts are that’s what we’ve got, we haven’t put anything on this last quarter of course we would have reported to you. And we are watching it.

Tim Hayes – Davenport & Company

Great. And then the expansion at Grundartangi I missed a bit of the detail you said that’s an expansion of the Rod mill.

Michael A. Bless

No, no that’s an expansion of the hot metal capacity. So it’s no more reduction sales its no more parts, but it will be quite frankly at the end of the day just cranking up the average to get more production out of deposits that we have now. And in order to achieve that, we need to do a couple of things including upgrading the high voltage equipment and as you referenced upgrading the [writing] room as well. And so, those are our neighbors for being able to with more power as I said, increasing the average to the cost.

Tim Hayes – Davenport & Company

Yes, how much is the expansion of the hard metal?

Michael A. Bless

It will be just shy of the – over the whole program just of 50,000 tons.

Tim Hayes – Davenport & Company

And I guess then timing in CapEx to achieve that?

Michael A. Bless

Yes, $90 million over five years, we’re going to get as I noted we really are working to try to accelerate this because it’s a very good IRR on lower risk project for us, but as laid out right now, its now just shy of five year, just shy of $90 million and the staging of that as I said is only about 10 of that $90 million get spent in 2012.

Tim Hayes – Davenport & Company

Thank you.

Michael A. Bless

Thanks.

Tim Hayes – Davenport & Company

(Inaudible)

Michael A. Bless

I can’t hear you (Inaudible).

Tim Hayes – Davenport & Company

What the average currently in the plant or what you’re going say (Inaudible)?

Michael A. Bless

It’s in the mid 190s and it will above 200,000.

Tim Hayes – Davenport & Company

Okay, thank you.

Michael A. Bless

Sure.

Operator

And our next question comes from the line of Bridget Freas with Morningstar. Please go ahead.

Bridget Freas – Morningstar

Hi, good afternoon, thank you for taking my question.

Michael A. Bless

Hi.

Bridget Freas – Morningstar

On alumina prices you’re expected to be steady in 2012 as a percentage of the LME. So now with alumina moving more to an index or spot basis how does that affect you? May be in Iceland that won’t matter much, given the totaling basis but what about in the U.S.?

Shelly Harrison

Even in the U.S. there should be a very limited impact certainly for 2012 and actually going out for the most of 2014, because of the existing contracts that we have in place that are already price with the percentage are remain

Bridget Freas – Morningstar

Okay. And then my second question on your 2012 shipment guidance being above data capacity. At these efficiency improvements that you’ve made sustainable capacity at these smelters increased permanently

Shelly Harrison

Yes, they have

Bridget Freas – Morningstar

Okay, thank you.

Operator

Next question comes from the line of Kuni Chen. Please go ahead

Kuni Chen – CRT Capital Group

Hi, sorry just a quick follow-up. On Helga Vick you mentioned the – I guess that the key issue there is the power prices mechanism, is that you have not yet had a chance to sit down with HS workload since the arbitration settlement. So you don’t really know how that dynamic will come together or have

Michael A. Bless

It’s the foremost so we’re just I said, its absolutes the former [farmers] he has been working over the last month or two since the arbitration came out to see where we think we are and we are just here literally on the verge over the next couple of weeks of sitting down with them there was some articles in the Atlantic press recently of there CEO was saying the exact same thing.

So we don’t know where they are and vice versa, but, I think here over the next month or two as we meet and kind of digest each others positions we’ll be able to determine with them. I mean the dialogue has been very (inaudible) on all that. We know them well, they know us well, it’s a question of how quickly we can get something that works for us mutually.

Kuni Chen – CRT Capital Group

Okay, I understood. Thanks.

Michael A. Bless

Thanks, Kuni.

Operator

We have a question from the line of Frank Duplak with Prudential. Please go ahead.

Frank Duplak – Prudential

Well, it’s just curious if you could give us an update on revolver availability at the end of the year?

Shelly Harrison

Yeah, sure. At the end of the year, we basically have full availability on the revolver, now that’s $100 million facility, but we do have LC’s outstanding against it. LC there $42 million across $58 million of net availability.

Frank Duplak – Prudential

Thank you.

Operator

And we have a question from Paul Massoud with Stifel Nicolaus. Please go ahead.

Paul Massoud – Stifel Nicolaus

Hi, Shelly. Hi, Mike. Apologize for any background noise you might here, but I just had a quick question on Helguvik. in the past, you’ve said that you preferred to wait on breaking ground and so have secured for all four phases. Is that still the case or would you consider starting – if may be a power secured from another so to first, two or three of those?

Michael A. Bless

Thanks, Paul. Let me just – let me correct or just modify your question if I can pick the liberty to do that, and then answer your question. So it’s not the start obviously, will be recommence, we got to $130 million of investments in the project already. and so what we said in the past, and this hasn’t changed it all, because that we would certainly not require certainty as it relates to specific delivery and price on the backend, say for the last phase or so, or something like that.

but that – given the fact that the capital costs per unit of capacity is much higher in Phase I that it is in the subsequent phases, just one quarter magnitude it’s almost 2X the capital costs for ton of installed capacity in Phase I versus Phases II, III and IV, because of course of the infrastructure that you got to put in place regardless of how much production capacity you have, because of that the returns are – get better over the projects, their better two over one and on and on and on and on. And so for that reason, we need to have some good, very good certainty in the early phases and then our willingness to proceed with relatively less certainty in terms of specific delivery dates and specific pricing, increases as you move out sort of past, certainly pass Phase III and maybe even pass sort of Phase II.

Paul Massoud – Stifel Nicolaus

Okay, thanks.

Michael A. Bless

You bet.

Operator

And there are no other question queuing up at this time.

Michael A. Bless

We appreciate everybody joining us this afternoon, and we look forward to talking with you again in a couple of months and not before. Thanks very much.

Operator

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

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