Seeking Alpha
World industry is remarkably short of the key metal aluminum. For this reason, its price has rocketed in the past year to an all-time high to $2,367 per metric ton -- up about 115% from 2001.

Century Aluminum Company (NASDAQ:CENX) produces primary aluminum products in the United States. At a market cap of just $1.12 billion, which is less than a twentieth of the size of the majors, CENX still churns out 615,000 metric tonnes of aluminum per year -- about 2% of the world total. (Yahoo)

Four catalysts that make CENX a buy:

1) After several years of paring back non-core business, it has come to focus solely on making 'primary' aluminum, the processed material that other companies then turn into useful products. That makes it the most highly leveraged among its peer group to higher aluminum prices. According to S&P, its sensitivity amounts to 16 to 17 cents of earnings per share for every penny-per-pound change in the price of aluminum futures. Compare that to sensitivities of 5 cents per share for Alcoa (NYSE:AA) and 10 cents per share for Alcan (AL (defunct)).

2) The cost of doing business domestically is far higher than in places like China and South America. It's not just labor costs in this case, but the cost of power. Century contracted Glencore International to obtain ownership of a big smelter in Grundartangi, Iceland.

3) Century has entered into a advantageous 13-year deal with Icelandic power suppliers for the electricity and has pre-sold all of its capacity in a long-term deal to two customers: Glencore and the Australian commodities giant BHP Billiton (NYSE:BHP).

4) Valuation-wise Century will probably earn around $3.90 per share in 2006, or a little better than 40% more than in 2005, and as much as $5.00 in 2007. At the current share price of $30, that means its forward PE multiple on 2006 estimates is around 7.2. Century's average PE multiple in the past has been around 15, so if the market comes to value it closer to its prior levels, the shares could reach $45 to $60 over the next 18 months.

Cons:

1) Due to the amount of power required to turn raw alumina into aluminum via an electro-mechanical process, the company is also very vulnerable to the price of both electricity and natural gas.

But if you think that aluminum supplies will continue to be constrained, and thus the price will continue to rise, while electricity and natural gas pricing is contained, then Century becomes a great vehicle to ride the molten metal wave.

CENX 1-yr chart:

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Source: Century Aluminum: Smart Play On The Molten Metal Rally? (CENX)