| CENTURY ALUMINUM CO Item 1A Risk Factors The following describes certain of the risks and uncertainties we face that could cause our future results to differ materially from our current results and from those anticipated in our forward-looking statements |
| These risk factors should be considered together with the other risks and uncertainties described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein |
| The cyclical nature of the aluminum industry causes variability in our earnings and cash flows |
| Our operating results depend on the market for primary aluminum, which is a highly cyclical commodity affected by global demand and supply conditions |
| Historically, global demand and prices for primary aluminum have fluctuated in part due to economic and market conditions in the United States and other major global economies, as well as currency fluctuations |
| The relative pricing of other materials, such as steel, plastic and glass, which are used as alternatives for aluminum in some applications, also affects demand for aluminum |
| Certain aluminum end-use markets, including the automotive sector and the building and construction sector, are also cyclical |
| When downturns occur in these sectors, demand for primary aluminum decreases, resulting in lower prices for our products |
| Over the past 10 years, the average annual cash price for primary aluminum on the LME was dlra1cmam522 per metric ton and has ranged from a low of dlra1cmam182 per metric tons in 1999 to a high of dlra2cmam668 per metric ton in February 2006 |
| The average LME cash price for aluminum was dlra1cmam899, dlra1cmam716, and dlra1cmam432 per metric ton for the years ended December 31, 2005, 2004, and 2003, respectively |
| Primary aluminum prices could decline below current levels, reducing our earnings and cash flows |
| A prolonged downturn in prices for primary aluminum could significantly reduce the amount of cash available to meet our current obligations and fund our long-term business strategies and may force the curtailment of all or a portion of our operations at one or more of our smelters |
| Conversely, if prices increase, certain of our hedging transactions, including our forward sales of primary aluminum and our LME-based alumina contracts, may limit our ability to take advantage of the increased prices |
| More information about Century’s market risks is available in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk |
| ” 13 _________________________________________________________________ We reduce our casting and shipping costs by selling molten aluminum to the major customers of our Ravenswood and Hawesville facilities; the loss of one of these major customers would increase our production costs at those facilities |
| A combined total of 57prca of our consolidated net sales for 2005 were derived from sales to Alcan and Southwire Company |
| Alcan’s facility is located adjacent to Ravenswood and Southwire’s facility is located adjacent to Hawesville |
| Due to this proximity, we are able to deliver molten aluminum to these customers, thereby eliminating our casting and shipping costs and our customers’ remelting costs |
| Century has contracts with Alcan and Southwire which are due to expire at the end of July 2007 and at the end of 2011, respectively |
| Alcan has the right to reduce its purchases under its contract by 50prca, upon 12 months’ notice, and Southwire has the right to reduce purchases under its contract by 20prca beginning in 2010 |
| If we are unable to renew these contracts when they expire, or if either customer significantly reduces its purchases under those contracts, we will incur higher casting and shipping costs |
| A material change in our relationship with Glencore could affect how we purchase raw materials, sell our products and hedge our exposure to metal price risk |
| We benefit from our relationship with Glencore, our largest shareholder |
| We have entered into various long-term contracts with Glencore to sell up to 11dtta3prca of our current annual primary aluminum production and to purchase up to 46dtta0prca of our annual alumina requirements under contracts expiring at various dates from the end of 2006 through 2013 |
| In addition, our subsidiary Nordural has entered into an alumina tolling agreement with Glencore for 90cmam000 metric tons of the expansion capacity at Nordural |
| In December 2005, Glencore assigned 50prca of its tolling rights under this agreement to Hydro Aluminum AS for the period 2007 to 2010 |
| Nordural consented to the assignment |
| We also enter into forward sales and hedging contracts with Glencore that help us manage our exposure to fluctuating aluminum prices |
| Because Glencore is a major customer, supplier and metal hedge counterparty, a material change in our relationship with Glencore, could affect how we purchase raw materials, sell our products and hedge our exposure to metal price risk, which could impact our operating costs |
| Losses caused by disruptions in the supply of power would reduce the profitability of our operations |
| We use large amounts of electricity to produce primary aluminum, and any loss of power which causes an equipment shutdown can result in the hardening or “freezing” of molten aluminum in the pots where it is produced |
| We may incur losses due to a temporary or prolonged interruption of the supply of electrical power to our facilities, which can be caused by unusually high demand, blackouts, equipment failure, natural disasters or other catastrophic events |
| If such a condition were to occur, we may lose production for a prolonged period of time and incur significant losses |
| Although we maintain property and business interruption insurance to mitigate losses resulting from catastrophic events, we may be required to pay significant amounts under the deductible provisions of those insurance policies |
| In addition, the coverage under those policies may not be sufficient to cover all losses, or may not cover certain events |
| Certain losses which are not covered by insurance may trigger a default under our revolving credit facility |
| Changes or disruptions to our current alumina supply arrangements could increase our raw material costs |
| We depend on a limited number of suppliers for alumina, the principal raw material used to produce primary aluminum |
| Supply of alumina has been constrained over the past three years, and the construction of new production facilities requires substantial lead time |
| Disruptions to our supply of alumina could occur for a variety of reasons, including disruptions of production at a particular supplier’s alumina refinery |
| These disruptions may require Century to purchase alumina on less favorable terms than under our current agreements |
| Spot alumina prices are currently substantially higher than the prices we pay under our long-term agreements |
| 14 _________________________________________________________________ Glencore supplies the alumina used at Ravenswood under a contract that expires on December 31, 2006 |
| We are currently assessing our options for future alumina purchases to replace the Glencore contract |
| Century and Falconbridge, through joint venture companies, purchased in 2004 the Gramercy alumina refinery that supplies the alumina used at Hawesville |
| As part of the acquisition, the joint venture also purchased an interest in a Jamaican partnership that owns bauxite mining assets in St |
| Bauxite is the principal raw material used in the production of alumina and all of the bauxite used at the Gramercy alumina refinery is purchased from the Jamaican partnership |
| If there is a significant disruption of bauxite shipments in the future, the joint venture could incur additional costs if it is required to use bauxite from other sources |
| The cost of alumina used at Hawesville may be higher than under our LME-based alumina contracts |
| We acquire alumina used at our Ravenswood and Mt |
| Holly facilities at prices based on the LME price for primary aluminum |
| The Gramercy refinery that Century and Falconbridge acquired from Kaiser supplies all of the alumina used at Hawesville at prices based on the Gramercy refinery’s production costs |
| Those production costs could be materially higher than the price paid under LME-based contracts during periods when aluminum prices are low and raw material costs used in the production of alumina, such as natural gas, are high |
| Changes in the relative cost of certain raw materials and energy compared to the price of primary aluminum could affect our operating results |
| Our operating results are sensitive to changes in the price of primary aluminum and the raw materials used in its production, including caustic soda and calcined petroleum coke |
| Although we attempt to mitigate the effects of such price fluctuations through the use of various fixed-price commitments and financial instruments, these efforts may limit our ability to take advantage of favorable changes in the market prices for primary aluminum or raw materials |
| In addition, because we have sold forward a certain amount of our production capacity in future years, rising raw material and energy prices would negatively impact our earnings and cash flow, all other things being equal |
| See “Item 7A — Quantitative and Qualitative Disclosures About Market Risk |
| ” Electricity represents our single largest operating cost |
| As a result, the availability of electricity at economic prices is critical to the profitability of our operations |
| While we purchase primarily all of our electricity for our existing US facilities under fixed-price contracts through 2006, a portion of the contracted cost of the electricity supplied to Mt |
| Holly varies with the supplier’s fuel costs |
| An increase in these fuel costs would increase the price Mt |
| Holly pays for electricity |
| Power costs at Mt |
| Holly were dlra12dtta4 million higher in 2005 than 2004, primarily due to fuel cost adjustments |
| Also, the fixed price in the contract for Ravenswood may be increased as a result of an ongoing rate case |
| The fixed price portions of our current power contracts at Hawesville are due to expire at various times from the end of 2006 through 2010 |
| If we are unable to obtain power at economic rates upon the expiration of these contracts or in connection with the rate case, we may be forced to curtail or idle a portion of our production capacity, which would lower our revenues and adversely affect the profitability of our operations |
| We are subject to the risk of union disputes |
| The bargaining unit employees at our Ravenswood and Hawesville facilities and at the Gramercy refinery are represented by the United Steel Workers of America |
| Century’s labor contracts at Hawesville and Ravenswood expire in March and May 2006, respectively |
| We may be unable to satisfactorily renegotiate those labor contracts |
| In addition, our recently negotiated contract with Nordural’s employees that expires in 2009 and our contract with employees at the Gramercy plant that expires in 2010 may not prevent a strike or work stoppage at any of these facilities in the future, and any such work stoppage could prevent or significantly impair our ability to conduct production operations at those facilities which could materially adversely affect our financial results |
| 15 _________________________________________________________________ We are subject to a variety of environmental laws that could result in costs or liabilities |
| We are obligated to comply with various federal, state and other environmental laws and regulations, including the environmental laws and regulations of Iceland, the European Economic Area and Jamaica |
| Environmental laws and regulations may expose us to costs or liabilities relating to our manufacturing operations or property ownership |
| We incur operating costs and capital expenditures on an ongoing basis to comply with applicable environmental laws and regulations |
| In addition, we are currently and may in the future be responsible for the cleanup of contamination at some of our current and former manufacturing facilities or for the amelioration of damage to natural resources |
| For example, we, along with others, including former owners of our former St |
| Croix facility, has been sued for alleged natural resources damages at the facility |
| While it is not presently possible to determine the outcome of this matter, our known liabilities with respect to this and other matters relating to compliance and cleanup, based on current information, are not expected to be material and should not materially adversely affect our operating results |
| However, if more stringent compliance or cleanup standards under environmental laws or regulations are imposed, previously unknown environmental conditions or damages to natural resources are discovered, or if contributions from other responsible parties with respect to sites for which we have cleanup responsibilities are not available, we may be subject to additional liability, which may be material and could affect our liquidity |
| Further, additional environmental matters for which we may be liable may arise in the future at our present sites where no problem is currently known, with respect to sites previously owned or operated by us, by related corporate entities or by our predecessors, or at sites that we may acquire in the future |
| Overall production costs may become prohibitively expensive and prevent us from effectively competing in price sensitive markets if future capital expenditures and costs for environmental compliance or cleanup are significantly greater than current or projected expenditures and costs |
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Environmental Expenditures and Other Contingencies” and Note 13 to our consolidated financial statements for a detailed description of our environmental matters and associated costs and risks |
| Acquisitions may present difficulties |
| We have a history of making strategic acquisitions |
| We expect to make strategic acquisitions in the future |
| We are subject to numerous risks as a result of our acquisitions, including the following: • it may be challenging for us to manage our existing business as we integrate acquired operations; • we may not achieve the anticipated reductions in average unit production costs as a result of our acquisitions; and • management of acquisitions will require continued development of financial controls and information systems, which may prove to be expensive, time-consuming, and difficult to maintain |
| Accordingly, our recent or future acquisitions might not improve our competitive position and business prospects as anticipated |
| The ongoing expansion of Nordural, which is expected to be completed in the fourth quarter of 2006, will more than double the facility’s existing production capacity |
| The expected benefits of the expansion may not be realized if Nordural is unable to complete the expansion in the time forecast or experiences significant cost overruns |
| We may add additional capacity to the current expansion project or in a future expansion of Nordural |
| In each case, our ability to add the additional capacity depends on our ability to enter into certain key contracts for that capacity |
| Operating in foreign countries exposes us to political, regulatory, currency and other related risks |
| Nordural is our first facility located outside of the United States and following completion of the ongoing expansion, it will represent 29dtta5prca of our overall primary aluminum production capacity |
| The bauxite operations related to the Gramercy plant, which we acquired through a joint venture with Falconbridge, are 16 _________________________________________________________________ located in Jamaica |
| We may in the future consider other investments in foreign countries |
| International operations may expose us to risks, including unexpected changes in foreign laws and regulations, political and economic instability, challenges in managing foreign operations, increased cost to adapt our systems and practices to those used in foreign countries, export duties, tariffs and other trade barriers, and the burdens of complying with a wide variety of foreign laws |
| In addition, we may be exposed to fluctuations in currency exchange rates and, as a result, an increase in the value of foreign currencies relative to the US dollar could increase our operating expenses which are denominated and payable in those currencies |
| For example, Nordural’s revenues are denominated in US dollars, while its labor costs are denominated in Icelandic krona and a portion of its anode costs are denominated in euros |
| Our historical financial information may not be comparable to our results for future periods |
| Our historical financial information is not necessarily indicative of our future results of operations, financial position and cash flows |
| For example, our historical financial data does not reflect the effects of: • our acquisition of the remaining 20prca interest in Hawesville prior to April 1, 2003; • our acquisition of Nordural prior to April 27, 2004; and • the equity earnings of the joint venture purchases of the Gramercy assets prior to October 1, 2004 |
| Our high level of indebtedness requires significant cash flow to meet our debt service requirements, which reduces cash available for other purposes, such as the payment of dividends, and limits our ability to pursue our growth strategy |
| We are highly leveraged |
| We have an aggregate of approximately dlra671dtta9 million of outstanding indebtedness as of December 31, 2005 |
| In addition, we could borrow additional amounts under our dlra100 million credit facility and Nordural has access to an additional dlra143dtta0 million under its dlra365dtta0 million term loan facility |
| The level of our indebtedness could have important consequences, including: • limiting cash flow available for capital expenditures, acquisitions, dividends, working capital and other general corporate purposes because a substantial portion of our cash flow from operations must be dedicated to servicing our debt; • increasing our vulnerability to adverse economic and industry conditions; • limiting our flexibility in planning for, or reacting to, competitive and other changes in our business and the industry in which we operate; • placing us at a disadvantage compared to our competitors who may have less debt and greater operating and financing flexibility than we do; and • limiting our ability to borrow additional funds, which may prevent us from pursuing favorable acquisition opportunities when they arise |
| In addition to our indebtedness, we have liabilities and other obligations which could reduce cash available for other purposes and limit our ability to pursue our growth strategy |
| We will need a significant amount of cash to service our debt |
| In addition, we will be required to settle in cash up to the principal amount of our convertible notes (which are convertible by the holder at any time) upon conversion, which could increase our debt service obligations |
| More information about our liquidity and debt service obligations is available at “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein |
| We are also exposed to risks of interest rate increases |
| Nordural entered into a dlra365dtta0 million senior term loan facility and had outstanding borrowings of dlra230dtta4 million at December 31, 2005 |
| Nordural’s annual debt service requirements will vary, as amounts outstanding under its new term loan facility will bear interest at a variable rate |
| 17 _________________________________________________________________ Our ability to pay interest and to repay or refinance our indebtedness, including Nordural’s senior term loan facility, and our senior notes and convertible notes, and to satisfy other commitments, including funding the Nordural expansion, will depend upon our future operating performance, which is subject to general economic, financial, competitive, legislative, regulatory, business and other factors that are beyond our control |
| Accordingly, there is no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness, including the notes, or to fund our other liquidity needs |
| If we are unable to meet our debt service obligations or fund our other liquidity needs, we could attempt to restructure or refinance our indebtedness or seek additional equity capital |
| There can be no assurance that we will be able to accomplish those actions on satisfactory terms, or at all |
| Restrictive covenants in our credit facilities and the indenture governing our senior notes limit our ability to incur additional debt and pursue our growth strategy |
| Our revolving credit facility and the indenture governing our senior term notes each contain various covenants that restrict the way we conduct our business and limits our ability to incur debt, pay dividends and engage in transactions such as acquisitions and investments, which may impair our ability to pursue our growth strategy |
| ” Any failure to comply with those covenants may constitute a breach under the revolving credit facility or the indenture governing the notes, which may result in the acceleration of all or a substantial portion of our outstanding indebtedness and termination of commitments under our revolving credit facility |
| If our indebtedness is accelerated, we may be unable to repay those amounts upon acceleration and our secured lenders could foreclose on any collateral securing our secured debt |
| Substantially all of Nordural’s assets are pledged as security under its term loan facility, including, but not limited to, all of Nordural’s property, plant and equipment related to the smelter and the harbor area and all of Nordural’s current and future inventory, receivables, insurance policies, bank accounts, and rights under specified contracts relating to the operation of Nordural, including its tolling, anode supply and power contracts having a term longer than two years |
| In addition, the shares of Nordural have been pledged to the lenders as collateral |
| If Nordural is unable to comply with these covenants, the lenders would be able to cancel commitments under Nordural’s loan facility, cause all or part of the amounts outstanding under the loan facility to be immediately due and payable and foreclose on any collateral securing the loan facility |
| The term loan facility also contains restrictions on Nordural’s ability to pay dividends, including a requirement that Nordural make a repayment of principal in an amount equal to 50prca of any dividend paid to shareholders |
| See “Liquidity and Capital Resources |
| ” Based on Nordural’s needs for cash to finance its expansion and operations, we do not currently anticipate that Nordural will distribute any cash in the foreseeable future |
| We depend upon dividends from our subsidiaries to meet our debt service obligations |
| We are a holding company and conduct all of our operations through our subsidiaries |
| Our ability to meet our debt service obligations depends upon the receipt of dividends from our subsidiaries |
| Nordural’s senior term loan facility places significant limits on Nordural’s ability to pay dividends |
| Subject to the restrictions contained in our revolving credit facility and the indentures governing our senior and convertible notes, future borrowings by our subsidiaries could contain restrictions or prohibitions on the payment of dividends by those subsidiaries |
| In addition, under applicable law, our subsidiaries could be limited in the amounts that they are permitted to pay as dividends on their capital stock |
| The price of our common stock may fluctuate significantly |
| The market price of our common stock has experienced significant volatility from time to time, and this volatility may continue in the future |
| From January 1, 2005, through February 28, 2006, the intra-day sales price of our common stock on NASDAQ ranged from dlra17dtta82 to dlra39dtta07 per share |
| In addition, the securities markets have experienced significant price and volume fluctuations |
| The market price for our common stock may be affected by a number of factors, including actual or anticipated variations in our quarterly results of operations, expectations about the future price of aluminum, changes in earnings estimates or recommenda- 18 _________________________________________________________________ tions by securities analysts, changes in research coverage by securities analysts, the conversion of some or all of our outstanding convertible notes, any announcement by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments, developments in the aluminum industry and sales of substantial numbers of shares by current holders of our common stock in the public market |
| In addition, general economic, political and market conditions and other factors unrelated to our operating performance may cause the market price of our common stock to be volatile |
| Provisions in our charter documents and state law may make it difficult for others to obtain control of Century Aluminum, even though some stockholders may consider it to be beneficial |
| Certain provisions of our restated certificate of incorporation and amended and restated bylaws, as well as provisions of the Delaware General Corporation Law, may have the effect of delaying, deferring or preventing a change of control of Century, including transactions in which our stockholders might otherwise have received a substantial premium for their shares over then current market prices |
| For example, these provisions: • give authority to our board of directors to issue preferred stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any stockholder vote; • provide, under our charter documents, for a board of directors consisting of three classes, each of which serves for a different three-year term; • require stockholders to give advance notice prior to submitting proposals for consideration at stockholders’ meetings or to nominate persons for election as directors; and • restrict, under our charter documents, certain business combinations between us and any person who beneficially owns 10prca or more of our outstanding voting stock |
| In addition, several of our officers have entered into employment and severance compensation agreements that provide for cash payments, immediate vesting of stock options and performance shares and acceleration of other benefits under certain circumstances, including a change in control of Century |
| Our 1996 Stock Incentive Plan, as amended, also provides for acceleration of the ability to exercise stock options and the vesting of performance shares upon a change of control, and our Non-Employee Directors’ Stock Option Plan provides for acceleration of an option holder’s ability to exercise stock options upon a change of control |