Operational Challenges And Supply Disruptions Will Reduce Aluminum Production And Impact Profitability

Key Takeaways

• Global demand and limited production capacity could drive higher aluminum prices, positively impacting future revenues.
  
• Operational challenges and supply disruptions may reduce production volumes and increase costs, potentially affecting profitability and earnings.
  
• Record aluminum demand, long-term supply contracts, tax credits, strategic acquisitions, and operational improvements position Century Aluminum for future revenue and profit growth.

Catalysts

Engages in the production of standard-grade and value-added primary aluminum products in the United States and Iceland.

• The expectation of ongoing global demand growth for aluminum, particularly driven by electrification and light-weighting trends, alongside limited new production capacities, suggests increased pressure on supply and higher aluminum prices, potentially impacting future revenues positively.
  
• Potential inclusion of alumina as an eligible cost for the Section 45X production tax credit could increase annual tax credit benefits by $30 million, potentially enhancing profitability and net income if implemented.
  
• Operational challenges, such as the curtailment of power supply at the Grundartangi plant in Iceland through May 2025, could lead to reduced production volumes and negatively impact future earnings.
  
• Supply disruptions in bauxite and alumina such as those in Guinea could lead to price volatility and increased costs, affecting Century Aluminum's net margins and overall profitability.
  
• The strategic review and potential redevelopment of the Hawesville facility may delay capital allocation decisions, possibly affecting future earnings if not resumed or sold for operational use.

Century Aluminum Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Century Aluminum's revenue will grow by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.6% today to 9.6% in 3 years time.
• Analysts expect earnings to reach $264.4 million (and earnings per share of $2.65) by about December 2027, down from $306.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2027 earnings, up from 6.5x today. This future PE is lower than the current PE for the US Metals and Mining industry at 18.2x.
• Analysts expect the number of shares outstanding to grow by 2.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Century Aluminum Future Earnings Per Share Growth

Risks

• Record levels of global aluminum demand driven by trends towards electrification and lightweighting could support increased sales and revenue for Century Aluminum in the future.
  
• The company has managed to secure long-term alumina supply contracts, insulating it from spot price volatility, which can stabilize costs and potentially improve net margins.
  
• The implementation of Section 45X tax credits, particularly if expanded to include alumina costs, could significantly enhance earnings through reduced tax liabilities.
  
• Strategic acquisitions, such as the controlling interest in Jamalco, have reduced exposure to volatile spot alumina prices, potentially improving profit margins.
  
• Ongoing improvements in operational performance and asset utilization, supported by a strong pricing environment, are likely to enhance Century Aluminum's earnings capability.

Valuation

• The analysts have a consensus price target of $23.0 for Century Aluminum based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.8 billion, earnings will come to $264.4 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 7.6%.
• Given the current share price of $21.6, the analyst's price target of $23.0 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.