Apr 21, 2009
Executives
Shelly Lair – VP and Treasurer
Logan Kruger – President and CEO Wayne Hale – EVP and COO Mike Bless – EVP and CFO
Analysts
Kuni Chen – Banc of America David Gagliano – Credit Suisse Tony Rizzuto – Dahlman Rose David Rosenberg – Oaktree Capital Mark Liinamaa – Morgan Stanley
Brandon Senese [ph] – Cobalt Capital
Operator
Ladies and gentlemen, thank you for standing by and welcome to Century Aluminum Company First Quarter 2009 Earnings call. At this time, all lines are in a listen-only mode.
Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) And as a reminder, today’s conference is being recorded.
I would now like to turn the conference over to Ms. Shelly Lair.
Please go ahead.
Shelly Lair
Thank you, Art. Good afternoon everyone and welcome to the conference call.
For those of you joining us by telephone, this presentation is being webcast on the Century Aluminum website, www.centuryaluminum.com. Please note that website participants have the ability to advance their own slides.
The following presentation, accompanying press release, and comments, includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectations and involve known and unknown risks and uncertainties.
Century’s actual results or actions may differ materially from those projected in these forward-looking statements. These forward-looking statements are based on our current expectations, and we assume no obligation to update these statements.
Investors are cautioned not to place undue reliance on these forward-looking statements. For risks related to these forward-looking statements, please review Annex A and our periodic SEC filings, including the risk factors and management’s discussion and analysis sections on our latest annual report and quarterly report.
I'd now like to introduce Logan Kruger, Century’s President and Chief Executive Officer.
Logan Kruger
Thank you, Shelly. Good afternoon everyone and thank you for joining us.
We have been very busy on many fronts. All of our efforts are focused on preserving the value of your company and we welcome the opportunity to report to you on our progress.
So let’s get started on slight number four. I will address the market in more detail over the following slides.
So let me just provide context here by saying we have not as yet seen many concrete signs of improvement in the end markets either in North America or around the world. There are some signs out that particularly from China that could indeed indicate stabilization or at the very least, a significant slowing to the decline.
Yet until we see more evidence it’s difficult to gain much confidence at this time. Bottom line, the industry remains in an over-supplied position.
We do not believe it’s prudent for producers to plan that improving demand will solve the problem any time in the near term. In the shadow of this very difficult business environment, I could not be more proud of how our employees have performed.
It is during such times as we are experiencing at the moment that effective performance is even more critical. Most importantly, the safety performance at the smelters has been very good, especially in the face of full curtailment at Ravenswood and the one line curtailment at Hawesville.
It is during these times such as that we sometimes forget about the bedrock principles like safety. These principles should not be trivialized.
Our employees have proven their commitment and I want to thank them more. The curtailments have been handled efficiently and at or near the targeted costs.
Wayne will provide more details when he talks with you and will discuss the remaining operations. Grundartangi, which is cash flow positive even at today’s current metal prices continues to produce well about its rated capacity.
Our near-term strategy is straightforward, to strengthen the company's cash flow and thus preserve Century as a survivor when the conditions improve. To that end, we have significantly improved our liquidity during the last quarter.
Mike will provide the details. And as Wayne will discuss, we are all working on the operations to institute significant changes to allow for the long-term value preservation.
Let me now move on to slide number 5. The Icelandic economy continues to experience challenging times with unemployment reaching 9% recently.
This is a significant change from the base of effectively zero a year ago. With the financing packages from the IMF and individual countries in place, we are seeing some stabilization in the local banking system.
General elections are being held this weekend at which point a formal coalition will be formed. Recent polls indicate that the parties, which had been leading the government since February may well remain in power.
Obviously, we shall see on April the 25th. As Wayne will discuss when he talks about operations, our Grundartangi plant has essentially been unaffected by the political and economic turmoil in Iceland.
Efficiencies continue to improve and operating costs primarily power, carbon, and labor, continue to decline. We have significantly reduced activity and spending commitments on the Helguvik project as we reassess the path forward for this world-class project.
We're refining the project cost based on a smaller initial phase and recent commodity prices and construction costs. We expect that the analysis will be completed in the second half of 2009.
Just last week the Investment Agreement was approved by the Parliament in Iceland and is now awaiting ratification by the European Surveillance Authority. This as you know, is a very positive milestone for the project as this evidences the government support for the project and addresses important aspects of the project such as the fiscal regime.
As you would expect we are investigating many financing alternatives for this project. At this point in time, we have not made any commitments with respect to financing.
Any agreement we would consider entering into the future specifically for the project would not be – would be non-recourse to the Century parent and to Grundartangi. Let me move on to slide number 6.
When we look at the market we see that the average LME price for the first quarter was $1,360 per ton. This is the lowest quarterly average since first quarter of 2003.
The most recent spot alumina price was quoted at $227 per ton. US demand remains weak, however the Midwest premiums continue to be in the $0.04 range.
The LME – our stocks continue to rise. In quarter one of this year, we saw an increase of roughly 1.2 million tons taking the total LME stocks up to 3.5 million tons.
Inventories are now equal to 67 days of global demand, a level we haven't seen since the early 90’s when the collapse of the Soviet Union drove significant inventories into the warehouses. Let me move on to slide number 7.
As the global economy slowed and the aluminum demand declined, producers implemented production cuts. To date, 6.7 million tons of production capacity, representing some 17% of the 2008 global production capacity, have been announced for closure.
Additionally, 8.1 million tons of aluminum production capacity has been announced for closure as well. We believe a significant portion of the announced closures have been implemented, but there is still a bit of a lag effect.
Shanghai prices have stabilized at somewhat higher levels in the LME aluminum price due to government actions, strategic stockpile, taxes, GDP growth targets to name a few. As a result, new capacity curtailments in China have essentially stopped and it is believed that some Chinese smelters may have restarted capacity recently and several others are expected to restart in the near term.
The rise in the Shanghai metal prices increased the arbitrage for metal imports on a trailing [ph] basis to some $500 per ton with traders sending metal into China to benefit from the price differential. We continue to expect more cuts outside of China, primarily in the US and Europe, as the majority of the smelters continue to operate with negative cash flows.
We believe these further curtailments will be necessary to balance the market. Let me move on to slide number 8.
In February, the company announced the full curtailment of its 170,000 tons per year Ravenswood facility, and in March we announced the closure of one potline with a capacity of 52,000 tons per year at Hawesville. In total, the company has reduced production capacity by 220,000 tons per year, which equals 28% of our 2008 production capacity.
As you can see from the slide this, puts us at the high end of curtailments compared to other industry players. But we are prepared to take further steps to reduce production levels if the economics makes sense.
If you look at slide number 9, aluminum prices have been range bound for the last three months. Since mid-January, the LME cash prices have been between $1,250 per ton to $1,475 per ton with the current price at around $1,400 per ton.
The majority of the industry experts agree that prices reached a bottom in February and are unlikely to go much below recent levels. But we could see prices move towards the lower end of the range again in the near term.
The 50th percentile producer is now operating around $1,650 to $1,700 per ton, about $150 per ton, above the high end of the range of the LME prices we have been seeing in this year. We do not believe that the LME prices are sustainable at this level where all but the very lowest cost producers are operating at a loss.
But current prices could persist for some time until the economy regains confidence and particularly demand picks up. I would like to now pass this on to Wayne to talk us through the operations.
Wayne Hale
Thanks, Logan. Let’s turn to slide 10.
Looking across the operations, Ravenswood saw a significant change during the quarter. After closing one potline in December, we made the difficult but necessary decision to curtail the entire plant in February.
The process was completed by mid-month. Adding my thoughts to Logan’s comments, it is during these challenging financial times that unfortunate decisions must be made.
Our employees at Ravenswood acted in a safe and professional manner to efficiently curtail the plant. My thanks to Jim Chapman and his entire team for managing the curtailment effectively.
We’re now operating the plant in a care and maintenance mode with a support staff of around 28 People. This number will be reduced over the next couple of months by another four to five as some of the service and support work concludes.
The contract with the United Steelworkers expired at the end of May and we are now working with the union leadership to commence the usual formal bargaining process. We look forward to be the new contract being an enabler to win its time to consider restarting the plant.
Moving on to Hawesville, we curtailed Line 5 in early March. The plant is now operating efficiently at an annual capacity of around 200,000 metric tons per year.
We are in discussions with our customers and suppliers to ascertain if and when the curtailment of additional capacity is feasible and makes economic sense. At this point, I can say there appears to be benefit to curtailing an additional potline.
This is being considered for some time in the near future and if completed, would represent an additional 50,000 ton reduction. The new power contract for Hawesville continue to move somewhat circuitously to completion.
The parties are in the process of satisfying the conditions of the Kentucky Public Service Commission imposed requirements. In addition, the world has changed significantly.
As you all know, since the principal terms and economics of the transaction were agreed over a year ago. In this context, we are carefully analyzing all aspects of the power contract to confirm that it still provides economic benefit to us over both the short and long term.
Insofar as the cost of these curtailments, Mike will be providing the details later. Moving on to Gramercy, the plant has been producing smelter grade alumina at half capacity since early February.
On an annualized basis, we and our partner are each taking now around 250,000 tons of SGA. This reduction in Gramercy throughput in addition to a reduction in sales of bauxite has reduced the rate of production at St.
Ann’s as well. At the lower production rate, Gramercy is performing well with key operating metrics such as energy efficiency being favorable to our expectations.
We continue to discuss with our partner the various near and longer-term options for this business. Turning to the next slide, as we’ve stressed consistently in previous discussions, Mt.
Holly operates safely, performs well and has good productivity. The issue is the power price.
Our forecasted power price for 2009 has reduced substantively from what was predicted just a few months ago and looks like it might fall even a bit further, it’s still significantly above the price necessary to achieve profitable operations even at higher LME high prices than today. We and our partner continue to work with the power provider on short and longer-term solutions that could meaningfully change the equation.
Such a change has thus far been elusive. In parallel, we continue to engage with our partner about the options available to us jointly in regard to the operation of the plant.
We're viewing Grundartangi, we continue to see improved performance from the plant and operating team, best-ever performances continue to be surpassed. Operating metrics such as injury reduction, emissions, equipment damage, production, and cost efficiency continue to improve from an already excellent base.
From external environment perspective, we have seen no real negative impact on our business from the economic and political uncertainties in Iceland. Turning to the review of our markets, we are seeing weakness in the extrusion and billet market with some limited support in the rod and cable business due to the present administration’s directive to strengthen the transmission grid centered around Texas and the recent ice storms in the Midwest.
There has been some recent short-term pricing support due to reduced scrap availability with associated tightening of spreads. Generation of scrap is down, in line with industrial production, which has reduced conception as well.
Aerospace is falling off, centered around Boeing and Air Bus. Boeing is aggressively de-stocking inventories.
Automobiles looks slightly stronger in May due to de-stocking winding down a bit. Sheet mill orders and coil flat sheet remain very depressed.
This will not improve until the transportation market recovers. There are signs that China’s stimulus package is gaining traction.
The World Bank predicts a recovery in the second half of the year and at annualized economic growth rate of around 6.5%, yielding a potential impact on aluminum demand. Unfortunately, there is little similar evidence in other international markets suggesting continued challenges in 2009.
Now, I will turn it over to Mike who will discuss the financials.
Mike Bless
First before diving into the financial results, just talk about the market movements quarter-to-quarter, as usual I will make all my comments comparing the quarter just ended to the prior quarter, so Q1 over Q4. In that period, the cash LME price – average cash LME price declined 26% Q4 to Q1, on a one-month lag, the cash price was up 35%, and as you know, many of our revenues in some of the cost price on a one-month lag.
So one-month lag, LME down 35%. Our realized average price is a weighted average global result for us, it down 32% in that context.
Turning to shipment volumes, you can see the data at the end of the financial information after the earnings release. Domestic volumes were obviously down significantly, Wayne has described that obviously due to the curtailments.
Volumes in Iceland down 2% sequentially on a reported basis, but on a per day basis flat. There were two less days in Q1 than they were in Q4.
And as you’ve had a chance to look at the numbers, Grundartangi again shipped at an average annualized rate of 276,000 tons, obviously compared to the 260,000 ton rated capacity, that's a terrific result and we continue to be very, very gratified with it. So based on those data, the change in sales in – in price and in volume, net sales as you can see on the slide here, quarter-to-quarter, up 44%.
Now if you go back to the financial information, let's walk down the income statement, I will call up the major items here. Gross profit, as you can see, up $10 million sequentially on a sales change or decrease sequentially of $178 million.
Couple of comments on that result, it might look a little strange at the context. Price alone dropped gross profit by $100 million quarter-to-quarter.
You might remember that in Q4 we took an inventory charge to reflect our inventory at lower cost of market as required and that charge is $56 million. In effect, that $56 million would have rolled through cost of sales this quarter had we not taken it last quarter.
So obviously gross profit is $56 million higher and it would have been if we hadn’t taken that LCM charge last quarter or in the fourth quarter as required. Couple other comments on gross profit, aluminum costs were offset, were down $17 million quarter-to-quarter.
Most of that was based on the fall in the metal price, but a couple of million dollars of it was based on lower aluminum price – aluminum cost into Hawesville, mostly from Gramercy as you know. Nordural power off $5 million quarter-to-quarter, obviously LME-linked and raw materials continuing the trend we've seen over the last couple of quarters, off $4 million quarter-to-quarter, mostly carbon-based products.
Continuing down the income statement, a new line item that you haven't seen before called other operating expense. This is where all the Ravenswood curtailment costs related will go.
Basically the accounting principle say that if you don't have revenue that attached to a cost, you can take it and put it on this line and that's where we put it. We obviously believe that it will be helpful to investors to see it isolated and it's the right accounting treatment.
You see $24 million on this line, it's actually the result of a $35 million chart that I will detail in a moment, reduced by $11 million curtailment gain related to employee benefit at Ravenswood. The $35 million gross expense this quarter, of that $35 million only $6 million of it was cash, the rest are accruals and reserves, obviously that will be paid up in cash in future quarters and I will detail our estimates for future spending at Ravenswood here in a couple of slides.
And one more item to note in that $35 million, we have just today finalized the settlement of our alumina long position related to Ravenswood over the next 12 months, that’s a beneficial settlement for us, it’s a – $6 million is the cost of the settlement to us. It compares favorably to the size of the liability that we believe we have there, and as we finalize this agreement here over the next day or two, we will be putting out an 8-K to detail the terms of the settlement.
Again I will cover the cash impact of this spending over this charge in a couple of slides. Continuing down the income statement, SG&A, as reported, GAAP basis $10 million this quarter.
Obviously that includes some non-cash accruals. We continue to believe per our expectations that we told you about last call that around $2 million a month cash SG&A is a good estimate for 2009.
Equity earnings, you see a slight loss this quarter. The majority of that is due to your inventory adjustment of about $3 million at BHH which as you know is our 40%-owned anode plant in China.
Also lower third-party sales at both Gramercy and at St. Ann’s bauxite site contributed to lower sales and therefore lower profits there.
Just a quick comment on the effective tax rate. You’re going to see largely a result centering around zero for the foreseeable future.
We are paying no taxes in the U.S. obviously given our huge NOLs here and we don't provide a benefit on the income statement for losses.
So the effective tax rate in the US is effectively zero other than small changes like FIN 48 reserves and interest and things like that. Iceland, as you know, we report or provide 15% taxes and pay them on our income there.
So you are going to see an effective tax rate until things improve pretty close to zero on a quarterly basis. Shares outstanding at the bottom of the income statement data you can see 65 million average outstanding during the quarter, obviously impacted by the closing of the common stock offering in early February.
To get a sense of where we are at the end of the quarter, if you look at the balance sheet data, you can see down on the shareowners’ equity section, common shares at March 31, 74 million, preferred shares convertible into another 15.4 million common shares. Just one accounting item to note because it impacts the presentation on the balance sheet and the income statement, as Wayne pointed out, to clear if any confusion, this standard is APB 14-1.
You’ve probably seen it in other companies that you follow that have reported. This has to do with the reporting of convertible securities like the one that we have and it impacts both the balance sheet and income statement.
What it basically requires at a high level is that you bust out the debt and equity features of that convert and show them separately. So if you look at the impact of it, just look at the balance sheet to start, in the – and the 3.31 column, you will see that despite the fact of course that the convert continues to have a $175 million face amount, its now stated at $155 million with the balance in shareowners’ equity.
The APB also requires you to restate prior periods, so you will see actually in the December period it had a slightly couple of million dollars lower balance and that balance will continue to accrete up through the put date to its full face amount. If you go back to the income statement just to conclude on this, you will see interest expense of about $2 million in the year ago period, higher than it was reported.
That $2 million is the same amount in this current quarter, is non-cash of course, all these changes of course are non-cash. That $2 million basically is the result of the requirement in this accounting standard that requires you to accrue interest on the debt as if the debt were non-convertible or straight debt, higher interest rate.
The important thing here of course is there are no changes to the any of the terms and conditions of the converted, it’s just the way you account for it. Before we move on slides here two items on the cash flow statement, CapEx you will see, this is non-Helguvik CapEx on that line, $9 million in the quarter.
Detail on that, $3 million of that was new spending this year, $6 million of that was spending for projects that were or commitments that were made and liabilities that were incurred last year when we were obviously shutting up all those capital programs last fall. Those amounts were accounts payable at the end of the year and they were paid out earlier this year.
Lastly, Helguvik, $6.5 million of spending per our expectations. If you could turn to slide 13 please.
Due to the changes in the cash balance quarter-to-quarter, we thought it might be helpful if we just detailed this for you very quickly here. So obviously we began the quarter at 12/31 cash balance of $143 million.
Two capital items during the quarter, obviously the equity offering $104 million net proceeds and as you know, we repaid our outstanding revolver balance $25 million during the quarter. We talked about two tax refunds totaling $90 million that you see.
About $40 million from the liquidation of working capital, that’s largely from the curtailment of Ravenswood obviously, that's as expected. And again as expected, the actual cash loss from operations, as Logan said, the LME cash averaged $1,360 during the quarter and as we predicted on that basis, the loss – cash flow loss after tax was in the low-$20 million, just see it there.
Ending cash as you see on the balance sheet and on the slide of $267 million. If you just turn to Page 14 before I turn it back to Logan, we thought it would be helpful to lay out some forecasting items to help people build their financial models and such.
Two important assumptions for this page, the first is the LME assumption. Of course, we assumed LME when you start talking about cash costs at smelters and such is impacted by the LME, it obviously prices our alumina at Mt.
Holly and our power costs in Iceland. And these assumptions assume alumina – metal prices around where we've been around the 1400 level give or take.
Second is importantly, these data, specifically the cash cost blended estimate in the U.S., assumes the current power contract at Hawesville. As Wayne detailed, we still expect the new power contract to move forward, it's very complex and it’s taking some time, but we believe for a prudent sake it’s right to plan our liquidity and to show you these numbers given the current power contract.
The only changes when the new power contract closes, there is really only two, it's pretty straightforward. The first would be as we’ve detailed for you before that we would receive on the date of the closing of the new power contract a cash payment of $45 million.
And second, as we’ve said, our pro forma – our future power cost will go up based on where we are today and the estimates that we’ve seen from the power company, which we are assuming will decline based on movements in coal markets and such things. But as we see the data right now, our power costs going forward would increase on a quarterly basis about $8 million from the current run rate, that's assuming four lines running at Hawesville obviously as they are today.
So with those assumptions you see our estimates here a weighted average cash cost in the U.S. of about $1,800 per metric ton obviously.
Iceland, $1,350, that's obviously an alumina equivalent number given that we don't pay for alumina in Iceland due to the towing arrangement, our true cash cost is obviously much lower than that. But to equate it, we have assumed basically current global – current world alumina prices and grossed up our cash cost there, $1,350.
I would say the obvious here, these estimates are always moving, they are moving every day, there is a myriad major of factors that are moving these up and down everyday. And at these estimates, the margin of error on these estimates are at least a couple of percentage points on either side of these numbers.
Just very quickly, curtailment cost for Ravenswood, this is consistent with what we put out before, so balance of ’09, $30 million to $35 million and 2010, $25 million to $30 million thereafter as we have told you before, they follow up quite significantly. SG&A again about $2 million a month cash.
CapEx under $10 million, balance of the year, this is excluding Helguvik obviously and we’ve got $15 million in for a budgetary placeholder for 2010. Helguvik, again consistent with what we told you before, incrementally this – balance of this year, $15 million, that’s mostly deferred supplier payments and in addition, the cost of the minimal site activity.
2010, $5 million are all here deferred supplier payments, site activity will increase these numbers. And cash interest expense hasn't changed, about $22 million a year for the two bonds that are outstanding.
With that, I would like to turn it back to Logan.
Logan Kruger
Thanks, Mike. We like all industry participants continue to look at the data as carefully as we can, both daily moments and any trends we can discern.
There are some hopeful signs, chief perhaps among them the recent level of activity in the broad economy in China. However, we do not believe the industry is yet imbalanced and risks remain even on the supply side as for instance capacity is rumored to be poised to restart in China.
We continue to believe the industry cannot declare itself finished with its supply response. The fast effect that our participation has been amongst the most aggressive in any industry participants we will continue to do our part.
We are working diligently with the appropriate party to find ways to meaningfully lower the company's near-term cash burn and thus preserve value for the longer term. None of these discussions is easy as they all involve other parties with their own interest and requirements.
We have added significantly to our cash position as Mike has described and we will continue to analyze ways to enhance the company’s liquidity profile in a way that benefits our shareholders. With that, we’ll return to your questions.
Operator, we are ready now to take questions.
Operator
Thank you. (Operator instructions) Our first question comes from Kuni Chen with Banc of America.
Please go ahead.
Kuni Chen – Banc of America
Hi, good day everybody.
Mike Bless
Hi, Kuni.
Kuni Chen – Banc of America
I guess just first question on working capital. How much more do you think you can ring out going forward through the balance of this year?
Mike Bless
–
Logan Kruger
Kuni Chen – Banc of America
Okay, got you. And basically, that Ravenswood curtailment, $30 million to $35 million that flows through the other operating cost line through the balance of the year?
Mike Bless
No. Yes and No.
I mean, that line there – what you saw on that line this quarter again was a $35 million charge of which only $6 million was in cash. We’ve already recognized, again a residual – all other things being equal, $29 million of expense.
You won’t see come to – those are already on the balance sheet. So, when we pay the cash, it will just see the reduction in those balance sheet liabilities and you’ll see the cash going out on the cash flow statement if you will.
Kuni Chen – Banc of America
I got you. Okay, and then just last question.
On Helguvik, looks like a couple of things are percolating there. Just hoping you could give us some color on what’s happening there.
It looks like you’re working on some non-recourse financing. Maybe you could just give us a sense as to sort of what the investment in a smaller phase one might look like?
Do you retain basically a 100% equity stake in the project going forward, if you could just kind of talk to some of those issues?
Logan Kruger
Yes. Kuni, let me just take it.
I think first of all, just to make sure we all understand the major work on the project was curtailed and we’ve reviewed the project and that full review will be ready in the second half. As you would expect, we will continue to look at ways of financing this project and I don’t think it’s appropriate (inaudible) to comment now on what that may or may not bring other than commentary we said right at the beginning that it would be a non-recourse type of funding.
Secondly, we’ve split the project into four phases, each one about 90,000 tons and until we’ve done a sufficient work I don’t believe that we should comment on what the capital estimates are, but we should note that obviously with commodity prices and construction costs coming down that we are seeing and we expect to see some reduction in that. So, I think I’ve covered all the – all your points.
In terms of the others on the ownership and those sort of things, as a matter of policy we wouldn’t comment on it. Mike?
Mike Bless
Yes. Let me just say one further thing before we let Kuni go here.
Steve Schneider, our Chief Accounting Officer, who is here in the room with us, reminds me that the ongoing costs at Ravenswood for the curtailment, those that we didn’t reserve this quarter, will indeed flow through those lines. I mean, the costs that we recognize have already been recognized on those lines, you want to see those again of course on the income statement.
But new costs every quarter, those that we can’t recognize now under accounting rules FAS 5 Liability Recognition or whatever, those will every quarter flow through those lines, but you’ll them every quarter on that line.
Logan Kruger
Last piece on Helguvik, Kuni, is just that we have got a engineering teams, very small, working on the re-look at those projects and a very limited on-site work. I think Wayne commented and Mike commented on this well.
Very low level, very low cost. The good news of course was the Investment Agreement being approved by the Icelandic Parliament just pre the election week.
Obviously, that is subject to the European Surveillance Authority’s approval. We think that will come through, it will just take some time.
Kuni Chen – Banc of America
I mean, I’m sorry, last question. Do you think potentially you could be in a position to move forward with this project at some point, let’s say over the next 12 months if a financing package gets put together here?
Logan Kruger
I think, Kuni, it’s a good project. We know that it’s competitive, it’s in the right spot, it’s got competitive setup.
We would be I think somewhat adventurous to comment at this point of time. We have to do our homework and you know what we like.
We will spend the right time on this thing and it’s hard to forecast it in today’s world. We see the world has been pretty tough, but we recognize the value of those project and we recognize the importance of it.
And so, it’s important for us to continue to work in this at the right level to see what opportunities there are and the worlds may or may not change, we will see as we go forward.
Kuni Chen – Banc of America
Okay, thanks.
Mike Bless
Thanks, Kuni.
Logan Kruger
Thanks, Kuni.
Operator
And next, we have the line of David Gagliano with Credit Suisse. Please go ahead.
David Gagliano – Credit Suisse
Wayne Hale
Well, David, this is Wayne. We have four lines operating now to supply sufficient (inaudible).
We can take an additional line own. So, three lines will supply South line [ph].
David Gagliano – Credit Suisse
Okay. All right, perfect.
And then, just as a follow-up, on the cash flow information on page 14, the – first of all the smelter cash cost, that $1800 a ton, that’s basically for Mt. Holly and Hawesville, is that right?
That excludes Ravenswood, right?
Logan Kruger
Correct, you bet, David. Absolutely.
David Gagliano – Credit Suisse
Mike Bless
You got a lot of assumptions there and we – again, we – you’ve heard what we’ve said in the past in the written materials. I think we’d say clearly based on these data that it extends into 2010 nicely as to when in 2010 whether it’s year-end or something otherwise.
I mean, everybody is going to have their own interpretation.
Logan Kruger
I would say it’s well into 2010. To try and pick a particular period in 2010 is difficult, David.
But you’ve done the right arithmetic, I think.
David Gagliano – Credit Suisse
Okay.
Mike Bless
Another statistic I could give to help out, we talked about in the past and I should have updated it quite frankly is that – I was just doing $0.66 David to get around $14.50 [ph] is that based on where we are today, today’s production capacity, so four lines at Hawesville, Mt. Holly, Grundartangi, and our tax position, which is basically a non-tax payer.
Every $100 in the LME, up or down increases or decreases of course bottom line free cash flow, by somewhere in the $40 million to $45 million range. So, you can play with your sensitivities in that respect.
David Gagliano – Credit Suisse
All right, great.
Logan Kruger
Thanks, David.
Mike Bless
Thanks, David.
Operator
Next, we have the line of Tony Rizzuto with Dahlman Rose. Please go ahead.
Tony Rizzuto – Dahlman Rose
Thanks very much, a great job on reshaping the company in this difficult environment. Your primary realization on your direct shipments at $0.72 a pound would seem to reflect more than just the Midwest premium.
Has it been accentuated by the greater shift towards high purity metal as you guys shut down Ravenswood?
Logan Kruger
Wayne Hale
I mean, there is a – certainly a bit of shift of opportunistic developments in the plant to take advantage of high purity.
Mike Bless
But I think Tony has got it sorted on a weighted average basis. Tony, it’s Mike.
You got it right, which is we haven’t changed our high purity and the denominator is lower. So – and all the stuff we’ve taken out obviously is standard grade.
So, I think the math result that you are looking at, I think you got the right explanation for it.
Tony Rizzuto – Dahlman Rose
Okay. And then at Mt.
Holly guys, what is the timeframe? Can you give us an idea of the timeframe for a possible decision there and can you give us an idea of what the current power price is that you are paying right now?
Logan Kruger
Yes. Tony, it’s Logan.
So, I think the answer to try and give you a timeframe on Mt. Holly is very difficult.
You have two partners, both are operating companies, both come at perhaps from different directions, we are in very extensive discussions with Alcoa. We like the facility, it’s just how do you see that facility in this period of time and what you do with it.
So, I would be wrong to put a timing on this because it will just put everyone in a box, which we don’t need. We’ve – it’s receptive but parties do have different views.
In terms of the power prices, I’m not sure what we said before, but you could look it up I think and from CRU and that would probably give you some reasonable idea of where it is.
Mike Bless
Yes, I mean as we said before, we can’t state the exact price due to the agreements with the power supplier, but as we said before, it’s not the least attractive power tariffs in the – electric power tariff smelters in the U.S., but it’s probably weighing in the back of the third, maybe fourth quarter for power tariffs and it’s not a good situation.
Logan Kruger
Tony, in summary, you’ve got a good facility, well run, with an as Wayne said earlier, an attractive [ph] power price and the discussions are ongoing. They are not cursory, they are run in a very professional manner and we’ll keep you up-to-date as things happen if it’s significant.
Tony Rizzuto – Dahlman Rose
Okay, that’s because that is a good facility, I know that was – I think was one of the most recent vintages of –
Logan Kruger
It is.
Mike Bless
It is.
Logan Kruger
And it’s very well run. I think if you look at it from an operating statistics, from a safety point of view, I think Wayne also indicated that when we look to power prices going into this year from Santee Cooper as a supplier, they were somewhat higher than we’ve seen so far.
But even with that improvement, it’s still – I think Mike and Wayne have described somewhere in the third quarter, all of power prices. So, you can get it, see or they might give you an indicator.
I don’t have that in front of me at this time.
Tony Rizzuto – Dahlman Rose
Got you. In Grundartangi, when you guys gross up the cost on alumina, the – essentially, take the average for purposes of a presentation like this, you look at the average in the quarter, the LME, and you kind of use that index there to kind of utilize what the alumina cost would be?
Mike Bless
Yes. What we did Tony, is to keep it very simple and very vanilla is just – as I said, we ran these estimates around 1400 metal, which is kind of a – it’s not the mathematic mean or anything, but it’s just kind of where the metal is you are well aware has been recently and then we looked at where we believe based on our market intelligence sort of long-term meaning a year plus, contract alumina prices are trading today and on that basis, we grossed up the actual cash cost at Grundartangi.
Tony Rizzuto – Dahlman Rose
Got you – got you. And what are some of the cost reduction efforts that you still see an opportunity is there for reducing?
Logan Kruger
Specifically Grundartangi?
Tony Rizzuto – Dahlman Rose
Yes.
Logan Kruger
Obviously, capacity throughput, I think Wayne and the teams there, David (inaudible) the guys have done a fantastic – I think obviously we work on the other key elements. Wayne (inaudible)?
Wayne Hale
Yes, I think the key ones as you upon, certainly the denominator production but certainly we look at the labor cost, the overtime, and specifically contractor costs and as Logan hit it, carbon costs are now even more substandard than energy costs. So, we are looking at that and working with our suppliers diligently.
Logan Kruger
Tony Rizzuto – Dahlman Rose
Right, excellent. And I’ve just got one more question left.
Well, I’m going to – like you to take a shot at this. Your thoughts on this UC Rusal and there has been a lot of mixed reports about what the Russians are doing and what they said they would do and I’m – what are you guys – what are you seeing here?
You really believe that they’ve taken out what they said they were going to do?
Logan Kruger
Tony Rizzuto – Dahlman Rose
Okay. I appreciate your thoughts on that.
Thank you.
Mike Bless
Thanks.
Logan Kruger
Thanks, Tony.
Operator
Next, we have David Rosenberg, Oaktree Capital. Please go ahead.
David Rosenberg – Oaktree Capital
Hi guys.
Mike Bless
Hi, David.
David Rosenberg – Oaktree Capital
The question I had was, historically you guys have always said that you are about 23% hedged to aluminum due to natural hedges in all of our smelters. Can you refresh that number given now that Ravenswood is curtailed?
Logan Kruger
It’s – I don’t have it right now, David. We are all agreeing here, it’s obviously lower.
That’s a throwaway statement. We’ll have to provide that sort of in a – maybe the next sell side conference that we go to or something like that.
It’s – I wouldn’t even want to – it would be a pure guess on my part, I just prefer not to do it. If we can get ourselves together quickly here to give you a reasonable estimate before the questions run out, we’ll do it, but I kind of doubt it.
Otherwise, we’ll put that out there. It’s a fair, very fair question, the next public format that we ask.
David Rosenberg – Oaktree Capital
Okay. And could you also tell us what the availability was on a revolver at quarter-end?
Mike Bless
Yes, I mean a couple of answers to that question. First is, as you know we continue to have a 11 – well, take a step back, it’s a $100 million revolver.
We continue to have a $11 million of the capacity used to back step letters of credit. Those LOCs mostly are used for the $8 million plus – to back step the $8 million of industrial revenue bonds we still have out.
Given where the inventory is priced today, we still are doing the month-end calculations, but there is not a lot of availability left on it. There is maybe another, say $20 million-ish, maybe as much as $25 million, but I prefer to say $29 million of actual cash drawdown availability left on it.
As we said before, you didn’t ask David, but the obvious question is why don’t you draw on. If you go below a certain amount, you can look at the document online, it’s $25 million of availability, you end up in a $15 million – Shelly Lair, Treasurer, just corrects me, you end up in a dominion cash situation, you are quite familiar with that term, and it’s given our liquidity today, it wouldn’t make any sense and I would assume you would agree to do that, but that’s kind of the availability at current metal prices.
David Rosenberg – Oaktree Capital
Okay, thank you.
Mike Bless
Sure, David.
Operator
And next, we have line of Mark Liinamaa with Morgan Stanley. Please go ahead.
Mark Liinamaa – Morgan Stanley
Hello all.
Mike Bless
Hi, Mark.
Logan Kruger
Hi, Mark.
Mark Liinamaa – Morgan Stanley
I think I know the answer to this as well, but just to be clear, there have been some press reports about Glencore force majeures and alumina supply agreements to competitors. Are there any risks or potential disruptions either in the U.S.
or Iceland?
Logan Kruger
Mark Liinamaa – Morgan Stanley
Okay. And can you comment at all about the – maybe your long-term view on Gramercy?
Logan Kruger
Wayne Hale
No, I think you hit it, Logan.
Logan Kruger
Yes, as you know Wayne is – Wayne and his team look after our interest in Gramercy and both partners have recognized the need to certainly reduce the op for the Gramercy and the plant is running pretty efficiently from an energy point of – there are concern as well at these lower levels. But it’s certainly not a market producer at this point in time as you would guess.
Mark Liinamaa – Morgan Stanley
Sure. And just finally, as you look at the supply demand and balance and you and others have commented that we need to see more smelter capacity come offline to get things in balance.
Is there enough cost differential that you have some level confidence if there are some logical people to step up for or is this going to be a bit of a waiting game do you think?
Logan Kruger
I don’t think that it – Mark, that it’s deliberately a waiting game. I think it’s each individual, industry participant, company, operation has different sets of circumstances.
We’ve just gone through our discussions with Mt. Holly, discussions at Gramercy.
So, there you got two different sets of partnerships, which may give you a different result for different discussion. I think they – certainly from a North American, European, and perhaps even into parts of Asia, there are significant levels of production that is above in costs, above what you are seeing on the LME.
And I think most producers have to face up to the decision to continue to run or to curtail in some form. You have even seen some level of curtailment coming out of the Middle East, which was a – I think it’s somewhat of a surprise to most of us.
So, a modest one, but it’s also sort of tells you that even at that level for certain levels of production it’s perhaps wiser to curtail.
Mark Liinamaa – Morgan Stanley
Logan Kruger
Yes, Mark, the China ones have happened, some of them already have happened.
Mark Liinamaa – Morgan Stanley
The central government though I understand has been taking a little harder line view on this than the provincial government – operation. Is that your view that the central government still wants to show some discipline?
Logan Kruger
I think the answer is, yes, balanced against unemployment and other social political demand, so you’re talking of a very large country with 1.2 billion people and lot of interested parties. So I think it’s very localized, but the – overall, the central government wishes to curtail in power-intensive industries.
But power is not as much as problem as it was maybe a year ago because other industries have come off. So it's a moving feast, but obviously there have been curtailments, but there have also been some restarts, of course helped by what’s happened with the Shanghai price, Mark.
Mark Liinamaa – Morgan Stanley
Very good. Thanks and good luck for you with –
Logan Kruger
Thanks very much, Mark.
Mike Bless
Thanks, Mark.
Mark Liinamaa – Morgan Stanley
Bye for now.
Mike Bless
Bye.
Operator
We have a question from Brett Levy with Jefferies & Company. Please go ahead.
Brett Levy – Jefferies & Company
Hi guys, could you talk –
Logan Kruger
Hi, Brett.
Brett Levy – Jefferies & Company
Hi, how are you?
Logan Kruger
How are you?
Brett Levy – Jefferies & Company
Can you talk a little bit about kind of a scenario where essentially you take Hawesville down, you take Mt. Holly down, let's assume we’re out a couple of years some of the customers contracts have gone away.
Is there a viable plan to basically be a Iceland producer so long as Iceland is the only production facility that’s cash flow positive?
Mike Bless
Brett, its Mike. I mean, you are asking a pretty loaded question there with assumption on assumption.
I don't to be honest even know how to answer that other than to tell you what you would already hopefully would say, which is we are looking at – we are studying hard all of those potential scenarios. It's a throw-away answer, but it happens to be the truth and I wouldn't even want to start speculating about a Iceland-only company or an Iceland-only plus this or an Iceland-only plus that.
It's – everything is in the mix at this point in time and we're talking as Wayne said suppliers as you say correctly customers, partners have a big equation here, and it’s just – that one I think defies an answer at this point.
Logan Kruger
Brett Levy – Jefferies & Company
And then, we've seen some flexibility. Obviously you probably saw the agreement Teck Cominco reached with their banks.
It looks like the credit markets are opening up a little bit. Is there a possibility of taking your existing bank agreement and maybe finding a better agreement?
Michael Bless
Sure. We are again, on the capital structure side looking at all that stuff too, opening capital markets, fixed-income markets, what opportunities could be there if and when the time is right.
On the bank group, we've had good discussions with the bank group. We've got a really good group there.
BofA has been a terrific agent there, very current on what's going on at the company. We keep good contacts with them.
So we're talking to them, there is nothing advanced in any – to the – in any way in terms of the kind of thing you're talking about right now. The last couple of months hasn't been a great time, this is an understatement as you well know, Brett, to start renegotiating unsecured credit agreements but that discussion is absolutely ongoing.
Brett Levy – Jefferies & Company
Mike Bless
Okay, fair enough. I will give myself –
Brett Levy – Jefferies & Company
Thanks very much guys.
Logan Kruger
See you later.
Operator
We have a question from Brandon Senese [ph] with Cobalt Capital. Please go ahead.
Brandon Senese – Cobalt Capital
Thanks. My questions have been answered, thanks.
Logan Kruger
Thanks, Brandon.
Mike Bless
Thanks, Brandon.
Operator
(Operator instructions) At this time, there are no further questions in queue.
Logan Kruger
Thanks very much, operator. Thanks to everyone for taking the time for – to be on our call today and we look forward to talking to you again soon.
Thank you.
Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference.
You may now disconnect.