Century Aluminum Co Q1 FY2024 Earnings Call

Thank you for joining us. Welcome to the Century Aluminum Company First Quarter 2024 Earnings Conference Call. I will now hand the call over to our host, Ryan Crawford. Please proceed.

Thank you, operator. Good morning, everyone, and welcome to the conference call. I'm joined here today by Jesse Gary, Century's President and Chief Executive Officer; Jerry Bialek, Executive Vice President and Chief Financial Officer; and Peter Trpkovski, Senior Vice President of Finance and Treasurer. After our prepared comments, we will take your questions. As a reminder, today's presentation is available on our website at www.centuryaluminum.com. We use our website as a means of disclosing material information about the company and for complying with Regulation FD. Turning to Slide 1. Please take a moment to review the cautionary statement shown here with respect to the forward-looking statements and non-GAAP financial measures contained in today's discussion. And with that, I'll hand the call to Jesse.

Thanks, Ryan, and thanks to everyone for joining. We made lots of progress this quarter with some exciting new initiatives. So I'll start today by quickly reviewing the improving market environment and the strong operating performance from each of our plants. Jerry will then take you through the details of our excellent first quarter results, and then I'll finish with an update on our new U.S. greenfield smelter project and our recently announced secondary joint venture with MX Holdings. Overall, strong operational performance and declining costs drove adjusted EBITDA of $25 million in the first quarter. Jerry will give you the full details here, but we are really proud of the job our team did across our locations to operate safely and efficiently through the quarter. We have seen a real improvement in the safety culture across our plants, which is reflective of strong plant leadership and the commitment that all of our employees have made to operate safely. Turning to Slide 3. Market conditions remain broadly balanced in the first quarter before an improving demand picture in the U.S. and Europe paired with continued strong demand in China drove LME prices substantially higher in April. This pickup in demand was evident in regional premiums as well with the European premium increasing most notably over the course of the quarter to be up nearly 50% from year-end levels. Alumina markets also rose during the quarter with Q1 Atlantic alumina prices up about 10% from Q4 levels driven by supply curtailments in Australia. In April, spot alumina prices have followed LME higher as production disruptions in India and elsewhere have made for a tight market. In rising alumina markets like these, we can see that most clearly the strategic value of our Jamalco acquisition and the captive supply of high-quality alumina and bauxite that it now provides for our smelters. Combined with our long-term commercial contracts, the Jamalco acquisition makes us roughly net neutral to APAI pricing as a company. Production at Jamalco also improved through Q1, and I'm pleased to say the refinery returned to profitability in March. Of course, the team is not resting on this achievement, and we plan to continue to drive additional efficiencies and operational improvement through the balance of the year. Turning to the global trading environment. As you can see on Slide 4, global inventories remain at post-financial crisis lows with the vast majority of the available metal around the world being comprised of Russian stocks, including over 90% of all LME inventories. Long-term global trends towards near-shoring strategic mineral production, including aluminum, continued to accelerate this month with new government actions announced in the U.S., U.K. and Mexico that will impact global aluminum flows and supply into our key markets in the U.S. and Europe. Most broadly, the U.S. and U.K. announced earlier this month new sanctions on Russian aluminum and other metals, including a ban on physical import of Russian metal into the U.S. and U.K. produced after April 13. The sanctions further restrict the ability of the London Metal Exchange and Chicago Mercantile Exchange to accept delivery of Russian metal into licensed warehouses. We would like to thank the U.S. and U.K. administration for taking this necessary action. We firmly believe that this was the right step, and we urge the EU to take action as well to ensure a consistent approach across Western markets. Elsewhere in North America, Mexico announced last week the immediate imposition of new tariffs on a number of industrial goods, including primary aluminum and other aluminum products. The new tariffs, including a 35% duty on P1020, a 20% duty on value-added products and 25% to 35% duties on aluminum extrusions will apply to all countries with whom Mexico does not have a free trade agreement, including countries that exported over 700,000 metric tons of P1020 and value-added aluminum products into Mexico last year. While the full details of the program are not yet clear, including the applicability of exemptions and products re-exported from Mexico, the actions are expected to be supportive of U.S. delivery and value-added product premiums. In the U.S., we continue to expect that pending antidumping and countervailing duty trade case against extrusion imports will have a significant positive impact on domestic U.S. billet demand beginning in the second half of this year. In March, the Department of Commerce granted U.S. extruders an early victory by imposing preliminary duties of the subsidy portion of the case. And in May, we continue to believe that commerce will also impose additional antidumping duties on 14 countries. If so, the duties would go immediately into effect and are expected to add strong support to the U.S. extrusion and billet markets. As a reminder, we did hold back some second-half billet volumes for spot sales in anticipation of improving U.S. market conditions and a more constructive pricing environment. Finally, we continue to discuss with the U.S. Treasury Department the potential to add direct and indirect material costs as eligible costs under Section 45X of the Inflation Reduction Act. In late February, I testified at the joint Treasury and IRS hearing regarding this issue, noting specifically the essential nature of these material costs to aluminum production. Our position is in line with testimony and comments submitted from a broad set of industry participants, ranging from critical mineral producers to our downstream customers, including automotive companies seeking to ensure stable domestic supply chains. If direct and indirect material costs are ultimately added as eligible costs, we expect to recognize an additional annual benefit of $50 million to $55 million for 2023 and similar amounts for 2024 and going forward. Any increases in future production at our existing or new U.S. smelting sites would also be eligible for the production tax credit and would be expected to increase our annual benefit on a roughly pro rata basis to the amount of increased production. Turning to operations. We saw a strong and stable performance across our smelters in the first quarter. And our Jamalco refinery returned to stable operations and reached profitability in March. In Iceland, the previously announced 20-megawatt energy curtailment did drive lower volumes from Grundartangi in Q1 as expected. When the power curtailments were initially announced, they were expected to be finished by the end of April, but we now expect that they will continue until the end of May as Iceland has continued to experience an abnormally cold spring leading to lower Snowpack net loss and reservoir levels. This impact is included in our Q2 guidance. In better news at Grundartangi, we did cast our first billet out of our new green billet casthouse earlier this month. We are now producing trial orders for our European customer base and expect to qualify with our key customers over Q2 and Q3 before ramping production for normal commercial sales in the fourth quarter and beyond. We're very excited to begin supplying the much-needed natural low-carbon billet into the European marketplace. Finishing out the energy picture, energy prices in the U.S. continue to be constructive driven by a moderate spring and natural gas prices below $2. Given the continued constructive energy markets and recent uptick in LME, we did make the decision to derisk our Sebree energy exposure a bit and hedge forward a small portion of Sebree power price exposure as well as the corresponding amount of metal price exposure over the next 12 months. On the raw material side, we have finally begun to see many of our raw material imports with pre-pandemic price levels with coke and caustic soda prices both falling below $400 per metric ton. Due to our contractual and physical inventory lags, the benefits of these price decreases will take some time to roll through our results, which Jerry will give you a bit more detail on in a bit. Finally, at Mt. Holly, we made good progress during the quarter towards completing the necessary engineering and procurement plans to enable the potential restart of the remaining 25% of production that is not operating today. As we've discussed before, our experience with these research projects means that it's best to be thorough in the planning stage rather than to rush the research and potentially create operational and cost issues down the line. We are hopeful that we will have additional updates for you on our Q2 call later this summer, but we do not expect that we'll have any significant capital or cash requirements for the restart over the course of 2024. Jerry will now walk you through the quarter and our Q2 outlook.

Thank you, Jesse. Let's turn to Slide 7 to review first quarter results. On a consolidated basis, first quarter global shipments were approximately 175,000 tonnes, up slightly from the prior quarter despite the power curtailments in Iceland. Realized prices, however, decreased versus the prior quarter due to lower value-added and regional delivery premiums, resulting in net sales of $490 million, a 4% decrease sequentially. Looking at Q1 operating results, adjusted EBITDA attributable to Century was $25 million. This was a sequential decrease of $32 million primarily driven by the recognition of the full-year 2023 IRA Section 45X credit during the fourth quarter compared with one quarter of 2024 credit recorded in the current period. Normalizing for the timing of the recognition of the Section 45X benefit in the prior quarter, adjusted EBITDA improved due to lower energy and raw material costs, which were partially offset by the anticipated lower value-added product premiums. During the period, we finalized purchase accounting for the Jamalco acquisition and recorded a bargain purchase gain of $246 million. Adjusted net loss was $3 million or $0.03 per share. The main adjusting item is the deduction of $246 million related to the bargain purchase gain. As a result of finalizing purchase accounting, we have now updated our 2024 outlook for depreciation and amortization to between $100 million and $110 million for the year, as you can see on Slide 19. We maintained strong liquidity of $302 million at the end of the quarter, consisting of $93 million in cash and $209 million available on our credit facilities. Now turning to Slide 8 to explain first quarter sequential improvement in adjusted EBITDA on a normalized basis. In total, adjusted EBITDA for the first quarter was $25 million. Realized LME of $2,190 per tonne was up $8 versus the prior quarter, while realized U.S. Midwest premium of $409 per tonne was down $16. The European delivery premium of $223 per tonne was down $57. Together, LME and delivery premiums amounted to a $4 million headwind in the quarter. Power costs decreased by $4 million. Realized coke prices decreased $71 per tonne, and realized pitch prices decreased $163 per tonne. Together, raw material costs resulted in a $13 million improvement in EBITDA. Lower value-added premiums created a headwind of $9 million. OpEx was $9 million better than the prior period, including the OpEx efficiencies we identified in last quarter's outlook and in addition, some deferred pot relining expense related to the Iceland power curtailment that will now be incurred in the second quarter. With that, let's turn to Slide 9 for a look at cash flow. We began the quarter with $89 million in cash. Adjusted EBITDA contributed $25 million. Capital expenditures totaled $30 million, $17 million of which relates to the Grundartangi casthouse project. We increased short-term borrowings to fund normal working capital flows. As I pointed out last quarter, at the end of quarter 1, we had $93 million in cash. Let's turn to Slide 10, and I'll give you some insight into our expectations for the second quarter 2024. For Q2, the lagged LME of $2,265 per tonne is expected to be up about $75 versus Q1 realized prices. The Q2 lagged U.S. Midwest premium is forecast to be $417 per tonne, up $8. The European delivery premium is expected at $270 per tonne or up about $47 per tonne versus the first quarter. Taken together, the LME and delivery premium changes are expected to increase Q2 EBITDA by approximately $15 million versus Q1 levels. We expect power prices to be in a range between flat to a $5 million benefit. Collectively, we expect our key raw materials to be about flat. We expect volume to be flat to a slight headwind, given normal summer seasonality at our U.S. smelters. Finally, we expect a headwind of about $10 million related to pot relining expense deferred from Q1 because of the power curtailment in Iceland. All factors considered, our outlook for Q2 adjusted EBITDA is expected to be in a range between $25 million to $35 million. I want to take a moment to demonstrate the earnings potential of the business at current market conditions. As we have discussed, historically, rising LME prices take time to roll through our results due to contractual lags with our customers. If we were simply to adjust the outlook range to current LME spot prices only, the business could generate $75 million to $85 million of quarterly adjusted EBITDA. And improvements in regional and value-added premiums would add additional upside. The work that we've done to stabilize operations and drive efficiencies, along with favorable market conditions, provide exciting opportunities for the business. And now I'll turn the call back over to Jesse.

Thanks, Jerry. Turning to Slide 11. I'm pleased to present our two new exciting growth projects that we announced this quarter. One of our core strategies at Century is to capitalize on our position as the largest user of primary aluminum in the U.S. market, which is the shortest target for aluminum in the world. Our production footprint in the U.S. is close to our customer base, allowing us to offer unmatched flexibility and service to our customers while benefiting from strong regional premiums and long-term trends towards near-shoring supply chains and critical mineral production. Both Sebree and Mt. Holly are well known in the marketplace as Tier 1 suppliers of billets and other value-added products. Demand for aluminum products in the U.S. has continued to grow as long-term trends towards renewable energy and electrification have called for increasing amounts of advanced aluminum alloys and green aluminum products. In order to capitalize on these trends, we have looked for ways to build on our leading position and meet this ever-increasing demand from our customer base. Turning to Slide 12. The first of those opportunities is to make a more substantial foray into secondary aluminum production. This has long been a priority for us. And as we have discussed in the past, we have engaged in some small amounts of secondary production in our existing U.S. casthouses. Through this experience, we have engaged with our customers and see the growing demand for green recycled billet production in the U.S. Given the differences in supply chain and operational expertise necessary to build and operate a secondary casthouse, we quickly realized that finding a partner with experience in this space would be key to successfully entering this new line of business. As we announced in March, we were thrilled to find the perfect partner in MX Holdings, a longtime operator of secondary casthouse and scrap procurement and trading businesses in the U.S. MX Holdings' strategy and expertise complement our own. And we have quickly found that the two organizations share a common set of values and people-centric culture. Together with MX, we are far advanced in our plans to construct a new 250 million-pound secondary billet casthouse in the Ohio Valley region. The casthouse is being designed with cutting-edge casting and post-consumer scrap processing equipment. When paired with our combined advanced technical expertise, billet produced by the joint venture will deliver exceptional quality and performance and enable our customers to achieve their sustainability objectives for next-generation extrusion products. Engineering work and supply chain planning is near completion, and we expect to be in a position to make the final investment decisions in the third quarter. Upon completion in 2026, the casthouse would be the largest American-owned secondary billet casthouse. The joint venture will be complementary to our smelters by offering our existing extrusion customers a complete suite of primary and secondary value-added products as well as the potential for a closed-loop supply chain solution through scrap tolling arrangements. We expect we will be able to provide you with more details on those projects on our Q2 call in August. Okay. Turning to Page 13. We were thrilled to announce late last month our plan to build a new state-of-the-art green aluminum smelter here in the U.S. The green aluminum smelter project will nearly double the size of the existing U.S. industry and build on our leading market position to fulfill the ever-growing strategic need for secure domestic U.S. supply of low-carbon primary aluminum alloys and value-added products. The new green aluminum smelter would provide our U.S. customer base with a secured domestic source of low-carbon and military-grade primary aluminum as well as a full suite of value-added products produced with best-in-class technology. We've been working on this project for quite some time. And we're extremely proud and grateful to be selected by the U.S. Department of Energy to receive up to $500 million in funding as part of the industrial demonstrations program. The selection process for the DOE grant was extremely competitive. And for our project to be selected for this historic investment is confirmation of both the strategic need for domestic primary aluminum production and the viability of the project. Combined with the Section 45X production tax credits, this generous grant from DOE shows a significant commitment that the Biden administration has made to ensuring that this critical industry and its workers will be producing the strategic metal in the U.S. long into the future. I'd also like to thank David McCall and our colleagues at the United Steelworkers for their help and shared commitment towards making this project a reality. The green aluminum smelter is expected to create more than 1,000 full-time direct jobs represented by the United Steelworkers and over 5,500 construction jobs. Of course, this new aluminum smelter is a tremendous undertaking and one that will take years to complete. As detailed in our announcement of the project, we've already begun engineering work, energy procurement, and site selection focused on the Ohio and Mississippi River Valleys and have narrowed the potential location of the smelter to three states. Our next immediate steps on the project will be the completion of the site selection and energy supply negotiations, finalization with the Department of Energy regarding the terms and timing of the $500 million grant and completion of our second phase of engineering work. We expect to make significant progress on each of these initiatives over the next several months, and we'll provide updates on each on our next call. I can't tell you how proud we are to be announcing these two projects and helping to ensure the future of the U.S. aluminum industry. We look forward to your questions today, and we'll turn the call over now to the operator.

The first question comes from Lucas Pipes of B. Riley Securities.

Congratulations on your progress on many fronts. One of them is starting production in Iceland with the casthouse. And it sounds like you'll be ramping up over the course of this year. In Q2, I would imagine you're probably still losing money as you ramp up. And I wondered if you could maybe articulate that so I can fine-tune my model and get a better sense for the impact, especially as the facility ramps.

Sure, Lucas. Thanks for the question. You're right that over Q2 and Q3, the casted volumes will be fairly limited, mainly consisting of trial loads for our customer base in Europe. And so most of those volumes will come over the course of Q2, sent into Europe where they will be trialed over Q2 and Q3. And then you'll actually start to see the volumes ramp in Q4, as we mentioned, and should be going full out in Q1. In terms of the cost structure, that will all be included in the guidance that we gave. So there won't be anything incremental to that. It won't be significant over that period. And then you'll start to see the additional upside for the business of those billet sales starting to hit in Q4 and then full out in Q1 of '25.

Got it. So the big step up would come not in Q3, it's really kind of in Q4 versus Q3 where we would see that kind of quarter-over-quarter step-up in EBITDA, thanks to this asset.

That's correct, Lucas. There will be some sales in Q2 and Q3, but those are really pretty small and really just trial loads into the customers.

Any way to quantify the potential impact in Q4 versus Q3?

We'll, of course, give that guidance on our Q3 call. And what I would just say for now is there will still be a ramp-up period in Q4 as you start to sell into that customer base. So it won't be the full out quarter's worth of volume that will hit in Q1 of '25, but it will be substantially higher than what you'll see in Q2 and Q3, yes.

I appreciate that. Congratulations on the new projects you outlined in the U.S. It's very exciting on many different levels. Regarding the new casthouse, if I interpreted correctly, we will begin in 2026. Could you provide some insights on the economics of that project? What is the capital intensity? How will the spending be distributed over the next two years? Any details you can share on the return thresholds would be very helpful.

Sure, Lucas. Yes, you're right. We're really excited about this project. We've been discussing our goals to enter this segment of the business for quite some time. We're seeing a significant increase in demand for secondary aluminum, both in the U.S. and in Europe and other regions. This presents a great opportunity for us to enter this market, and we believe it will be well received. Additionally, it's very complementary to our current billet business in the U.S., allowing us to provide closed-loop supply chains for our existing billet customers. We plan to offer a full range of both primary and secondary products to our customer base. We anticipate making an investment decision in Q2 or Q3, and once that decision is made, we'll update everyone on the project's specifics and expected returns. We're working with our partner at MX to finalize the engineering work for the project and are making considerable progress. We expect this to be a solid project. Regarding spending and return profiles, we believe we'll secure attractive financing for this asset. As a joint venture, with us holding a minority stake, our cash requirements will be reduced. With the financing structures we are considering, we anticipate minimal cash needs for the project throughout the remainder of 2024. This provides some insight into the timing, and we will share more details as we move forward. In terms of returns, we previously discussed our return requirements when talking about the Iceland casthouse, aiming for unlevered internal rates of return in the mid-teens. This gives a sense of our expectations for future projects. Lastly, we find the secondary business appealing because it operates independently of LME prices, as we purchase scrap at a discount and sell at LME prices, making it a processing and margin business that is separate from our LME-exposed operations.

Very helpful. And just a follow-up on the financing. Should I expect the vast majority of the capital project-level loan of either secured or unsecured?

Yes. We do expect that this will be project-level financing.

The next question comes from Katja Jancic of BMO Capital Markets.

On the green aluminum smelter, can you talk a bit about how much you think this smelter would cost in total?

Thanks. Yes, as I mentioned on the call, we're very enthusiastic about the green smelter. For someone with over 15 years in the U.S. industry, it's truly rewarding to discuss growth. The overall supply situation in the U.S. shows a shortfall of over 4 million tonnes, indicating that a project like this is essential. The grant we received from the DOE highlights the recognition at both the national and federal levels of aluminum as a critical mineral for the supply chain. Regarding the next steps for the smelter and your specific question, Katja, we are concentrating on the upcoming process. As I pointed out on the call, site selection and securing the energy contract will be our immediate focus, and we are making significant progress in that area. Furthermore, we are nearing completion of the second phase of the engineering work for the project, which will take several months to finalize. After this engineering work, we will have a clearer understanding of the total capital cost for the project and will hopefully be able to provide more details at that time. For now, our priority is moving the project forward. We are really excited about it and believe it will yield attractive returns. We are also positioned favorably with the DOE grant, the advantages of the 45X benefits, the tightness of the U.S. market, and the associated premiums. Coupled with the opportunity to establish a cutting-edge facility in the U.S. near our customer bases, along with the flexibility provided by our existing casthouse of value-added products, we see this as a highly appealing opportunity.

That's fair. But is it fair to say that it would be a multibillion-dollar project?

Yes, it will absolutely be in that range, Katja.

And maybe then I know this is very early, but would you consider partnering with someone on building this project? Would that be a possibility?

Yes. We're looking at a variety of different financing alternatives. And as I said, we're pretty confident with all of those items. There will be an attractive opportunity. So we think if we did want to bring in a partner, we think that would definitely be something that would be attractive to them. But it's a little too early to talk about exactly what the financing structure would look like.

Okay. If I may, one more on Jamalco. What is the utilization rate the facility is currently operating?

So we're right around that 1.2 million tonnes of annualized volume that we originally mentioned. And what we've been focusing on and what sort of drove some of the improvements and the return to profitability in March is really the stability of the operations coming out of some of those disruptions that we had in Q4. Really proud of the guys and gals for pushing through and reaching that stability again and returning the plant to profitability. And we're excited about what it means going forward.

The next question comes from the line of Timna Tanners of Wolfe Research.

I wanted to ask a bit more follow-up on those topics. So on Jamalco, I just wanted to be clear as far as I missed it. Is the equipment outage resolved, and you should be at a more normalized run rate in Q2? Are there lingering issues? Where does that stand?

Yes. You're right on, Timna. Equipment issue is resolved. We should be at that normalized run rate in Q2. And we do expect that the refinery will continue to be profitable over the second quarter.

Okay. Great. You all seem to be busier than ever. I can't remember a time when I covered you and saw so many projects underway. You have the new smelter and the Iceland casthouse, which is quite a lot. I'm trying to get a high-level understanding of why you're pursuing a new smelter and increasing capacity through the new casthouse while also having capacity offline at Hawesville and Mt. Holly. Firstly, where do you see all the additional aluminum going? I assume it's taking share from imports? If you’re doubling capacity with the new smelter and also adding capacity, what’s the vision there? Additionally, how do you weigh the options between restarting existing capacity and adding new capacity, as well as the distinction between primary and secondary smelters? I’d like to hear more of your thoughts on this.

Yes, that's a great question, Timna. I agree with you, we are busier than ever, largely because of our optimism about future aluminum demand. Global inventories are at their lowest since the financial crisis, and LME stocks are also at their lowest levels in years. We're seeing improving demand in both the U.S. and Europe, along with strong demand from China. We're genuinely excited about the future of the aluminum industry and believe it's the right metal to address significant macro trends we've discussed. This enthusiasm is driving our efforts because we see opportunities ahead. Additionally, I'd like to acknowledge our operations team. We remain busy with projects, and one reason we're able to manage this is the stability of our operations, which has lasted longer than in recent memory. A lot of credit goes to our operational team for maintaining this stability in a volatile macro environment. They have worked hard, and we have done well in this area.

We have many projects ahead of us and believe there are significant opportunities in the U.S. to address the 4.1 million tonne short position with domestic production. Our plan is to replace imports and capture that market share. There will be growth on the demand side, especially with the new smelter, the secondary casthouse, and the potential restart of Mt. Holly. We have a strong ability to fill that gap. Considering global trends, including Section 232, Russian sanctions, and Mexican tariffs, it’s evident that securing supply chains is a priority. Our operational footprint positions us well to provide this certainty to our customers, more effectively than others. We are committed to executing this strategy and continuing to meet our customers' needs. We are actively progressing the Mt. Holly restart, and we are preparing in advance to ensure successful implementation when the time comes. We are closely examining all these projects.

That was helpful in understanding your perspective on the aluminum market and the significant capacity additions you're considering. However, could you explain the rationale behind building a new smelter? You mentioned there hasn't been a primary smelter built in over 40 years, which suggests there are reasons for that. Perhaps this is a unique opportunity due to the barriers you've referenced, such as sanctions and tariffs. Why not concentrate more on secondary options as a greener alternative? Additionally, why choose to build instead of restarting an existing facility?

Yes, that's a valid point. As you pointed out, no new smelter has been built in the U.S. since Mt. Holly in 1980. During this time, there have been significant advancements in efficiency. We are prepared to start building and producing for the long term in the U.S. We believe the existing sites are viable, but with a new smelter, we can achieve a cost structure that should rank in the top quartile globally, which is a significant advantage for us. Additionally, considering the trends in near-shoring, the DOE grant, and the 45X tax credits, we see a real opportunity here, which is why we are pursuing this. Regarding growth, we believe there will be growth in both primary and secondary sectors. Many applications specifically require primary aluminum, which supports the need for a primary smelter. There is also increasing demand for secondary aluminum, given its recyclable nature and environmental benefits. Offering both options to our customers in the U.S. presents a strong initiative and a valuable product range that will enhance our sales efforts.

Your final question comes from the line of John Tumazos of John Tumazos Independent Research.

Jesse, could you give us a little primary in pot lining 101? Does the $10 million do the whole thing in the second quarter? Or will it continue into the third and fourth quarters? When you reline the pots, do you reline them 1 month before you expect them to fail or 1 year before you expect them to fail? And was there a productivity loss in the first quarter delaying the pot line reline or your pots at failures and output that you lost?

Sure, John. Happy to do it and really just to talk about this generally. So as we discussed, we did have a bit of an energy curtailment from one of our suppliers in Iceland in Q1 and falling into Q2. And what you do when you get an energy curtailment like that, is you generally will take a small portion of your pots offline equal to basically to reduce your energy consumption. And so that's what happened in Q1. And as you might imagine, when we choose which pot to take offline, we take the ones that would be due for relining during that quarter anyway. So in Q1, you get a bit of a deferral because you're not relining pots because you've taken them out to meet the energy curtailment. And then as we get ready in Q2 to put those pots back online, you will reline both the pots you would have relined in Q1 and the pots you are planning to reline in Q2, which is what really drives that $10 million headwind that you see there. So that will be a one-time thing in Q2, will not repeat, and we'll go back to our normal pot relining process going forward.

Are there any other expenses that might have been delayed where you'd have a little breathing room now with the metal price rising? For example, Peter and Ryan or all the engineers working on these projects do for a 10% raise. Are there other cost catch-ups now that things are moving in the right direction?

Not really, John. As we go through the cycles, we do try to maintain and run our sustaining CapEx programs on a steady basis. One thing you learn from being in this business for long periods of time is while the market is cyclical, you really want to keep these plants operating as stable as possible through the cycles. And so we try not to defer large amounts of that sustaining CapEx over time. So not a whole lot of items that I can think that would fall into that category, should be pretty clean going forward from that perspective.

I want to complement you on working so hard with the secondary aluminum expansions in the greenfield smelter. The market needs it. And it's great that you guys burn midnight oil and do all these things.

Thanks, John. We really appreciate that.

As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Jesse Gary for closing remarks.

Thank you all for joining the call today. Before we conclude, I want to discuss the recent increase in LME prices and how they will influence our outlook moving forward. As Jerry noted, we have lags with our customers relating to LME and regional premiums. Specifically, for our U.S. volumes, we have a 1-month lag for 50% of the volumes and a 3-month lag for the other half. Iceland operates mainly on a 3-month lag, causing a delay in reflecting the benefits of rising LME in our results. The premiums also exhibit lags, with a 1-month delay for the Midwest premium and a 3-month delay for the European premium. These lags are detailed in our financial information on Slide 20. If we momentarily disregard these lags and consider the second quarter outlook based on current spot LMEs, we could see a significantly higher estimated result in the range of $75 million to $85 million, not accounting for additional opportunities. For example, EDPP is currently about $50 higher than it was during our Q2 results, and U.S. Midwest premiums in the forwards are trading $0.04 to $0.05 higher than they were in Q2, both indicating potential for additional gains for our business. We expect the value-added market to continue its improvement throughout 2024 and into our 2025 contracting season, benefiting both the Grundartangi billet casthouse and our existing U.S. casthouse. Furthermore, we are awaiting updated guidance on 45X. Should we receive a broader interpretation of eligible costs, it would provide further upside to the guidance in Q2. We are very optimistic about the business and the opportunities ahead, and we believe we will achieve excellent results as we work on our expansion projects. I see Lucas has one more question, so I'm happy to address that.

So this question comes from Lucas Pipes of B. Riley.

I was a bit late getting back in the queue, and your comments just now addressed many of my follow-up questions, so I appreciate that. One point I wanted to discuss is your perspective on the balance sheet. In the release, you indicated that reducing debt is a priority. Given that your shares have performed well, how do you approach your cost of equity, cost of debt, and optimizing the balance sheet in the current environment?

Thanks, Lucas. Just very simply there, that's really not something that we're considering at this time. We think there will be plenty of cash flow in order to allocate towards reducing net debt. And so that would be our plan on that, really prioritizing the cash flow we expect for this business, which, as I just went through, we think there's huge opportunity for significant cash flows over the course of the next few quarters and not really any need to go to the equity markets at this time.

Very helpful. At the end of your comments, you mentioned the additional opportunity around 45X and provided a lot of detail regarding your earnings potential in this environment. As I mentioned, that was very helpful. If you were to realize the full benefit today, what would be the additional contribution? It would be great to have an update on that.

Sure. And we went through this on the last call in some detail and the slide on that on Slide 26 in this investor deck. But you can see if direct and indirect raw materials are included, that would be about an additional $50 million to $55 million uptick in our 2023 credit and similar sort of uptick going forward for 2024.

And again, this is kind of backwards looking as to that 2023 utilization rate. So with a full Mt. Holly restart and maybe unknown coming back, we could kind of scale that up proportionately.

Yes. Absolutely. And obviously, the greenfield is some distance away, but that would also be eligible for the credit.

There are no additional questions waiting. So, Jesse, I'll hand the call.

Thank you very much, everyone, for joining. We look forward to talking to you later this summer for our Q2 call.

Ladies and gentlemen, I'd like to thank you all for joining today's call. Have a great rest of your day. You may now disconnect.