Century Aluminum Company (CENX)

Executive Summary / Key Takeaways

• Tariff-Driven Margin Inflection: The Section 232 tariff increase to 50% on imported primary aluminum has transformed Century's US operations, driving the Midwest Premium from $0.20/lb to $0.72/lb and creating a protected domestic market that enabled the Mt. Holly restart and new smelter project—initiatives that would have been uneconomical just two years ago.

• Vertical Integration as Strategic Imperative: The 2023 Jamalco acquisition (55% JV) secures 1.4 million tonnes of alumina capacity and insulates Century from seaborne bauxite volatility, while the Q1 2026 steam turbine will achieve power self-sufficiency, moving Jamalco into the second quartile of the cost curve and reducing input cost risk.

• Financial Trajectory at an Inflection Point: Q3 2025 adjusted EBITDA of $170-180M guidance, combined with $66.5M in 45X tax credits year-to-date and a net debt target of $300M by early 2026, demonstrates operational leverage that could generate $25M quarterly EBITDA from Mt. Holly's restart alone—nearly paying back the $50M investment by year-end 2026.

• Execution Risks Dominate the Narrative: The Grundartangi equipment failure idling two-thirds of production for 11-12 months creates a $30M Q4 EBITDA headwind and tests management's operational reliability, while Mt. Holly's Q3 instability (4,000 tonnes shortfall) reminds investors that smelter restarts remain inherently volatile despite tariff protection.

• Critical Variables for 2026: The investment thesis hinges on three factors: durability of the 50% tariff regime beyond the current administration, successful commissioning of Mt. Holly's 50,000 tonnes by Q2 2026, and realization of Jamalco's cost reduction targets—any slippage on these could derail the margin expansion story.

Setting the Scene: The US Aluminum Industry's Protected Enclave

Century Aluminum Company, founded in 1995 and headquartered in Chicago, Illinois, operates as one of only two major primary aluminum producers in the United States. The company produces standard-grade and value-added aluminum products across three smelters—Mt. Holly (South Carolina), Sebree (Kentucky), and Hawesville (Kentucky)—while leveraging low-cost hydroelectric power at its Grundartangi facility in Iceland. This geographic footprint creates a unique strategic position: US assets capture domestic premiums while Icelandic operations provide cost-advantaged base production.

The aluminum industry has historically been a global commodity business, cyclically plagued by Chinese overcapacity and volatile London Metal Exchange (LME) pricing. However, the implementation of Section 232 tariffs in 2018, and their dramatic strengthening in 2025 to 50% with elimination of all exemptions, has effectively created a protected domestic market. This policy shift transformed Century's competitive calculus overnight. The Midwest Premium, which averaged $0.20/lb in Q4 2024, reached $0.39/lb spot in Q1 2025 and currently trades at $0.72/lb—adding approximately $1,600/tonne to realized prices and creating a margin umbrella that supports capacity restarts previously mothballed for a decade.

Demand drivers have simultaneously aligned in Century's favor. Electric vehicle production requires 40% more aluminum per vehicle than internal combustion engines, while power and data infrastructure build-out is projected to drive 22% growth in transmission construction spending through 2027. US manufacturing reshoring initiatives have increased domestic billet shipments by 8% year-over-year in the first half of 2025, as downstream customers shift supply chains from Asia to secure US-based supply. This confluence of protectionist policy and structural demand growth has created a rare window for domestic primary aluminum expansion.

Technology, Products, and Strategic Differentiation: The Mine-to-Metal Moat

Century's competitive advantage rests on three pillars: tariff-protected US production, low-cost Icelandic power, and vertical integration through Jamalco. The US smelters produce value-added billet products for automotive and construction end markets, commanding premiums over standard-grade ingot. Sebree achieved "near-record performance across operational and financial KPIs" in Q3 2025, demonstrating that focused operational excellence can extract maximum value from protected market conditions.

The Iceland operation provides a structural cost advantage. Grundartangi's access to hydroelectric power priced below $30/MWh—versus $45-60/MWh for US grid power—creates a $400-500/tonne production cost advantage that insulates the company from energy volatility. This moat proved critical during Q3 2025 when warmer-than-average temperatures elevated US power prices, while Icelandic contracts remained stable. The recent extension with ON Power through 2032 secures this advantage for another seven years.

The Jamalco acquisition represents the most significant strategic shift in Century's history. The 55% joint venture in Jamaica provides 1.4 million tonnes of alumina capacity with self-sufficient bauxite supply through long-term mining licenses, insulating Century from seaborne bauxite price volatility that has plagued competitors following Guinea's license revocations. A major capital improvement program, including a $33 million steam power generation turbine expected online in Q1 2026, will achieve full power self-sufficiency and move Jamalco into the second quartile of the global alumina cost curve. This vertical integration reduces input cost volatility and captures margin upstream that would otherwise accrue to third-party suppliers.

The DOE's $500 million cooperative agreement for a new US smelter—potentially the first in 45 years—represents a strategic validation of Century's domestic focus. Management envisions a facility that would "double the size of the existing US industry" and is currently negotiating with a single site and power provider, with a partnership model emerging as the most likely path. This project, combined with the Mt. Holly restart, positions Century to capture the majority of US primary aluminum growth through decade-end.

Financial Performance: Evidence of Operational Leverage

Q3 2025 results validate the tariff-driven margin expansion thesis. Net sales of $632.2 million increased 29% year-over-year, driven by a $267.7 million favorable impact from realized LME and regional price premiums. The aluminum segment contributed $573.5 million, with the Midwest Premium realization of $1,425/ton representing a $350/ton sequential improvement. More importantly, gross profit increased $55.4 million year-to-date despite $71.8 million in unfavorable raw material price realization and $67.4 million in higher power costs—demonstrating that pricing power is overwhelming cost inflation.

The 45X Advanced Manufacturing Production Tax Credit provides crucial financial support. Century recognized $24.7 million in Q3 and $66.5 million year-to-date as a reduction to cost of goods sold, effectively adding 400 basis points to gross margin. Management received $75 million from the IRS for its fiscal year 2024 filing in October 2025, with the fiscal year 2023 credit still expected. These non-dilutive cash inflows accelerate the path to the $300 million net debt target, which management expects to reach "early in 2026."

Capital allocation priorities reflect confidence in the core thesis. The Mt. Holly restart requires approximately $50 million in capital spending, with first hot metal expected in Q1 2026 and full run rate by Q2 2026. At spot prices, this incremental 50,000 tonnes will generate $25 million in quarterly EBITDA—nearly paying back the investment within two years. Total 2025 capex is estimated at $70-80 million, including $33 million for Jamalco, representing a disciplined approach to growth that prioritizes returns over scale.

Liquidity remains robust despite operational headwinds. As of September 30, 2025, Century held $151.4 million in cash with $336.8 million in unused credit facility availability, totaling $488.2 million in liquidity. The July 2025 refinancing of $400 million in 6.88% senior secured notes due 2032 extended maturities and reduced borrowing costs, while the October repayment of the $116.4 million Grundartangi casthouse facility simplifies the capital structure ahead of the net debt target.

Outlook and Guidance: Assumptions and Execution Hurdles

Management's Q4 2025 adjusted EBITDA guidance of $170-180 million embeds several critical assumptions. The $65 million sequential improvement from Q3 is driven by lagged LME and premium realizations—Q4 lagged LME of $2,705/ton is $197/ton above Q3 realized, while the lagged Midwest Premium of $1,775/ton adds another $350/ton. However, this is partially offset by a $30 million EBITDA headwind from the Grundartangi outage, which will reduce shipments by 37,000 tonnes.

The guidance assumes normalized power prices in October after Q3's warm-weather spike, and a $10-15 million headwind from realized hedge settlements. Management notes that updating the Q4 outlook for spot metal prices (LME >$2,600/tonne, MWP $0.72/lb) would increase EBITDA by approximately $45 million to $220 million—highlighting the sensitivity to price realization and the potential upside if premiums remain elevated.

The 2026 trajectory depends on three execution milestones. First, Mt. Holly must achieve full production of 50,000 incremental tonnes by Q2 2026, generating $25 million quarterly EBITDA. Second, Jamalco's steam turbine must commission in Q1 2026, enabling production towards 1.4 million tonnes and reducing unit costs. Third, management must resolve the material weaknesses in IT and business process controls at Jamalco identified in Q3 2025, which could otherwise impede operational improvements.

The Hawesville strategic review process remains open-ended after "significant additional interest" extended discussions into Q4 2025. Management is comparing potential sale value against restart economics, with rising aluminum prices bolstering the restart case. This optionality represents a potential 250,000-tonne capacity addition that could increase US primary production by nearly 50% if tariffs remain durable—a scenario that would fundamentally alter Century's scale and market power.

Risks: Direct Threats to the Thesis

The Grundartangi equipment failure represents the most immediate risk to the investment case. The October 2025 transformer failure idling one of two potlines will reduce production by two-thirds for 11-12 months, creating a $30 million quarterly EBITDA headwind. While CEO Jesse Gary expects insurance to cover losses above the $15 million deductible, the incident exposes operational fragility in aging equipment. Management is "working with designers and manufacturers to better understand what caused these failures," but the extended timeline suggests supply chain constraints for replacement transformers could delay restart beyond mid-2026.

Mt. Holly's Q3 production instability, while resolved by mid-October, demonstrates the execution risk inherent in smelter restarts. The 4,000-tonne shortfall against expectations reminds investors that even with tariff protection, operational excellence is not guaranteed. The restart's $50 million investment and $25 million quarterly EBITDA target assume flawless commissioning—any repetition of instability could compress returns and delay the net debt target.

Tariff policy risk looms over the entire investment thesis. The 50% Section 232 rate is a Trump administration policy that could be reversed or weakened under future leadership. While management touts that "President Trump's policies have enabled a future where we could see US production triple by the end of the decade," investors must price the probability of policy reversion. If tariffs return to 10% or exemptions are reinstated, the Midwest Premium could collapse back to $0.20-0.25/lb, eliminating the margin support for Mt. Holly and the new smelter project.

Commodity price volatility remains a fundamental risk despite tariff protection. While the Midwest Premium is protected, LME prices still drive 60-70% of revenue realization. A global economic slowdown reducing aluminum demand could push LME below $2,200/tonne, overwhelming premium gains. Conversely, a supply disruption pushing LME above $3,000/tonne could attract imports even at 50% tariffs, pressuring domestic premiums.

Jamalco's material weaknesses in IT and business process controls, disclosed in Q3 2025, could impede the cost reduction program. While management states remediation is ongoing, ineffective controls risk operational errors and financial misstatements that could delay the turbine commissioning or obscure cost curve progress.

Competitive Context: Protected Niche vs. Global Giants

Century's competitive positioning is defined by what it is not: a globally diversified mining giant. Alcoa Corporation (AA), with $3 billion quarterly revenue and 18.9% gross margins, operates across the value chain but lacks Century's pure US exposure. While Alcoa benefits from some tariff protection, its international operations face import competition that Century's domestic-focused model avoids. Century's 9.5% gross margin trails Alcoa's, but the gap is narrowing as Midwest Premiums add $350/tonne to realized prices—equivalent to 7-8 percentage points of margin expansion potential.

Rio Tinto (RIO)'s aluminum division dwarfs Century with 7% global production share and 27.7% gross margins achieved through vertical integration from bauxite to smelting. However, Rio's minimal US primary production means it cannot capture the Midwest Premium windfall. Century's Jamalco acquisition partially replicates this integration, but at 1.4 million tonnes versus Rio's 15+ million tonnes, scale disadvantages persist. Where Century leads is agility—its single-segment focus enables faster decision-making on restarts and expansions than Rio's bureaucratic structure.

Norsk Hydro (NHYDY) presents the most direct technology comparison, with 37.5% gross margins driven by European hydropower and recycling operations. Hydro's low-carbon aluminum (<4 kg CO2e/kg) commands green premiums that Century's Iceland operations partially match, but Hydro's European focus leaves the US market to Century and Alcoa. The key differentiator is policy: Century's 50% tariff protection creates a moat that no amount of operational efficiency can breach.

The new US smelter project, supported by $500 million in DOE funding, would double domestic primary capacity and position Century as the undisputed US leader. This represents a structural shift from commodity producer to strategic industrial asset—a positioning that commands premium valuations in an era of reshoring and supply chain security.

Valuation Context: Pricing in Policy Perfection

At $31.08 per share, Century Aluminum trades at a $2.90 billion market capitalization and $3.37 billion enterprise value. The EV/EBITDA multiple of 13.31x sits above Alcoa's 6.08x and Rio's 7.34x, reflecting the market's pricing of tariff durability and growth from Mt. Holly. However, it remains below historical mid-cycle multiples for US primary producers, suggesting either skepticism about policy continuity or underappreciation of the Jamalco integration benefits.

Price-to-sales of 1.15x exceeds Alcoa's 0.88x but trails the 1.33x enterprise-to-revenue ratio, indicating the market assigns modest value to the upstream Jamalco assets. Gross margin of 9.52% significantly lags peers (AA 18.9%, RIO 27.7%, NHYDY 37.5%), but this gap should narrow as Jamalco's turbine reduces alumina cash costs by an estimated $30-40/tonne and Mt. Holly's restart adds high-margin domestic volume.

Return on equity of 7.50% trails Alcoa's 19.2% and Rio's 17.2%, reflecting Century's higher leverage (debt/equity 0.89x versus peers' 0.34-0.40x) and smaller asset base. The net debt target of $300 million, if achieved by early 2026, would reduce debt/equity to approximately 0.45x and potentially boost ROE to 12-15% through lower interest expense and equity growth.

Free cash flow remains negative at -$106.9 million annually due to heavy capital investment in Jamalco and Mt. Holly, contrasting with Rio's $19.1 billion in annual free cash flow and Hydro's positive generation.

However, management's capital allocation framework—prioritizing growth projects until net debt targets are met, then shifting to share buybacks—suggests 2026 could mark an inflection to positive free cash flow if EBITDA targets are achieved.

The valuation hinges entirely on the durability of the 50% tariff and successful execution of the capacity restart program. If both hold, the current multiple embeds a reasonable expectation of $250-300 million in 2026 EBITDA, representing a 11-13x EV/EBITDA multiple on a transformed earnings base. If either falters, the downside reverts to historical cyclical valuations of 5-7x EBITDA, implying a 40-50% stock price risk.

Conclusion: A Binary Bet on US Industrial Policy

Century Aluminum has engineered a remarkable transformation from a cyclical commodity producer to a strategically positioned domestic industrial champion. The Section 232 tariffs have created a protected market that enables margin expansion, capacity restarts, and vertical integration through Jamalco—initiatives that collectively could increase 2026 EBITDA by 50-75% above 2024 levels. The DOE's $500 million commitment to a new smelter validates Century's role in US supply chain security.

However, this investment thesis is binary and execution-dependent. The Grundartangi outage demonstrates that operational excellence cannot be taken for granted, while the Mt. Holly restart's $25 million quarterly EBITDA target requires flawless commissioning. Most critically, the entire margin structure depends on maintaining the 50% tariff rate—a political variable outside management's control.

The stock's 13.3x EV/EBITDA multiple prices in successful execution and policy continuity, leaving limited margin for error. For investors, the two variables that will determine success are: (1) whether the tariff regime survives the 2026 midterm elections and potential administration changes, and (2) whether Century can deliver the Mt. Holly restart and Jamalco cost reductions on schedule. If both prove durable, Century will have built an unassailable domestic moat in a strategic industry. If either falters, the reversion to cyclical commodity economics will be swift and severe.