Monday, February 9, 2009

A Stock I Just Bought - A Compelling Case For CENX

I just went long on shares of Century Aluminum (CENX) at around $4.30 or so.

Reason for the trade: Shares of CENX were recently down about 50% in about a week, after the company announced that it will issue $100 million (at the time 20% of the market cap, but now a much higher percentage of the market cap) to increase liquidity on the firm's balance sheet.

While hardly a death knell given that the offering price is $4.50 and that CENX has a stated book value of $29.87 or so from its latest filings.

Here's more on the company:

Century Aluminum (CENX), which trades with a forward P/E of well under 10 and EV/EBITDA of 1.6 in December of 2008, is now offering a compelling risk/reward scenario to willing investors.

Fewer companies in the commodity space have been hit as hard as Century Aluminum, which is down well over 90% since its mid-May high of around $80 or so. Century, whose main business is in the production of smelted aluminum, is principally based in Helguvik, Iceland.

Six-month spot prices for aluminum are down almost 75% from $1.50 per pound in July, to 66 cents per pound in 12/08, and low spot prices mean lower revenue and EBITDA margins.

Century, which recently increased its leverage to the spot price of aluminum, bought back forward hedge contracts from one of its largest equity and debt holders. Investor sentiment regarding this transaction was mixed; some thought that Century was taking off needed revenue hedges, while others thought the decrease of debt in the firm’s capital structure was a positive.

Century also issued a secondary of 6.5 million shares in the public market at a stock price of $62.25 per share. This netted the firm around $400 million. Right now, there is a massive glut of supply of aluminum on the market, but with companies such as Rio Tinto (RTP), Alcan and Alcoa (AA) cutting back production, the price should stabilize here.

Net sales for the third quarter of 2008 came in at $552 million, with operating income of $111 million. Earnings for the third quarter were 59 cents per share vs. a loss of 6 cents per share just one quarter ago. Total firm revenue for the full year 2008 is $1.9 billion, with EBITDA margins of 22% firm-wide.

Iceland was hit especially hard by the ongoing credit and economic crisis of 2008, because the debts of banks within the country were six times total GDP. In late October, the Icelandic parliament passed emergency power to take over the three largest commercial banks in Iceland due to massive outstanding debt notes. Iceland, which is not part of the ECB, was forced to raise the nations interest to more than 18%, in part by the terms of acquiring a loan from the International Monetary Fund.

Century’s exposure to Iceland and the ensuing economic crisis has affected the company’s short-term outlook, but with the stock down well over 90% here, it’s safe to assume that this has already been priced into the stock.

CENX successfully placed its secondary offering into the market recently. Additionally, news that Glencore Holdings, Century’s largest shareholder raised its stake from 30.2% to 38.2% helped ease investors' fears. Glencore acquired 13.2 million shares, or half of the secondary amount, helping the stock recover.

Aluminum prices also finished the week just passed nicely higher.


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