Investing.com -- S&P Global Ratings has revised the outlook for Century Aluminum Co (NASDAQ: CENX )., the Chicago-based aluminum producer, to positive from stable, citing improving credit metrics and profitability. The ’B-’ issuer credit rating for the company has been affirmed. The company’s senior secured debt also retained its ’B’ issue-level ratings, with the recovery rating on the debt remaining unchanged at ’2’.
Century Aluminum’s profitability has significantly improved due to backward integration, lower production costs from 45X manufacturing credits, and strong price realizations. The company’s earnings momentum is expected to continue following the completion of the Iceland cast house project, which will allow the company to expand into the premium-priced low-carbon billets market.
Century Aluminum’s outlook revision is based on the expectation of stronger earnings and cash flow. This should enable some debt reduction and consistently lower debt leverage. The positive outlook indicates that the rating on Century could be raised within the next year if the company maintains a debt to EBITDA ratio below 4x for another fiscal year with good free cash flow.
Over the past two years, Century Aluminum has more than doubled its margins and adjusted EBITDA. This growth has been driven by various factors including higher aluminum prices and premiums, 45X manufacturing credits, and recent investments to backward integrate Century’s key alumina raw material. In fiscal 2024, the company generated S&P Global Ratings-adjusted EBITDA and margins of $210.9 million and 9.5%, respectively. This compares favorably to $88.7 million and 3.2%, respectively, in fiscal 2022.
In May 2023, Century acquired a 55% stake in Jamalco, a bauxite mining and alumina refining operation in Jamaica. This acquisition has reduced the company’s exposure to volatile spot alumina prices and has contributed to profitability. Century has also benefited from tax credits from the U.S. federal government through the recognition of aluminum as a critical mineral. In fiscal 2024, the company received about $93 million of tax credits that partially offset production costs and contributed almost half of EBITDA.
Century Aluminum is expected to continue investing in various growth projects while reaping the benefits of completed ones. The company has completed the Iceland casthouse project, allowing for expansion into low-carbon billets. Century has also reached an extension agreement with power providers to its Grundargtangi smelter, securing power supply until 2032. Following the Jamalco acquisition, the company continues to invest in initiatives to return the refinery to its annual nameplate capacity of 1.4 million metric tons.
The company plans to use excess cash flows toward debt repayment. It is expected to generate free cash flow of $100 million - $150 million in fiscal 2025 on robust EBITDA and a release of working capital following high investments in the previous year. Management plans to use free cash flows to reduce debt until it reaches its net debt target of about $300 million.
S&P Global Ratings could revise the outlook to stable if debt to EBITDA rises toward 5x, which aligns with a 25% drop in run-rate EBITDA. The rating could be raised if Century sustains a second consecutive year of debt to EBITDA below 4x in 2025.
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