Hello, and welcome to the Century Aluminum Company conference call. My name is Alex, and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star one on your telephone keypad. If you'd like to remove your question, you may press star two. I'll now hand it over to Ryan to begin. Please go ahead.
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 one, please take a moment to review the cautionary statements shown here with respect to forward-looking statements contained in today's discussion. And with that, I'll hand the call to Jesse.
Thanks, Ryan. Thanks to everyone for joining. Turning to slide 2, I'd like to provide an exciting update on the Inflation Reduction Act and its expected impact on Century. As we've discussed before, there are a number of provisions in the IRA that we anticipate will indirectly increase demand for aluminum in the U.S., as the law incentivizes the transition to renewable energy and electric vehicles, which have high levels of aluminum content. Today, though, I'd like to focus specifically on the most direct and impactful provision of the IRA for Century, which is the critical mineral production tax credit of Section 45X. In order to incentivize production of critical minerals in the U.S., Section 45X provides a tax credit to producers equal to 10% of the cost of production of certain defined critical minerals, including primary aluminum produced in the U.S. after January 1, 2023.
Last week, the Department of the Treasury published proposed regulations implementing Section 45X. The proposed regulations clarified many aspects of 45X and asked for comments on several others, while specifically highlighting the important role that critical minerals like aluminum play in the renewable energy and energy storage industry. First and foremost, the proposed regulations confirmed the application of Section 45X to U.S. production of alumina, high-purity aluminum, and unwrought primary aluminum. Based on the proposed regulations, we estimate that Section 45X will apply to substantially all of Century's primary aluminum production in the United States. The proposed regulations also clarify certain eligible costs that qualify for the 10% credit, defining eligibility broadly to include all costs incurred by the producer in production of the critical minerals, other than certain direct and indirect material costs.
For example, the proposed regulations note that the tax credit will apply to labor, electricity, storage, depreciation, and overhead. Based on this guidance, we intend to recognize a full year 2023 EBITDA and net income impact from the tax credit of $55 million-$60 million. Importantly, the Treasury Department also specifically notes that it is still considering adding direct and indirect material costs as eligible costs under Section 45X, and has requested comments regarding how such costs should be treated for purposes of the critical minerals tax credit. If direct and indirect material costs are ultimately added as eligible costs, we would expect to recognize an additional benefit of $45 million-$50 million for 2023. For primary aluminum production, these direct and indirect material costs most significantly include the costs of coke, pitch, and alumina.
Of course, primary aluminum cannot be produced without any of these materials, which are essential to the modern electrolysis process. We intend to submit comments to Treasury requesting inclusion of these costs as eligible for the production tax credit and feel there is strong justification that they should ultimately be included. The quantum of anticipated 45X benefits noted relates to our current 2023 production levels at Sebree and Mount Holly. Any potential increases in future production 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. Jerry will now walk you through how we plan to account for the credits in 2023 and beyond.
Thanks, Jesse. Based on the proposed regulations and our conversations with our accounting and tax advisors, we intend to recognize the benefit of the 45X tax credit in Q4 as a reduction in the cost of goods sold and a flow-through to increase EBITDA and net income for the quarter. Because the provision became effective on January first, 2023, we also expect to recognize a catch-up adjustment for the first three quarters of this year, decreasing our cost of goods sold and increasing our EBITDA and net income for those periods as well. While we await final guidance from Treasury on the inclusion of direct and indirect material costs in the production tax credit, we will not yet recognize the portion of the benefit associated with those costs.
If, as we hope, Treasury ultimately determines to include such costs as eligible, we will record the benefit at such time.
... We therefore currently intend to recognize a full year 2023 EBITDA and net income increase of between $55 million and $60 million, applying about equally across each quarter of 2023. Finally, the language of the IRA and the proposed Treasury regulations makes clear that the production tax credit for critical minerals does not phase out over time. For the first five years of the program, meaning calendar years 2023 through 2027, Century expects to elect to receive the credit in the form of a direct cash payment from the IRS. For 2028 and beyond, we will instead receive the benefits in the form of tradable tax credits, allowing Century to still receive the full benefits of the tax credit by selling them on the open market if they are not needed to offset other taxable income.
We expect Century to show the 2023 credits as a tax credit receivable on our balance sheet until the direct cash payments are received, which we anticipate to be sometime in the second half of 2024. With that, I'll hand the call back over to Jesse.
Thanks, Jerry. We are grateful to Congress and the Biden administration for recognizing the vital importance of a strong domestic primary aluminum industry to U.S. national security. The production tax credits provided by Section 45X will help to underpin further investment in our industry, strengthen domestic supply chains, and ensure that the U.S. industry will be able to meet U.S. needs for this vital metal. Century Aluminum is proud to do its part towards accelerating the green energy transition and positioning the U.S. as a global leader in advanced manufacturing. Okay, just before we turn it over for questions, I wanted to address some news that erupted overnight in Iceland. Around 10 P.M. last night, local time, a volcanic fissure opened on the Reykjanes Peninsula, just north of the town of Grindavík.
The site of the eruption is over 90 kilometers from our Grundartangi smelter and does not affect Century's operations, nor does it threaten the safety of our employees. The eruption was largely anticipated and occurred in the area predicted by seismic activity over the past several weeks. The Icelandic Meteorological Office has confirmed today that volcanic activity at the site has already started to dissipate significantly, with lava flow reduced by 75% from initial levels and the size of the fissure reduced by roughly two-thirds. The direction of the lava flows has also been favorable, moving away from the town of Grindavík and surrounding power infrastructure towards uninhabited areas. Finally, the local power provider has also confirmed that there is no current threat to its power infrastructure, and air travel to the peninsula remains open. Barring additional fissures, the situation appears to be under control.
With that, we look forward to your questions.
Thank you. As a reminder, if you'd like to ask a question, you can press star followed by one on your telephone keypad. If you'd like to remove your question, you may press star followed by two. Please ensure you are unmuted locally when asking your question. Our first question for today comes from Lucas Pipes of B. Riley. Lucas, your line is now open. Please go ahead.
Thank you so much, operator. Good morning, everyone. Thank you for taking my questions. Thank you for hosting this call on this really important development. My first question is on the $55 million-$60 million. I want to make sure I understand that right. On my estimates, you're currently this year, 2023, utilizing slightly over 50% of your domestic capacity. And so I wanted to ask if you were to bring back additional capacity, would the benefit scale proportionately? In short, could we see essentially a doubling of the potential benefit if all of Mount Holly and Hawesville were to come back? Thank you very much.
Thanks, Lucas. Yeah, good question. Yeah, as I said in my remarks, I think the way to look at it, and as you laid it out in your question, is that you'd roughly see a pro rata increase in the credit, by the amount of production that is increased.
And the same would apply to the additional $45 million-$50 million for the material benefits if they were to come through?
Correct.
If there is more clarity on the material parts, and if you were to utilize 100% of your domestic capacity, we could be looking at something closer to $200 million of an annual benefit.
If both those things were to be true, I think you're just about right in terms of scoping the total potential annual benefit.
Thank you. Thank you very much for that. And in terms of potential clarity on those direct and indirect materials, when would you expect that? How has the guidance been from the IRS on additional clarity and what's the process? I assume there's a comment period, but would appreciate your thoughts and details on that. Thank you.
Sure. Thanks, Lucas. Yeah, there's a 60-day comment period, so we've already begun preparing our comments. Then there will be a hearing in late February, where interested parties can present their comments, and then final rulemaking will occur after that hearing.
Okay. Okay. Well, that's I’ll try to bite my tongue and not make too many Christmas present analogies, but I guess it's the gift that keeps on giving, hopefully. So best of luck with that. But a question on the domestic market. There are domestic content requirements, and I wondered if you see a potential shortage developing for domestic content, and how the domestic market for and the Midwest Premium might evolve in response to this development. Thank you very much.
Yeah, Lucas, as you mentioned, the U.S. market today is already significantly short production of aluminum to meet its existing demand. And obviously, as I mentioned in the beginning of my comments, we expect that demand to continue to grow or grow, even to accelerate over time as part of the green transition, as both electric vehicles and renewable energy, amongst other things, have increasing aluminum content versus their existing contemporaries. So we do see that shortage continuing to expand. And obviously, Century is well-situated to meet some of that shortage. And we're excited about the impact that IRA will have on our ability to do so.
Thank you very much for the color. I'll, I'll try to squeeze one last one in before I jump back in the queue. There is a 48C tax credit for capital expenditures, and I wondered if you could maybe expand on what that credit and if you may qualify for that. Thank you very much for all the color.
Sure. Yeah, without commenting specifically on 48C at this time, there are a variety of other provisions under IRA and funds that have been allocated under the Inflation Reduction Act that could potentially apply to Century. I think we've mentioned in the past that we have applied for some of those programs within the Department of Energy and other agencies. And those relate to a variety of things, and we're very excited about those applications. And we're waiting to hear back additional feedback as to whether or if we qualify and whether and if we'll be selected for funds under those programs. So more to come there, and we'll give an update once we know more.
Really appreciate the color. Again, great to see this and more questions, but I'll jump back in the queue. Best of luck.
Thanks a lot, Lucas. Appreciate it.
Thank you. As a reminder, if you'd like to ask a question, that's star followed by one on your telephone keypad. Our next question comes from Timna Tanners of Wolfe Research. Your line is now open. Please go ahead.
Yeah. Hey, good morning, guys. How are you?
Hey, Timna.
All right. Hey, I just wanted to ask you to talk us through how you think about restarting capacity. I know you've mentioned in the past that Mount Holly could be prioritized over Hawesville, but what are the costs of restarting capacity? What could be the timing? There is some new aluminum capacity coming on the secondary side, as you know, over the next several years. So how do you balance some of those projects and think about, you know, the market opportunity? And clearly, you cut Hawesville because it was uneconomic. Does this 5%-10% tax credit make Hawesville economic enough to justify restarting it in the interim? Thanks.
Thanks, Timna. Yeah, as you might imagine, we've been poring over the regulations since they came out just a few days ago now, and assessing that impact on both projects that you mentioned. We will continue to prioritize Mount Holly as the most likely restart and would continue to most likely be the first restart. As we move forward, there are a number of variables, of course, that go into that that we continue to evaluate to restart those last 90 pots there. Those include, you know, supply, demand, market conditions, and kind of finalizing and updating the restart costs there.
Certainly, the benefits under 45X, the 10% tax credit, is an incremental benefit that, you know, we have not previously anticipated, and will certainly be helpful to the prospects of those restarts occurring. We're not announcing anything today. We continue to do that work. But I will say that our recent power agreement with Santee Cooper did include an option to receive the energy necessary for that restart. So we do have that in place. What I guess I would say for now is we continue to do that work over the end of the year here, and we'll provide an update early in 2024.
Okay. But do you have a ballpark of kind of the cost to think about in terms of restarting Mount Holly? And then I know you've said Hawesville just would be a little more challenging just because of you, it's been idle now for a while, like over a year, right? And so just, like, what are the dynamics that have to happen there to think about a restart in terms of cost and other preparations?
... Sure. Yeah, we won't give cost estimates now. If and when we do a restart, we'll give the cost estimates at that time. But you're right on Hawesville. Those are challenges that we'll need to overcome there. Of course, we've been continuing to maintain the site, and we've had a team there maintaining the site and doing an excellent job. But labor dynamics have shifted. It has been, you know, over a year since it was curtailed, and we'll have to evaluate all of that as we look at the site and potential for restart.
I guess what I'd just continue to emphasize is I do think that Mount Holly would be the first priority in terms of restarts, in terms of both costs and ease of restart, given that it is an operating smelter. But again, we'll come back with further thoughts on this once we've had a little bit longer to digest the regulations and also to continue the work necessary to put costs around a potential restart of either site.
Okay. Super. Thanks for the color, and best of luck, and thanks for all the, you know, great details. Happy holidays.
Thanks, Timna. Happy holidays.
Thank you. Our next questions come from, Lucas Pipes of B. Riley. Your line's now open. Please go ahead.
Thank you very much, operator. Thank you for taking my follow-up questions. The first one is on the back to the U.S. market, and you commented earlier that you see this market being short, and I wondered if you could maybe put some numbers around how short you see it today, or... And what you're, you know, and maybe if you could also quantify the outlook for that, and then, might have a follow-up question on that market. Thank you very much.
Sure. Yeah, so just to give some specific numbers, and it bounces around from time to time, but really only gets shorter. Today, for 2023, we've assessed that the U.S. market to be short about 4 million tons. We see that increasing slightly in 2024. And of course, if we really see a rebound in demand, and obviously the recent pivot and potential interest rate adjustments for 2024 would certainly have an impact on that. We would only see that 4-point, you know, low 4 million ton deficit increasing.
That's very helpful. And the 4-million-ton deficit, how is it currently closed? Would it be possible to point to the source of material, be it Canada or overseas? And a lot of that material, I think, is either subject to a quota or a tariff. If you could maybe elaborate a little bit on how this gap is closed. And to cut to the chase, the reason for this question is if you were to bring back your capacity, it's pretty clear to me that market would remain in a deficit, but would really appreciate the additional point of clarification around the gap and where the material is coming from. Thank you.
Sure. Yeah, excellent question. So just to speak to North America itself, a portion of that deficit today is filled by Canada. The Canadian market, I don't have the number exactly in front of me. It's just a little bit under three million tons. They consume about a million tons domestically, so they're only able to fulfill a portion of that 4 million ton deficit. The remainder of that balance is filled with imports from overseas. And as you mentioned, the vast majority of those imports remain subject to the Section 232 tariffs on aluminum of 10%. So yes, we're very confident, Lucas. There's really no question that we would be able to place any increases in Century's production in the U.S. domestic market.
I think it would frankly be preferred by consumers in the domestic market, given the proximity to our customers and our familiarity and ability to service our customers. Also, obviously, lower freights to those customers. So I think there's really no doubt that we would be able to place the production, and that even if we were to restart all of our production, that the market would remain in significant deficit.
Very helpful. I really appreciate that. And my last question for now is back on the restarts. If you were to make a decision on Mount Holly, how long would it take to ramp it up to 100%? If you were to restart Hawesville, how long would it take to ramp to 100%? Any sense on timing? I would really appreciate that. Thank you.
Sure. Unfortunately, it's a difficult question as that is a portion of the work that we're currently completing. Supply chains for some of the materials needed for restart have extended and remain extended post-COVID. So we're working to see how long that those would be and whether anything could be expedited and how that would fit into an overall restart schedule. So difficult to handicap today, but again, we'll try to give you an update as soon as we know more.
Would the bottleneck be materials or labor, both? Where would you be most concerned?
Most likely it will be materials.
Okay. Well, hey, really, really appreciate this call. Thank you so much for the detail, and again, best of luck and happy holidays.
Thanks, Lucas. Happy holidays.
Thank you. At this time, we currently have no further questions, so I'll hand back to the management team for any further remarks.
No, we really appreciate everyone joining on short notice here. We're very excited about what these new benefits mean for Century and for the U.S. industry in general, and we look forward to talking to you all again early in the new year. Happy holidays and happy New Year to everybody. Bye.
Thank you for joining today's call. You may now disconnect your lines.