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Century Aluminum Company (CENX)

Increasing demand and higher prices may boost the shares of this aluminum producer.

Century Aluminum Company (CENX)
from Capitalist Times

Rising demand for aluminum from the US automobile industry bodes well for the latest addition to the Wealth Builders Portfolio, Century Aluminum Company (CENX). Century Aluminum specializes in smelting and owns six facilities...

Increasing demand and higher prices may boost the shares of this aluminum producer.

Century Aluminum Company (CENX)

from Capitalist Times

Rising demand for aluminum from the US automobile industry bodes well for the latest addition to the Wealth Builders Portfolio, Century Aluminum Company (CENX). Century Aluminum specializes in smelting and owns six facilities in the US and Iceland.

The price of aluminum that trades on the London Metal Exchange (LME) has been volatile over the past decade. Between late 2003 and mid-2008, China’s insatiable demand for the metal fueled an extended rally in aluminum prices. However, aluminum prices have weakened significantly since this inflection point, hitting their lowest level since the 2008-09 financial crises in January 2014.

This steady erosion in the value of primary aluminum has been bad news for Century Aluminum, Alcoa (AA) and other smelters; both companies’ stocks gave up about one-third of their value between June 30, 2011, and the end of 2013.

Weakness in the global economy and a slowdown in China’s demand growth have contributed

to weak aluminum prices, which have been exacerbated by excess smelting capacity and a persistent supply overhang. But rising demand and capacity curtailments among aluminum producers have helped to return inventories to healthier levels. In fact, global inventories appear poised to drop to less than 9 million metric tons for the first time since July 2012.

The overcapacity in China has only limited implications for the global aluminum market; Beijing imposes a 15% export tax on primary aluminum, so large-scale dumping of excess Chinese production on the global market appears unlikely.

Century Aluminum’s management makes a compelling case that, outside of China, the world faces a deficit of aluminum production. Excluding the Mainland, global demand for aluminum grew by 3.3% in the fourth quarter, exceeding a roughly 2% growth in supply.

Accordingly, 2014 could mark the first year since 2006 when global demand for aluminum grows at a faster rate than supply (again, excluding China). Although LME-traded aluminum prices remain relatively weak, signs of a tightening supply-demand balance have emerged in some geographic regions.

Rising aluminum prices and premiums, as well as a much-improved cost structure, could boost Century Aluminum’s earnings to about $0.50 per share in 2014—a far cry from the $0.82 per share loss that the firm posted in 2013. By 2015, the company’s earnings could exceed $1.00 per share.

At the height of the last bull market for aluminum, shares of Century Aluminum fetched between 1 and 1.2 times the firm’s annual revenue, compared to about 0.75 times revenue today. A return to this multiple implies upside of 40% to 60% from the stock’s current quote of less than $12.50 per share. Buy up to $13.50 per share for investors who can stomach the volatility.

Elliott Gue & Roger Conrad, Capitalist Times, www.capitalisttimes.com, 888-960-2759, March 18, 2014