Is Century Aluminum (CENX) Undervalued?

The market's perception of Century Aluminum Company (NASDAQ: CENX) has been a topic of debate among investors. While some analysts are bullish on the stock, citing its attractive financial prospects and strategic initiatives, others remain skeptical due to operational challenges and market fluctuations. So, could the market be wrong about Century Aluminum?

Century Aluminum's recent financial results paint a picture of a company on the rise. For the fourth quarter of 2024, the company reported net sales of $631.0 million, a 17% sequential increase driven by higher third-party alumina sales, aluminum prices, and regional premiums. This strong performance in net sales indicates that Century Aluminum is effectively capitalizing on market conditions and demand for its products.

The company's adjusted EBITDA for the fourth quarter of 2024 was $82.4 million, which, while showing a sequential decrease due to updated U.S. Treasury guidance, still reflects robust operational performance. Normalizing for the one-time Section 45X true up, the adjusted EBITDA improved primarily driven by favorable realized LME and regional price premiums and a nonrecurring benefit from a force majeure settlement, partially offset by additional operating expenses and higher raw materials costs.

For the full year 2024, Century Aluminum's net sales reached $2.2 billion, and its adjusted EBITDA was $245.2 million. These figures represent significant improvements from the previous year, with net sales increasing by $34.9 million sequentially and adjusted EBITDA increasing by $125.2 million. The company's reported net income attributable to Century stockholders for the full year 2024 was $339.4 million, or $3.29 per share, which is a substantial improvement from the full year 2023.

Comparing these results to industry benchmarks and competitors, Century Aluminum's performance is noteworthy. The company's ability to increase net sales and adjusted EBITDA despite operational challenges and fluctuating raw material costs demonstrates its resilience and strategic agility. The significant improvements in environmental metrics, including reductions in greenhouse gas emissions and increased reliance on renewable energy sources, particularly from its Iceland operations, further enhance its competitive position.

The company's selection by the U.S. Department of Energy to receive a $500.0 million grant to build a new aluminum smelter is a testament to its strategic initiatives and growth potential. This grant, along with the completion of the Iceland billet casthouse expansion project, positions Century Aluminum favorably in the market, with a strong focus on sustainability and value-added product offerings.

However, the sustainability of these factors in the long term is subject to several considerations. Aluminum prices and regional premiums are subject to market fluctuations, which can impact the company's revenue and profitability. For instance, the company's liquidity has declined quarter-over-quarter due to rising inventory levels and alumina shipment timing, raising concerns about its financial stability in the near term.

Century Aluminum faces operational challenges that can result in production shortfalls and increased per-metric ton costs, adversely affecting profitability. For example, the company reported a 1% sequential decrease in shipments of primary aluminum in the fourth quarter of 2024, which could indicate potential operational inefficiencies.

The company's reliance on fluctuating raw material costs adds further uncertainty to its fiscal outlook. For instance, the company reported a sequential decrease of $21.3 million in Adjusted EBITDA for the fourth quarter of 2024 due to updated U.S. Treasury guidance allowing a one-time Section 45X true up in the third quarter, which could indicate potential volatility in its earnings.

In conclusion, while Century Aluminum has made significant progress in improving its financial performance in 2024, the sustainability of these factors in the long term is subject to market fluctuations, operational challenges, and raw material costs. The company's strategic supply agreements, operational improvements, tax credits, grants, and sustainability initiatives can provide a solid foundation for long-term growth, but it will need to navigate these challenges effectively to maintain its improved financial performance.