Century Aluminium – Benefitting From Higher Tariffs

This article first appeared on GuruFocus.

To pre-face, I believe tariffs are a double-edged sword but right now it seems Century Aluminium (NASDAQ:CENX) is the one winning. If you haven’t kept up with the ever-changing Trump tariff plans then as of June all non-domestic aluminium products face a 50% tariff. Midwestern spot premium shot up nearly 100% overnight. CENX raised guidance for the year but hinted that the full effects will come next year. Shares are trading at a cheap level compared to the growth you are getting. Make no mistake here, this is a tariff play more than anything. I’m betting on the administration being hardstuck on these rates for the next 3 years and I plan on capitalizing on it too.

CENX is a vertically integrated aluminium company. It became this in 2023 when it acquired a 55% stake in the Jamalco smelter and mine in Jamaica. The deal opened up a supply chain of bauxite which gets turned into alumni which then gets turned into aluminium and sold off. Operations is a joint venture with the Jamaican government, but CENX buys all of the bauxite and alumina produced there for market price. Just 2 months after the acquisition there were some issues at the factory which disrupted production. It continued into Q1 2024 but it seems it has settled down now.

The sustaining capital needs is $10 million, but CENX has invested $15 million additional to get production to max capacity. We can work backwards and estimate the mine capacity, since the Jamacla smelters have a 1,4 million tonne capacity. Generally speaking you need about twice the amount of bauxite to make alumina, based on a 92% average recovery rate. So the mine has about a 3 million tonne capacity. This makes it one of the largest in the country as total country production is about 4,5 million tonnes. Reserves sit at 29 million which gives it a 9.6 year life span. Not that much frankly. But CENX has the capital to invest in new mines and secure supply ($40.7 million cash and $58 million trailing OCF).

There are three types of prices we have to consider when looking at aluminium companies. These are: LME, MPW and EDPP. The first refers to the global price of aluminum, the others for the regional premiums added on. The Midwestern Premium MPW is the highest one, and the one growing the quickest, up 105% on a 6-month basis. EDPP is for the European Union zone and has instead fallen slightly. Europe has strong aluminium supply chains so the need to pay higher premiums is unnecessary. Demand has also wavered which has impacted prices as well.

Century Aluminium – Benefitting From Higher Tariffs

LME prices rising YoY by 7.5% indicates higher demand from other regions, like Asia. China was responsible for 32% of the global demand back in 2023, much of that going towards construction. Imports in India are one the rise however, growing at 3.3% annually since 2021. It seems this region is picking up the slack when the EU experiences lower demand.

Century Aluminium – Benefitting From Higher Tariffs

CENX has smelters in the US and in Iceland at the Grundartangi facility. Sales were deadeven on a 6-month basis with losses in US production being offset by increases in the Iceland factory. CENX is therefore exposed to both MPW and EDPP prices. Since MPW is drastically higher (3.54x compared to EDPP) most of the revenues comes from the US smelters: 58,4% vs 41,6%.

Now what’s really interesting about CENX is that it has a supply contract with Glencore (GLCNF) to buy a set amount of aluminium each year. This is only natural as GLCNF owns 42.9% of CENXs common shares. In the first 6-months 59.1% of all revenues came from these sales, down slightly from 60,8% a year earlier. Because of this corporate structure I see it as highly unlikely CENX would not see its production find a buyer.

spot Midwest premium today is sitting at close to $1,600 per tonne or $0.72 per pound. Just please remember, while these tariffs became effective in Q2, they will only partially affect our results in Q3 and then be fully reflected in our results in Q4.

I choose to include this remark by CEO Jesse E. Gray from the earnings call. They have the finger on the pulse all the time and many investors might have hoped to see an immediate benefit of the tariffs. It seems we will have to wait a little bit.

Century Aluminium – Benefitting From Higher Tariffs

You can see the impact the new tariffs rate had on the spot prices. The rally began on June 2, the same day that Trump signed the 50% tariff rate into the books. He first began setting tariffs back in 2018 when foreign aluminium faced a 10% tariff. In May this year it rose to 25%. I don’t think anyone is expecting it to go higher than this, but if it does, expect to see the same price hike. Going off the net sales from the US smelters of $189 million we should see about 90 – 100% increase compared to Q4 2025 and Q1 2026 when mentioned by management the full effects will come into place.

Based on the 6-month results CENX produces 376,000 tonnes in the US. The LME and MPW together bring the price to $3.980 per tonne. So by this assumption revenues from here should be $1.5 billion minimum. The Iceland sales are $900 million per year so the analyst estimates seem to be quite accurate here. Still puts shares at a very conservative 1.01x sales next year. Since the sector trades at 1.4x sales it begs the question whether shares have more room to grow. I think it does.

Century Aluminium – Benefitting From Higher Tariffs

Shares of CENX have continued to rally after reaching a 12-month low back in April. It seems the market was too caught up in how tariffs would hurt other industries and not benefit domestic producers.

No matter your opinion on tariffs, the fact of the matter is that the policies have increased prices domestically by over 100% in just 6 months. Where these costs will have to come out is yet to see. My money’s on the American consumer. But it’s clear who the winners will be: companies like CENX. Looking at Kaiser Aluminium (KALU and Constellium (CSTM) I can confidently say that CENX stands out as the best. Its ROE far above the rest at 16,8%. This should only rise in the next 4 quarters as it benefits from the higher spot rates in the US. It’s also the one with the best FCF margin. Trailing levered FCF was $59.8 million compared to: $(181) million and $28.5 million.

Century Aluminium – Benefitting From Higher Tariffs

Similar among all three companies is that they trade at dirt low P/S multiples, all three below 1x. But in all other departements CENX sees the lower valuation. This seems odd as it had the best margins between all three. When this is the case there is usually something fishy. But it has a great leverage ratio at 1.73 (debt/EBITDA). KALU has 4.84 and CSTM 3.39.

Perhaps it has more to do with the massive runup it has already posted YTD. It would make sense for the shares to consolidate for a little now until Q3 and Q4 starts rolling in. In any case the shares look cheap on a peer-basis. But this just amplifies the upside when the market finally gets it right with CENX.

The biggest risk now against my aluminium thesis is that domestic demand goes down. As I’ve outlined, the single reason for CENX seeing higher revenues is because of the tariff policies now set in place.

Century Aluminium – Benefitting From Higher Tariffs

But if demand wavers then there isn’t much benefit to them after all. CENX would report a higher net selling price, but volume would likely crumble, offset a little by the Glencore agreement. Since 2024 the North America demand for aluminum has fallen significantly, 50% from late 2023 levels.

The risk of less affordable aluminum prices is significant, since many US industries rely on prices staying low. I think we might see a lot of closures in the US because of this as cost cutting just won’t do the job if import costs rise 100% overnight. Depending on the impact the current administration might choose to cut back tariffs and go back to 25% instead.Since the stock rose because of the tariff implementation my logic is that it will just as quickly if the same tariffs are backtracked on. CENX is not a very leveraged business (1.73x leverage ratio) so this remains the biggest risk for the company.

If you’re not an aluminum bull after this report then I feel like I’ve failed a bit. Asian markets are showing incredible strength even as LME prices are rising. Even if US demand has wavered, due to the agreement with Glencore CENX still has an accessible revenue stream and gets all the benefit that the tariff rates have had on domestic prices. It’s the best performance in its peer group based on margins, trades at the lowest multiples and is the least leveraged. What’s there not to like here? If you want exposure to commodities I can’t really think of a better option then CENX at this point.