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Noranda may sell assets, trim benefits

Keywords: Tags  Noranda Aluminum Holding Corp., aluminum prices, Midwest premiums, London Metal Exchange, LME, quarterly results, new LME rules, strategic plans shutdowns

CHICAGO — Noranda Aluminum Holding Corp. is exploring reducing pension contributions and selling non-essential assets as it grapples with low London Metal Exchange aluminum prices and uncertainty about Midwest premiums, company executives said.

The Franklin, Tenn.-based aluminum producer’s comments came in response to analysts’ questions during a July 24 conference call about how Noranda might respond should low aluminum prices prove to be a sign of long-term weakness in commodity markets.

Analysts also asked how the company would respond should warehouse financing arrangements unwind in reaction to proposed new LME rules. The LME proposals aim to limit long waits for metal at warehouses, and some market sources have argued that the proposed rules could drive down Midwest premiums, which have benefitted producers in the face of low LME tags (, July 19).

"We have no plans to shut down any of our major facilities," Noranda president and chief executive officer Layle "Kip" Smith said, noting that the company saw solid demand from its customers in the second quarter, with previously forecast 1 to 2 percent growth for 2013 still a "viable estimate."

But if any shutdowns become necessary, "the one that would probably come first ... would be the primary plant," Smith said. The cost of shutting a facility varies widely, with Noranda’s alumina operations the most expensive followed by individual potlines, which can cost as much as $10 million to $20 million to close and restart, he said.

All of Noranda’s primary aluminum is produced at its 263,000-tonne-per-year smelter in New Madrid, Mo., according to Noranda’s website. The company’s alumina refinery in Gramercy, La., has a production capacity of 1.2 million metric tons per year.

Noranda’s customer contracts do not contain provisions that would prevent the company from curtailing production, Smith said. In addition, the company continues to look at other cost-saving measures, including renegotiating contracts and turning to suppliers "for sustainable support ... during this rough time," he said.

Noranda could also cut back on maintenance spending if necessary, although the company would prefer not to do so because the short-term gains of such actions can be outweighed by long-term costs, Smith said. The company is slowing the pace of spending on a rectifier upgrade (, Jan. 24) at its New Madrid smelter, among other measures, he said.

A $45 million rod mill expansion at New Madrid, which is expected to be in full production in 2015, is still under way, as is a $10 million to $15 million dredging project in Jamaica (, April 11), chief financial officer Robert Mahoney said. But Noranda is mulling reducing its pension fund contributions for 1 to 2 years and selling "non-strategic assets," such as "not indispensable" equipment that vendors might be able to better operate, he said.

Smith stressed that aluminum demand is the most important factor in driving prices and that Noranda is in a good position because 98 percent of its products are sold to U.S. customers in a recovering U.S. market. In addition, Noranda continues to realize value-added and fabrication premiums equal to those seen in the first quarter and above those in 2012, he said.

"We continue to believe in the long-term fundamentals of aluminum, especially given our strategic position as a U.S. producer," Smith said. "At the same time ... it’s clear that we currently face challenging headwinds from an LME aluminum price standpoint."

LME aluminum prices have declined since mid-February and in the last five weeks have traded in a range of 78 to 82 cents per pound, "among the lowest levels observed since 2009," Smith said. About 40 percent of global aluminum capacity is operating at costs not supported by current aluminum prices, he estimated.

On the premium front, Noranda has no "proprietary view" on "tensions in the Midwest premium" given that warehouse LME policies are only proposals and that there "doesn’t appear to be any consensus out there" on their potential impact, Smith said. But the company’s business model includes receiving all premiums, including Midwest, "on every single pound of material we produce. ... so every time there is a move in the Midwest, that is very, very important to us," he said.

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