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Contra the Heard is a quarterly publication, but we keep our clients apprised of our most recent moves via email. This is a very important part of our service that enables our readers to closely follow all of our buy and sell decisions. We also issue an update when there is takeover activity with one of our stocks.
Here is a sample of a release that went to our readers:
CONTRA THE HEARD
(Last update: January 6, 2016)
Update January 10, 2016
NASDAQ Buy: Century Aluminum (CENX)
A few companies that were being stalked saw their stock prices surge in the second half of December. With negative sentiment roiling world markets, they gave back these gains, setting up an opportunity to nibble at some stocks.
Century Aluminum is an aluminum production company with operations in the United States and Iceland. It is a small player versus competitors like Alcoa and Norsk Hydro, and its operations are confined to smelting as opposed to other activities such as bauxite mining and aluminum fabrication. The enterprise has traded publicly since the mid-1990s when Glencore formed the organization to house its aluminum production assets. Since then Glencore has remained an active owner and customer and currently owns over 45 percent of the shares and accounts for 90 percent of sales.
Aluminum is a classic boom and bust commodity. Right now there is a glut of this metal, just as there is for oil. China, with about a 55 percent share of world production, is subsidizing the industry with ample supply, crushing prices. That might be set to improve as a consortium of Chinese producers responsible for 41 percent of the global total has agreed to reduce output and cooperate with Russia to bring order to the market. Meanwhile Alcoa has shuttered its 269,000 tonne per year Warrick facility and the U.S. is now producing less aluminum than at any time since WWII.
Although this is positive news, CENX carries many risks, which explains the modest portfolio weighting. In 2009 the shares dived to a low near $1.00 and management has diluted shareholders from 37 million to 93 million. History may repeat itself again if China is unsuccessful or reneges on their plans. Quite simply, it might be a bit early for taking a stab at this one.
Century is also having trouble with its Mt. Holly facility in South Carolina as the local utility has refused to let the company buy cheaper power from out of state. That increases costs for what is the newest and most cost effective plant in the U.S. An agreement to keep the plant open was reached just before Christmas, but if a long term solution is not found, it could be closed.
Glencore is under significant pressure and in the event it declares bankruptcy, its Century stake could be up for grabs. This could put selling pressure on CENX´s shares.
For all its risks, we see great potential in the corporation if it can ride out this down cycle. Unlike many of its peers, CENX has a decent balance sheet with ample liquidity and moderate debt. It also sells premium products and its flagship Icelandic operation is a world class low cost producer powered by zero carbon emissions geothermal. While plans have been shelved for over a year, talk of an expansion may fall upon keener ears when the commodity price returns to form.
By the way, Phil is very familiar with the company having purchased it in 2012 at an average price of $8.11. He sold 80 percent of his position at $25.06 in late 2014 and still holds the remainder. Plus, Benj visited this outfit a few years ago at their HQ in California.
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