3/31/2015 Century Aluminum Company: Promise Amidst Market Noise ­ Century Aluminum Company (NASDAQ:CENX) | Seeking Alpha

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Marc Radow, The Vici Partners, LP (10 clicks)Long/short equity, contrarian, hedge fund manager, valueProfile| Send Message|(20 followers)

Century Aluminum Company: Promise AmidstMarket NoiseFeb. 17, 2015 2:57 PM ET | About: Century Aluminum Company (CENX), Includes: AXP, CAKE,GM, TSLA by: Marc Radow

3/31/2015 Century Aluminum Company: Promise Amidst Market Noise ­ Century Aluminum Company (NASDAQ:CENX) | Seeking Alpha

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Summary

Materials have a good risk / reward.Analysts often misinterpret fundamentals.Lesser­followed equities often represent value.

$2 Billion, mid cap industrial Century Aluminum Company (NASDAQ:CENX) produces and sellsaluminum in the domestic markets. It specializes in standard grade and value­added aluminum products.The runway ahead, in spite of recent volatility and analyst prognostications, look good.

While indices hit all time highs (again) there were notable price collapses. The savvy investor will takenote that the falls from highs are pummeling, dangerous, and sometimes poorly explained withoutrationale. Others' falls are more obvious… across the spectrum are names such as AMEX (NYSE:AXP),Tesla (NASDAQ:TSLA)… and more still like Cheesecake Factory (NASDAQ:CAKE)… a spouse'sdelight so I'm regrettably too familiar.

To be brief on these headlines because opportunities reside where others don't look; AXP investors areeither sanguine or fraught on its future. Google "Boycott Costo" as this is just one cornerstone of mycontrarian belief but most can decide on their own whether they want to stake a claim.

TSLA is widely shorted and newsy, the cult like stock is anyone's guess. As a resident of Nevada (hometo the Giga­Factory) I'm one of few who see too many eggs in a basket that has way too many holes.TSLA will have too much competition from gov't assistance (NYSE:GM) who has a much strongerbalance sheet… Interesting news but not tradable.

CAKE didn't plumb 52 week lows but it did give nimble investors a chance to add to a consumer centricequity. Supposedly there's a consumer wealth effect to low gas prices. If you believe, then CAKE sportsnear zero debt and a chance to bite into a tasty opportunity. After touching $46 for its earnings release,it's now 4% higher at $48. Compelling but it's just not as timely.

And this is where CENX comes in, lesser known and followed. As the second major aluminum producerin North America (behind Alcoa, AA) it trades with substantial volatility… mostly to the price of themetal. With analysts following that herd, CENX provides the value oriented investor an entry atfavorable pricing. For more info on how aluminum is priced in the US and its effect on CENX pursuantto analysts' views, click here:

Importantly, CENX benefits from two important areas; 1) CENX market is mostly North America soLME (London Metals Exchange) pricing means less whereas the spread to Midwest pricing is moreimportant, and 2) the price of natural gas is a major input cost to the production of aluminum. ( report #1,report #2 )

Low natural gas prices are a boon to US manufacturers. And the cost advantages of US abundant supply(think Marcellus and thank you Southwestern Energy, SWN) are unmistakable. Following are aluminumprice charts on the LME and the Midwest spread. Analysts' fear is the spread could compresses as supplygrows domestically and imports of aluminum rise as a result of a strong USD. I disagree and more on thisbelow.

3/31/2015 Century Aluminum Company: Promise Amidst Market Noise ­ Century Aluminum Company (NASDAQ:CENX) | Seeking Alpha

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There's more under the hood

3/31/2015 Century Aluminum Company: Promise Amidst Market Noise ­ Century Aluminum Company (NASDAQ:CENX) | Seeking Alpha

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Demand for light weight aluminum should march on. Ford's new F150 is proving a show stopper. As thefuel efficiency advantages are too compelling (even at $2+ gas) its aluminum truck is 700 lbs lighter.During AA's latest earnings release, CEO Klaus Kleinfield, confirmed improved fuel efficiency of 9mpg, let alone better towing, better breaking, and overall performance. He also discussed CAFE[Corporate Average Fuel Efficiency] regulations... there's lots of runway for copycats into aluminum.

Additionally, QE Euro style is just beginning. I've written about this before and highlighted VGK, theEuropean ETF. The premise, when done in massive quantities, spurs domestic production andmanufactured exports. Europe's QE is aimed to grow material demand 'other there'… not export the rawmaterial over here. Read between the lines and other materials should benefit too… and this is central towhere I think analysts are wrong about flooding US imports, but I digress.

Add these tectonic movements together and CENX worries are further over played and its opportunity isstill ahead. That said, a view in the rear view mirror shows CENX was a lot less expensive (aka cheaper)in 2012­13. But then, CENX was negative EPS… today, past capex and market conditions should deliverearnings over $1.04 EPS (4th quarter scheduled for 2/19, est $.64) and forward 2015 are estimatedconservatively 50% higher (analysts range from $1.50 to over $3). The point is earnings are nowpositive, and years earlier they weren't.

(click to enlarge)

More fuel to this fundamental fire… CENX balance sheet is solid and stronger than AA's. Debts to assetsare just 14%, none of which is due inside of 5 years, Debt to equity are 25%. Comparatively AA debt is2x's greater and its P/E is 50% higher. Given the outlook, today is an entry opportunity for CENX.

3/31/2015 Century Aluminum Company: Promise Amidst Market Noise ­ Century Aluminum Company (NASDAQ:CENX) | Seeking Alpha

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The Trade and How to Express your Opinion:

An investor could buy CENX outright. Without a dividend this is a capital appreciation play only.Allocating out of something that pays a yield into something that doesn't is often a hard choice, so unlessthere's excess liquidity sitting in your brokerage or bank accounts, this may or may not serve youralternatives well. Regardless, an entry in the low $20's should reward you, currently offered at $23.10.

Alternative Investment:

Or use options… considering implied volatility remains higher than historical, given the outlook, makeCENX an ideal case for Put writing. Following is a 1 year chart courtesy LiveVol. You'll see 360 dayoptions implied volatility is higher than historical volatility notwithstanding bouts last October andDecember. Then, the outlook was less clear (to me) but still offered great entries. While I'm not atechnician, this is evidence of stern support at low $20's. Translation… long dated option sales are moreadvantageous than similar option purchases.

(click to enlarge)

Importantly, I look to write the longer term January 2016 Put at a strike that balances my personal risktolerance with my thesis to profit. Many will argue a shorter term contract yields faster 'theta' (timedecay), but closer analysis reveals Implied Volatilities LOWER than Historical. That means BUYINGshort term options would be more advantageous than selling. But I very rarely emphasis added everbuy short term options, especially OTM. These are fools errands to lose $, but I'll happily reply toquestions.

Additionally, shorter term option sales leave us exposed to an 'If Put' cost basis that is higher than Iprefer. Clipping short term premium does NOT take advantage of the current value pricing. If / when the

3/31/2015 Century Aluminum Company: Promise Amidst Market Noise ­ Century Aluminum Company (NASDAQ:CENX) | Seeking Alpha

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underlying equity rises, as we predict otherwise we'd dismiss the trade, the larger premiums at the currentlower strikes will no longer be available. If you write shorter term, you'll have collected pennies whiledollars were today available.

With writing Leaps (long term), we can engineer significant yield to compensate for a lack of dividendand lower our cost basis. Specifically, the Jan '16 $23 Put offers us $4.40 premium (see the trade barcourtesy ThinkorSwim, and use limit orders as the bid / ask spread is $.80)… and delivers a cost basis at$18.60 (strike less premium received). This is comfortably below the technical support at low $20's andhas a margin of safety that is 20% below the current bid $23.10 (divide the If Put cost basis by thecurrent bid).

(click to enlarge)

If you are not comfortable owning CENX, or uncertain with the fundamental (slightly contrarian) thesis,watch from the sidelines. Note, however, the sideline is an investment… a bad one where cash (excessliquidity) comes with a negative real yield (interest below inflation).

Disclosure:

Short CENX put options. The foregoing is not intended to be specific investment advice, but concepts toconsider when investing. Consult your Investment Adviser.

Source: Century Aluminum Company: Promise Amidst Market Noise

Disclosure: The author is long SHORT CENX PUT OPTIONS. (More...)The author wrote this articlethemselves, and it expresses their own opinions. The author is not receiving compensation for it (otherthan from Seeking Alpha). The author has no business relationship with any company whose stock ismentioned in this article.

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