ATLANTA, Dec. 22 /PRNewswire-FirstCall/ Novelis Inc. (NYSE: NVL) (TSX:
NVL) announced today that the Company has taken a series of actions to limit
its short- and long-term metal price ceiling exposure.
The cornerstone of this initiative is the successful negotiation of
certain can sheet contracts in North America which removes the metal price
ceiling from those contracts. As a result, the Company expects that it will
no longer have metal price ceiling exposure beyond 2006 that exceeds its
internal hedge position. At the same time, Novelis is pleased to have
achieved these changes while also maintaining or enhancing long-term volume as
well as contract terms and conditions.
Novelis also outlined further steps it has taken to minimize its exposure
during the fourth quarter of 2005 and during 2006:
* For the fourth quarter of 2005, the Company has established metal
positions such that its maximum ceiling price exposure impacting
Regional Income beyond its internal hedge position in the quarter is
expected to be less than $5 million.
* For the first half of 2006, the Company has hedged its metal price
ceiling exposure (above its internal hedge position) through the
purchase of call options positioned to cover the exposure at the
ceiling price.
* For the second half of 2006, the Company's metal price ceiling exposure
(above the Company's internal hedge position) has now been hedged with
call option positions at various strike prices. As a result, the
Company's maximum potential metal price ceiling exposure impacting
Regional Income (above its internal hedge position) is expected to be
approximately $45 million beyond the cost of the options, assuming the
current Midwest premium. Novelis said that at any point between today
and 2007, should an economic opportunity arise to further limit the
remaining metal price ceiling exposure for the second half, the Company
will consider taking such actions.
Approximately 20% of the Company's total volume is currently subject to
contracts with a metal price ceiling. As a result of these actions, the
percentage of the Company's total volume subject to contracts with a metal
price ceiling should drop to approximately 10% of the Company's total volume
by 2007. The Company remains committed to eliminating all remaining metal
price ceiling contract provisions as soon as possible.
"As an aluminum conversion business, one of our highest priorities must be
to minimize, to the extent possible, metal price exposure and volatility to
our earnings," said Brian Sturgell, president and chief executive officer.
"While a metal price ceiling has been a standard component in can sheet
contracts in North America since 1996, the industry has not previously
encountered a sustained level of high metal prices like those existing today.
As a result, we have undertaken two major initiatives. First, we have
announced and are taking actions toward the elimination of the ceiling concept
in all of our can sheet contracts. Second, in late September, we
significantly revised our hedging policy and initiated the actions necessary
to cap our remaining metal price ceiling exposure in a comprehensive manner,
while at the same time ensuring that our business practices continue to be
aligned with the Novelis conversion business model."
The financial impact of purchasing the 2006 options was a cash outflow of
approximately $43 million in 2005, provided for by utilizing a portion of the
Company's strong cash flows during the year. The Regional Income impact to
the first half of 2006 will be an expense of approximately $29 million. The
Regional Income impact on the second half of 2006 will be an expense of
approximately $14 million. These expenses will be incurred as the options
mature in 2006.
Other Metal Price Impacts
The Company said that it will continue to be impacted by metal price
movements unrelated to metal price ceiling contracts. These are associated
with its Brazilian smelter metal sales and recurring metal timing differences.
Novelis accounts for its inventory on a weighted average cost basis.
Virtually all of its sales are made on the basis of metal price plus
conversion price. Metal timing differences arise due to the difference
between the price of metal charged to customers in a given period and the
price of metal charged to cost of goods sold in that period.
Internal Hedges
Novelis' total volume that includes a metal price ceiling in 2006 is
approximately 20% of its aggregate annual global volume. Novelis' internal
hedges cover approximately one-half of its current metal price ceiling volume
or approximately 10% of its aggregate annual global volume. The portion
covered by the Company's internal hedges is calculated by taking Novelis' full
volume of production from the Company's Brazilian smelters and a portion of
the volume from the Company's used beverage can (UBC) purchases. The Company
assumes in the calculation that UBC spreads will continue to move relative to
high metal prices as they have in the past.
In addition to the above, a portion of Novelis' can sheet sales volume is
represented by commercial tolling arrangements that also reduce the Company's
hedging requirements. Under these arrangements, the Company converts scrap
back into can sheet for customers, an activity that represents no metal risk
to Novelis.
Novelis is the global leader in aluminum rolled products and aluminum can
recycling. The Company has 36 operating facilities in 11 countries and more
than 13,000 employees. Novelis has the unparalleled capability to provide its
customers with a regional supply of technically sophisticated rolled aluminum
products throughout Asia, Europe, North America, and South America. Through
its advanced production capabilities, the Company supplies aluminum sheet and
foil to the automotive and transportation, beverage and food packaging,
construction and industrial, and printing markets. For more information on
Novelis, visit http://www.novelis.com.
Statements made in this news release that describe Novelis' intentions,
expectations or predictions may be forward-looking statements within the
meaning of securities laws. Novelis cautions that, by their nature, forward-
looking statements involve risk and uncertainty and that Novelis' actual
results could differ materially from those expressed or implied in such
statements. Important factors which could cause such differences include an
increase in the price of aluminum (or premiums associated with such price), an
increase in the price of derivative instruments, a default under the new can
sheet contracts, an increase in energy costs, global supply and demand
conditions for rolled aluminum products, changes in the relative value of
various currencies, demand and pricing within the principal markets for the
Company's products, changes in government regulations, particularly those
affecting environmental, health or safety compliance, economic developments,
relationships with (and financial or operating conditions of) customers and
suppliers, competition from other aluminum rolled products producers as well
as from substitute materials such as steel, glass, plastic and composite
materials, and the level of our indebtedness and ability to generate cash and
other factors relating to the Company's ongoing operations. Reference should
be made to Novelis' registration statement on Form S-4, as amended, filed with
the Securities and Exchange Commission for a discussion of major risk factors.
SOURCE Novelis Inc.
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Related links:
http://www.novelis.com
CONTACT:
Media, Brenda Pulley, +1-404-814-4266,
brenda.pulley@novelis.com, or Investor, Holly K. Ash,
+1-404-814-4212, holly.ash@novelis.com, both of Novelis Inc.
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