What happened
Century Aluminum (CENX -3.05%) stock plunged today and was trading down 13.8% as of 1 p.m. ET Wednesday. It tripped 15.7% at its lowest point in trading today, as of this writing.
Aluminum prices seem to have bottomed after tumbling since March, but one analyst just slashed Century Aluminum stock's price target by more than 50%.
So what
Analyst Timna Tanners from Wolfe Research downgraded Century Aluminum's rating to "peer perform" from outperform and cut the aluminum stock's price drastically to $14 a share from $30 per share, according to TheFly.com.
Although Tanners has a positive view about aluminum, the analyst sees rising energy prices in the Midcontinent Independent System Operator, or MISO, region as a major headwind for the aluminum company.
Here's all you need to know about MISO and why Tanners' concern isn't entirely unwarranted.
Image source: Getty Images.
MISO is a non-profit, multi-member organization that operates power grids across a large portion of 15 states in the U.S. and is regulated by the Federal Energy Regulatory Commission. That includes Kentucky, where two out of the three smelters that Century Aluminum operates are located. That includes its largest smelter at Hawesville.
For both of these smelters, power companies purchase power in the spot market and pass it through to the smelters at MISO pricing plus transmission and other costs.
With prices of oil and natural gas skyrocketing in recent weeks amid the Russia-Ukraine conflict, MISO energy prices have been on the rise, and they're expected to rise even further as demand for electricity is expected to surge in the summers.
Now what
Since power constitutes one of Century Aluminum's largest cost components, a rise in energy prices directly impacts the company's bottom line.
In fact, in its last quarterly earnings conference call, Century Aluminum confirmed that high energy prices added the maximum pressure to its costs during the quarter, and that it expects even higher energy prices in the second quarter, which could hit its earnings before interest, tax, depreciation, and amortization (EBITDA) by $45 million.
With aluminum prices also crashing almost 30% from their March peak on fears of weaker demand from large consuming nations like China, Century Aluminum's profits in the second quarter could take a pretty big hit versus the first quarter. That's what Tanners and the market is worried about right now.
