Tuesday is turning out to be a great day to own shares of Century Aluminum (CENX -3.05%), the self-described "largest domestic producer of primary aluminum in the U.S." This morning, investment bank B. Riley upgraded Century Aluminum stock to buy and raised its price target on the stock by 40%, to $14 a share.
Century Aluminum stock is up 14% through 10:45 a.m. ET in response.
Why B. Riley loves Century Aluminum
Why is B. Riley so enthusiastic about Century Aluminum, a $1 billion metals producer that lost $175 million over the last 12 months? Basically, it's because B. Riley thinks better days are ahead for the aluminum manufacturer -- and because the Biden administration is about to shower Century with cash.
As StreetInsider.com reports, "45X production tax credits" from the Inflation Reduction Act (IRA) are key to Riley's upgrade. Last month, in a conference call with analysts, Century revealed that it's expecting to claim a tax credit of anywhere from $55 million to $60 million on its 2023 earnings based on an IRA provision (contained in Section 45X of the law) that offers a tax credit "equal to 10% of the cost of production of certain defined critical minerals, including primary aluminum."
As good as that sounds, though, Riley thinks 45X could be even better news for Century. Ultimately, says the analyst, "CENX could realize roughly $200M of annual benefit in the case that material costs are included, and the company achieves 100% utilization in the U.S."
Should you buy Century Aluminum stock?
Now, to fully max out Riley's expectations, Century Aluminum would have to restart some of its operations and ramp up production at the rest. But the analyst notes that Century stock could be a "buy" even if it doesn't capitalize fully on all the gifts the government is offering.
Simply achieving 100% capacity use at Century's Mt. Holly production plant and reactivating its aluminum plant in Hawesville, Kentucky, and bringing it to 50% use would justify the 40% gains in stock price Riley anticipates -- even if the government doesn't grant tax credits for material costs. Meaning that if it does grant those extra tax credits, Century Aluminum stock could go up even more.
That's the good news. The bad news is that, assuming my math is right, Century Aluminum still does need to see almost the full $200 million in annual tax credits that Riley is hoping for in order to erase the $175 million in losses it booked over the last year and turn the company profitable again.
Long story short, while I understand the bull argument Riley is making, I'm not yet convinced that the tax credits it's counting on will be enough to make Century Aluminum a profitable stock again. For that reason, I'm not yet convinced that Century Aluminum stock is a buy, either.
