Noranda Income Fund
TSX : NIF.UN

Noranda Income Fund

May 16, 2016 20:11 ET

Noranda Income Fund Reports First Quarter Financial Results and Announces a Cash Distribution for the Month of May 2016 of $0.025 Per Priority Unit

SALABERRY-DE-VALLEYFIELD, QUÉBEC--(Marketwired - May 16, 2016) - Noranda Income Fund (TSX:NIF.UN) (the "Fund") today reported its financial results for the three-month period ended March 31, 2016. All amounts are in Canadian currency unless otherwise stated.

2016 First Quarter Highlights

  • Adjusted Net Revenues1 were $66.3 million, down from $67.5 million.
  • Earnings before income taxes (EBT) were $4.4 million, down from $15.4 million.
  • Zinc metal production was 67,627 tonnes, flat from 67,804 tonnes.
  • Zinc metal sales increased 38% from Q1 2015 to 72,639 tonnes, helping to offset the impact of lower zinc premiums, lower copper prices and lower sulphuric acid prices.
  • Zinc premiums revenue was $15.7 million, up from $14.5 million for Q1 2015 primarily as a result of higher sales volumes.
  • By-product sales were $6.3 million, down from $7.6 million.
  • Cash provided by operating activities was $69.4 million, primarily due to the $60.2 million decrease in working capital.
  • Extended its asset-based revolving credit facility to April 3, 2017.
  • Declared monthly cash distributions from January to April 2016 of $0.04167 per Priority Unit.
  • Glencore Canada committed to provide zinc concentrate throughout 2017.
  • Declared monthly cash distribution for the month of May 2016 of $0.025 per Priority Unit.
1 Adjusted Net Revenues is calculated as revenues less raw material purchase costs ("Net Revenues") excluding unrealized concentrate settlement adjustments and after foreign exchange gain/loss and derivative financial instruments gain/loss.

"Although soft market conditions had a major impact on our first quarter results, our performance in Q1 was consistent with our strategy of preparing for the transition to market terms in 2017 after the expiry of the initial term of the Fund's Supply and Processing Agreement with Glencore Canada," said Eva Carissimi, President and Chief Executive Officer of Canadian Electrolytic Zinc Limited, the Fund's Manager. "Through our focus on increasing productivity, lowering unit operating costs and better managing our inventory levels, we generated cash flow of $69.4 million, strengthened our balance sheet by reducing our debt by $64.6 million, and lowered our energy costs by $0.3 million. These developments are encouraging signs of progress."

First Quarter 2016 Financial and Operating Results

The Fund reported earnings before income taxes (EBT) of $4.4 million, down from $15.4 million in Q1 2015. The decrease was largely due to the year-over-year declines in zinc premiums and by-product prices and the impact of inventory margin during the quarter. These impacts were partially offset by higher sales volumes and a weaker average Canadian dollar compared to the US dollar. In Q1 2016, realized zinc prices were US$0.83 per pound and zinc premiums were US$0.07 per pound. These compare to US$1.04 and US$0.10, respectively, for Q1 2015. The impact of lower zinc premiums was partially offset by a 38% increase in zinc metal sales, which was drawn from Q1 production and existing inventory.

Through its Processing Facility, the Fund produces refined zinc metal and various by-products from zinc concentrate purchased from mining operations and sells refined zinc products to customers in the open market. The Fund earns a processing fee for transforming zinc concentrate into zinc metal and it earns additional revenue from premiums, by- product revenues and metal gains.

Production costs before changes in inventory were $47.3 million for Q1 2016, up $1.2 million from $46.1 million for Q1 2015. The increase was largely due to higher supply costs, which were primarily denominated in US currency. Higher maintenance costs stemming from efforts to improve plant and equipment efficiency also contributed to increased production costs. Energy cost reductions of $0.3 million partially offset the production cost increases.

Cash provided by operating activities in the three months ended March 31, 2016 was $69.4 million. In the same period of 2015, cash used in operating activities was $28.3 million. This turnaround this quarter was primarily the result of a positive $60.2 million decrease in non-cash working capital resulting from a decrease in inventories, a reduction in accounts receivable and an increase in accounts payable.

The Fund declared cash distributions of $4.7 million in Q1 2016, consistent with the comparative period for 2015.

As at March 31, 2016, the Fund's debt was $28.3 million (net of deferred financing fees), down from $92.8 million at the end of December 2015. The Fund's debt decreased as a result of the decrease in non-cash working capital during the period. As at March 31, 2016 the Fund's cash position was $2.7 million, up from $1.9 million as at December 31, 2015.

Outlook for the Fund

"As a result of our first quarter performance and our current outlook for market conditions, we re-affirm our expectations for 2016 production and sales of zinc metal to be between 265,000 to 275,000 tonnes," said Ms. Carissimi.

The Board of Trustees of the Noranda Operating Trust (the "Board") continues to work on a long-term strategy for the Fund.

The main challenges facing the Fund are (a) the continued supply of zinc concentrate and (b) the ability for the Processing Facility to continue to operate profitably after the expiry of the initial term of the Supply and Processing Agreement (the "Agreement") between the Noranda Income Limited Partnership ("Partnership") and Glencore Canada Corporation ("Glencore Canada") on May 2, 2017.

Discussions with third parties are complex given the Fund's structure, including without limitation that the Agreement and other contractual arrangements with Glencore Canada and its affiliates automatically renew with Glencore Canada for successive periods of five years unless Glencore Canada provides the Fund with written notice to the contrary at least 180 days prior to the expiry of the applicable term (by November 2016). To date, Glencore has not confirmed its intentions in this regard.

The Independent Committee is mindful of the potential negative impact that receipt of a termination notice as late as November 2016 would have on the affairs of the Fund. As a result, the Independent Committee is seeking to negotiate an amended and restated agreement with Glencore Canada in a manner that would incentivize Glencore Canada to declare its intentions in a timeframe that would not expose the Fund to enhanced commercial risks in securing zinc supply.

In order to mitigate the potential negative impact of a termination notice, and the fact that there can be no assurance at this juncture as to the Fund's ability to conclude a new or amended agreement before the November 2016 deadline, the Independent Committee has been actively working to ensure a continuous supply of zinc concentrate to the processing facility beyond the potential expiry date of May 2, 2017.

Negotiations with Glencore Canada

Since April 2014, the Fund (through the Independent Committee and its advisors) has been in discussions with Glencore Canada regarding the supply of zinc concentrate following expiry of the Agreement on May 2, 2017.

Representatives from the Fund met with representatives of Glencore Canada on multiple occasions between April 2014 and January 2016 in order to negotiate and agree upon the terms of an amended and restated Agreement.

Also, during the fall of 2015, the Independent Committee mandated its industry advisors to contact third party zinc concentrate suppliers and finished product purchasers to assess the availability of zinc concentrate supply to the Processing Facility following May 2017. The results of the market canvass have been useful to the Independent Committee in establishing what constitutes market terms in the context of ongoing negotiations with Glencore Canada.

At a Board of Trustees meeting in January 2016, the Independent Committee reported that there remained a number of unresolved material items to conclude an amended Agreement with Glencore Canada, and that the likelihood of reaching a satisfactory outcome in time to meet the deadline imposed by the termination date of the Agreement was uncertain. The Fund and Glencore Canada agreed to continue the negotiations until March 25, 2016 but negotiations have continued beyond this date with a view to reaching an agreement as soon as possible.

The Independent Committee remains hopeful that the parties will reach an agreement based on the best terms and conditions available in the market and the Fund's advisors are working diligently to bridge the gap between the parties. However, the Fund is not in a position to ascertain whether a satisfactory agreement will result from its discussions with Glencore Canada and there can be no assurance that the Fund will be successful in this regard.

Concurrently with ongoing negotiations regarding an amended Agreement, the Fund has secured Glencore Canada's commitment to provide a comprehensive feed plan for the Processing Facility for the entire 2017 calendar year. This commitment should ensure adequate uninterrupted supply of concentrate to December 2017, giving the Fund additional time to secure zinc concentrate beyond that date. The commitment for the period from May 2, 2017 to December 31, 2017 will be on the basis of market terms, which have not yet been agreed but are expected to represent a significant change from the stable processing fee the Fund has benefited from since its inception. As a result of this change in pricing and as discussed below, the Fund's financial results could differ materially in the later part of 2017 and beyond.

The Independent Committee is being assisted in its work by industry consultants, Steve Hayes and Andrew Roebuck, whom the Independent Committee has retained to advise it with regards to the zinc concentrate market. In May 2014, TD Securities was engaged as financial advisor to the independent trustees.

Consequences of Market Terms

Regardless of whether or not Glencore Canada renews the Agreement, after May 2, 2017, the Fund will be required to purchase zinc concentrate at market terms, instead of the current fixed processing fee. This position represents a significant change from the stable processing fee which has advantaged the Fund since its inception in 2002. The

Fund's results under market terms will be subject to more volatility than under the current Agreement. The Fund's results will be impacted by market treatment charges which fluctuate, as well as greater sensitivity to zinc price and the Canadian/US exchange rate resulting in more variable operating results.

It is generally expected that the zinc concentrate market will tighten in the next few years, as a result of several large mines closing in 2015, announced zinc mine production cutbacks for 2016 as well as the expected global demand for zinc concentrate. If the zinc concentrate market does tighten, purchase conditions will be less favorable for the Processing Facility and other Western custom zinc smelters. In particular, it will likely be more challenging to source zinc concentrates in the Fund's required quantities and qualities and at an economic price.

Even if zinc concentrate is available after the expiry of the initial term of the Agreement on May 2, 2017, the Fund's financial results could differ materially from those achieved under the Agreement, which provides stable treatment charges for concentrate. There has been an industry trend whereby more concentrate is being purchased on spot terms2 which have recently and historically been below benchmark terms3. Therefore, it may be difficult for the Processing Facility to achieve financial results similar to those achieved under the Agreement.

2 Spot treatment charges refer to the price paid by smelters for prompt purchase of zinc concentrate. Source: Wood Mackenzie
3 Benchmark treatment charges are negotiated annually between major miners and smelters. Source: Wood Mackenzie

Distributions

As a result of the above, the Board has evaluated its distribution policy. In determining whether there shall be a distribution and the level thereof, the Board periodically reviews the Fund's financial performance, business environment and prospects, and determines the appropriate levels of reserves. The Board also continues to evaluate on a monthly basis the expected future cash flows of the Fund as well as the reserves that may be required in the future. When not restricted, and as may be considered appropriate, the Fund's policy is to make monthly distributions to Unitholders.

In addition, the Board is evaluating the expected future cash flows in a variety of potential scenarios, as well as required reserves under those scenarios. Given the uncertainty of future pricing and market conditions for zinc concentrate, and the reduced profitability and prospects of the Fund, the Board has declared a distribution for the month of May of $0.025 per Priority Unit, as compared to $0.04167 per Priority Unit for the month of April. The distribution is payable on June 27, 2016 to Priority Unitholders of record as at the close of business on May 31, 2016. There is no assurance that distributions will continue in future, nor is there any assurance that, if they do continue, the level or frequency of such distributions will not vary.

First Quarter 2016 Results Conference Call:

The Fund will hold a conference call to discuss its Q1 2016 results tomorrow, May 17 at 8:30 a.m. Eastern. Eva Carissimi, President and CEO, and Michael Boone, CFO, of Noranda Income Fund's manager, will host the call.

When: May 17, 2016 at 8:30 a.m. E.T
Dial in number: 647-788-4919 or
Toll-free North American number: 1-877-291-4570

To access the webcast and view the slide presentation from the Noranda Income Fund website: http://www.norandaincomefund.com/investor/conference.html or click on this link: http://www.gowebcasting.com/7541.

Conference Call Replay:
Dial in number: 416-621-4642 or
Toll-free North American number: 1-800-585-8367

The conference ID is 3433172 and you will be prompted for your name and company. The recording will be available until midnight on May 31, 2016.

A full version of the first quarter 2016 Management's Discussion and Analysis (MD&A) and unaudited Consolidated Financial Statements will be posted on http://www.sedar.com and on the Fund's website at http://www.norandaincomefund.com/investor/financials.html later today.

Readers should be advised that the summarized communication presented in this press release is limited in its disclosure. It is not a suitable source of information for readers who are unfamiliar with the Fund, and it is not in any way a substitute for reading the Consolidated Financial Statements and MD&A because a reader relying on this summary alone might overlook decision critical information.

Forward-Looking Information

This press release contains forward-looking information and statements within the meaning of applicable securities laws. Forward-looking information involves known and unknown risks, uncertainties and other factors, which may cause actual events, results or performance to be materially different from any future events, results or performance expressed or implied by the forward-looking information, and as a result, the Fund cannot guarantee that any forward- looking statements or information will materialize.

Such risks and uncertainties include, but are not limited to, the effect of general business and economic conditions, the Fund's ability to operate at normal production levels, the Fund's capital expenditure requirements and other general risks and uncertainties set out in the Fund's continuous disclosure documents on available on SEDAR at www.sedar.com.

Forward-looking information contained in this press release is based on, among other things, management's current estimates, expectations, assumptions, plans and intentions, which management believes are reasonable as of the current date, and which are subject to a number of risks and uncertainties. Except as required by law, the Fund does not undertake to update these forward-looking statements or information, whether written or oral, that may be made from time to time by the Fund or on the Fund's behalf.

Noranda Income Fund is an income trust whose units trade on the Toronto Stock Exchange under the symbol "NIF.UN". Noranda Income Fund owns the electrolytic zinc processing facility and ancillary assets (the "Processing Facility") located in Salaberry de-Valleyfield, Québec. The Processing Facility is the second-largest zinc processing facility in North America and the largest zinc processing facility in eastern North America, where the majority of zinc customers are located. It produces refined zinc metal and various by-products from sourced zinc concentrates. The Processing Facility is operated and managed by Canadian Electrolytic Zinc Limited, a wholly-owned subsidiary of Glencore Canada Corporation.

Except where otherwise indicated, all amounts in this press release are expressed in Canadian dollars.

Further information about Noranda Income Fund can be found at www.norandaincomefund.com

Key Performance Drivers

The following table provides a summary of the performance of the Fund's key drivers:

Three months ended March 31 2016 2015
Zinc concentrate processed (tonnes) 135,727 125,369
Zinc secondary feed processed (tonnes) 1,237 4,910
Zinc grade (%) 51.6 53.5
Zinc recovery (%) 97.5 97.0
Zinc metal production (tonnes) 67,627 67,804
Zinc metal sales (tonnes) 72,639 52,497
Processing fee (cents/pound) 41.0 40.5
Realized zinc price (US$/pound) 0.83 1.04
Average LME zinc price (US$/pound) 0.76 0.94
By-product revenues ($ millions) 6.3 7.6
Copper in cake production (tonnes) 702 625
Copper in cake sales (tonnes) 796 605
Sulphuric acid production (tonnes) 111,925 99,100
Sulphuric acid sales (tonnes) 105,978 91,827
Average LME copper price (US$/pound) 2.12 2.64
Sulphuric acid netback (US$/tonne) 28 52
Average US/Cdn. exchange rate 1.37 1.24
* 1 tonne = 2,204.62 pounds

SELECTED FINANCIAL AND OPERATING INFORMATION

Three months ended March 31,
($ thousands) 2016 2015
Statements of Comprehensive Income Information
Revenues 172,581 160,471
Raw material purchase costs 112,541 77,145
Revenues less raw material purchase costs 60,040 83,326
Other expenses:
Production 49,510 35,703
Selling and administration 6,264 5,836
Foreign currency (gain) loss (13,452 ) 14,014
Derivative financial instruments loss 4,188 2,649
Depreciation of property, plant and equipment 7,580 6,499
Rehabiliation expense 590 2,004
Earnings before finance costs and income taxes 5,360 16,621
Finance costs, net 1,000 1,266
Earnings before income taxes 4,360 15,355
Current and deferred income tax expense 473 3,315
Earnings attributable to Unitholders and Non-controlling interest 3,887 12,040
Distributions to Unitholders 4,687 4,687
(Decrease) Increase in net assets attributable to Unitholders and Non-controlling interest (800 ) 7,353
Other comprehensive loss (3,955 ) (1,325 )
Comprehensive (loss) income (4,755 ) 6,028
Statements of Financial Position Information March 31, 2016 December 31, 2015
Cash 2,717 1,878
Inventories 143,803 171,086
Accounts receivable 73,567 87,909
Income taxes receivable 2,576 -
Property, plant and equipment 207,735 211,542
Total assets 437,733 480,331
Accounts payable and accrued liabilities 81,662 59,669
Income taxes payable - 2,443
Total bank and other loans 28,278 92,836
Total liabilities excluding net assets attributable to unitholders 162,954 200,797
Three months ended March 31,
Statements of Cash Flows Information 2016 2015
Cash provided by operating activities before cash distributions and net change in non-cash working capital items 13,910 18,377
Cash distributions (4,687 ) (4,687 )
Net change in non-cash working capital items 60,195 (42,030 )
Cash provided by (used in) operating activities 69,418 (28,340 )
Cash used in investing activities (3,916 ) (4,568 )
Cash (used in) provided by financing activities (64,663 ) 34,297
Net increase in cash 839 1,389
Cash distributions declared per Priority Unit 0.12501 0.12501

Contact Information

  • Michael Boone
    Vice President & Chief Financial Officer of
    Canadian Electrolytic Zinc Limited,
    Noranda Income Fund's Manager
    416-775-1561
    info@norandaincomefund.com