Noranda Income Fund
TSX : NIF.UN

Noranda Income Fund

March 11, 2015 07:45 ET

Noranda Income Fund Reports Fourth Quarter and 2014 Annual Results

SALABERRY-DE-VALLEYFIELD, QUÉBEC--(Marketwired - March 11, 2015) - Noranda Income Fund (TSX:NIF.UN) (the "Fund") today released its fourth quarter and annual 2014 results.

Fourth Quarter and 2014 Overview:

  • Earnings before income taxes was $12.6 million for the quarter (Q4 2013 - earnings before income taxes was $9.3 million) and $34.5 million for the year (2013 - earnings before income taxes of $65.0 million), excluding a $40.5 million non-cash impairment charge.
  • Including the $40.5 million non-cash impairment charge, the Fund recorded a loss before income taxes of $27.9 million for the quarter and of $6.0 million for the year.
  • Cash available for distributions before reserves was $15.2 million for the year (2013 - Cash available for distributions before reserves of $32.8 million);
  • A total of $18.7 million in cash distributed to Priority Unitholders in 2014.
  • Zinc premiums averaged 9.6 cents US per pound or 10.9 cents Cdn (Q4 2013 - 8.7 cents US per pound or 9.2 cents Cdn). For the year, premiums were $11.6 million higher than in 2013.
  • Zinc metal production was 71,207 tonnes for the quarter (Q4 2013 - 67,212 tonnes) and 262,049 tonnes for the year (2013 - 265,242 tonnes).
  • Completion and commissioning of two-year silica removal capacity project in 2014.
  • Completion of four-year rehabilitation project to replace cell-house liners in 2014.
  • New collective agreement reached in early 2015, effective until November 30, 2016.
  • In 2014, $15 million in senior secured notes repaid as per amortization schedule. Overall, the Fund's debt increased by $27.6 million (net of deferred financing fees), reflecting an increase in working capital requirements.

2014 Capital Spending

Capital spending was $35.1 million in 2014 compared to $33.4 million in 2013. Most of the annual 2014 capital investment was spent on sustaining the Fund's operations, including $8.2 million on replacement anodes for the cell house, $4.5 million on major roaster and acid plant equipment and $1.9 million on electrical infrastructure. Investment in the silica removal project totalled $9.5 million in 2014.

Financial and Operating Highlights (Fourth quarter 2014 compared to the fourth quarter 2013)

The Fund reported loss before income taxes of $27.9 million in the three months ended December 31, 2014 compared to earnings of $9.3 million in the same period a year ago. The $37.2 million decrease was mainly due to a $40.5 million asset impairment charge, and a $4.3 million increase in pension expense related to additional pension benefits and early retirement provisions for the new collective agreement. This decrease was partially offset by higher net revenues resulting from higher zinc sales volumes and premiums.

The $40.5 million non-cash asset impairment charge is primarily as a result of:

  1. the Fund's anticipated sourcing of zinc concentrate on market terms instead of at current fixed processing fee following the expiry of the initial term of the Supply and Processing Agreement in May 2017, which in recent years would have resulted in lower cash flow generation for the Fund;
  2. the increase in the Fund's net asset carrying amount in 2014 relating to fluctuations in the price of zinc and foreign exchange rates; and
  3. a sustained increase in the sourcing of concentrates from overseas resulting in higher inland freight and feed acquisition costs.

This non-cash charge is not expected to have an impact on the Fund's borrowing facilities.

Cash provided from operating activities in the three months ended December 31, 2014 was $13.6 million, including a negative $1.9 million increase in non-cash working capital due to an increase in accounts receivable and a decrease in accounts payable, partially offset by a decrease in inventory. In the same period of 2013, cash provided from operating activities was $21.7 million, which was positively impacted by a $7.6 million decrease in non-cash working capital due to an increase in accounts payable, partially offset by an increase in inventories and accounts receivable.

Financial and Operating Highlights (2014 compared to 2013)

Loss before income taxes was $6.0 million in 2014, compared to earnings before income taxes of $65.0 million in 2013. The $71.0 million difference is due to:

  • a $40.5 million asset impairment charge;
  • a $4.3 million increase in pension expenses related to additional pension benefits and early retirement provisions for the new collective agreement;
  • a $9.0 million increase in reclamation expenses
  • a $9.2 million increase in feed acquisition costs; and
  • lower zinc metal sales and by-product revenues.

This decrease was partly offset by higher zinc metal premiums.

Cash used in operating activities in 2014 was $7.0 million, including a negative $53.7 million increase in non-cash working capital due mainly to an increase in inventories and a reduction in accounts payable and accrued liabilities. In 2013, cash provided by operating activities was $91.2 million, including the benefit of a $28.6 million reduction in non-cash working capital due to a decrease in accounts receivable and inventories and an increase in accounts payable and accrued liabilities.

Outlook for the Fund

The Board continues to work on the 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 in May 2017, at which time the Fund expects that it will be required to purchase concentrate on market terms instead of the current fixed processing fee. The Fund's results under market terms will be subject to more volatility than under the current Supply and Processing Agreement.

Over the last several months, discussions have been held with various potential counterparties regarding the supply of zinc concentrate following May 2, 2017. These discussions will continue; however, there is no assurance that they will result in continued supply on terms that allow the Fund to continue profitable operations.

The Independent Committee is being assisted in its work by an industry consultant, Steve Hayes, whom the Independent Committee retained in December 2012 to advise it with regards to the zinc concentrate market. In May 2014, TD Securities was engaged as financial advisor to the independent trustees.

Distribution Policy

When not restricted, and as may be considered appropriate by the Board, the Fund's policy is to make monthly distributions to Unitholders. 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.

Given the challenges described above, the Board continues to evaluate the expected future cash flows in a variety of potential scenarios, as well as required reserves under each of those scenarios. Given the uncertainty of future pricing and market conditions for zinc concentrate, and that several potential scenarios are being considered, including the discontinuation of operations following the expiry of the agreement, the Board is carefully reviewing and, if required, will augment the Fund's reserves. An increase in reserves would have an adverse effect on cash available for distributions. There is no assurance that monthly distributions will continue in the future; nor is there any assurance that, if they do continue, the level of such distributions will not vary from the level of the most recent monthly cash distribution.

Conference Call and Webcast:

March 11, 2015 at 10:30 a.m. EST
Dial in number: 647-788-4919 or
Toll-free North American number: 1-877-291-4570

In addition, you can listen to the teleconference 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/6361.

Conference Call Replay:

Dial in number: 416-621-4642 or
Toll-free North American number: 1-800-585-8367
The conference ID is 97471062 and you will be prompted for your name and company. The recording will be available until midnight on March 25, 2015.

A full version of the annual 2014 MD&A and the audited 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, March 11, 2015. 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.

SELECTED FINANCIAL AND OPERATING INFORMATION
Three months ended Years ended
December 31, December 31,
($ thousands)2014 2013 2014 2013
Statements of Comprehensive Income Information
Revenues214,646 148,313 695,036 609,405
Raw material purchase costs119,776 75,617 388,750 294,459
Revenues less raw material purchase costs94,870 72,696 306,286 314,946
Other expenses:
Production56,519 45,819 189,309 182,725
Selling and administration5,780 6,532 22,939 21,794
Foreign currency loss6,508 2,360 13,951 7,446
Derivative financial instruments gain(475)(993)(1,587)(1,080)
Depreciation of property, plant and equipment10,382 8,785 36,560 36,351
Rehabilitation expense (recovery)2,192 (519)5,314 (3,683)
Impairment of non-financial assets40,500 - 40,500 -
(Loss) earnings before finance costs and income taxes(26,536)10,712 (700)71,393
Finance costs, net1,319 1,368 5,280 6,371
(Loss) earnings before income taxes(27,855)9,344 (5,980)65,022
Current and deferred income tax (recovery) expense(5,234)2,510 (878)14,247
(Loss) earnings attributable to Unitholders and Non-controlling interest(22,621)6,834 (5,102)50,775
Distributions to Unitholders4,686 4,687 18,748 18,750
Current income tax recovery on distribution(660)(603)(660)(603)
(Decrease) increase in net assets attributable to Unitholders and Non-controlling interest(26,647)2,750 (23,190)32,628
Other comprehensive income (loss)2,771 4,863 (1,862)11,897
Comprehensive (loss) income(23,876)7,613 (25,052)44,525
Statements of Financial Position Information December 31,
2014
December 31,
2013
Cash 1,626 15,547
Inventories 118,948 77,580
Accounts receivable 94,552 91,898
Income taxes receivable 4,103 4,040
Property, plant and equipment 228,879 272,341
Total assets 458,039 467,075
Accounts payable and accrued liabilities 76,256 87,844
Total bank and other loans 78,970 51,322
Total liabilities excluding net assets attributable to unitholders 203,638 187,542
Three months ended Years ended
December 31, December 31,
Statements of Cash Flows Information2014 2013 2014 2013
Cash provided by operating activities before cash distributions and net change in non-cash working capital items20,210 18,786 65,516 81,384
Cash distributions(4,686)(4,687)(18,748)(18,750)
Net change in non-cash working capital items(1,900)7,572 (53,749)28,561
Cash provided by (used in) operating activities13,624 21,671 (6,981)91,195
Cash used in investing activities(7,232)(14,002)(33,618)(31,657)
Cash (used in) provided by financing activities(5,492)(7,312)26,678 (45,294)
Net increase (decrease) in cash and cash equivalents900 357 (13,921)14,244
Cash distributions declared per Priority Unit0.12501 0.12501 0.50004 0.50004

Key Performance Drivers

The following table provides a summary of the performance of the Fund's key drivers for the three months and years ended December 31, 2014 and 2013:

Three months ended
December 31,
Years ended
December 31,
2014 2013 2014 2013
Zinc concentrate processed (tonnes) 125,094 126,302 497,013 506,209
Zinc secondary feed processed (tonnes) 4,530 - 16,819 -
Zinc grade (%) 53.3 52.9 52.8 53.1
Zinc recovery (%) 97.5 97.1 97.3 97.2
Zinc metal production (tonnes) 71,207 67,212 262,049 265,242
Zinc metal sales (tonnes) 74,483 65,248 258,160 269,807
Processing fee (cents/pound) 40.0 39.5 40.0 39.5
Zinc metal premium (US cents/pound) 9.6 8.7 10.0 8.4
By-product revenues ($ millions) 8.6 8.9 31.1 38.7
Copper in cake production (tonnes) 633 491 2,432 1,821
Copper in cake sales (tonnes) 796 338 2,218 1,937
Sulphuric acid production (tonnes) 96,263 99,232 391,369 405,993
Sulphuric acid sales (tonnes) 98,424 95,966 396,624 401,235
Average LME copper price (US$/pound) 3.00 3.24 3.11 3.32
Sulphuric acid netback (US$/tonne) 51 69 51 71
Average LME zinc price (US$/pound) 1.01 0.87 0.98 0.87
Average US/Cdn. exchange rate 1.14 1.05 1.10 1.03
* 1 tonne = 2,204.62 pounds

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