Noranda Income Fund
TSX : NIF.UN

Noranda Income Fund

July 26, 2016 07:45 ET

Noranda Income Fund Reports Second Quarter Financial Results and Provides an Update on Negotiations With Glencore Canada

SALABERRY-DE-VALLEYFIELD, QUÉBEC--(Marketwired - July 26, 2016) - Noranda Income Fund (TSX:NIF.UN) (the "Fund") today reported its financial results for the three- and six-month periods ended June 30, 2016. All amounts are in Canadian currency unless otherwise stated.

2016 Second Quarter Highlights

  • Glencore Canada committed to provide zinc concentrate supply to the Fund throughout 2017.
  • Adjusted Net Revenues(1) were $56.4 million, down from $78.5 million in Q2 2015.
  • Loss before income taxes of $3.2 million compared to earnings of $20.4 million in Q2 2015, in part due to the volatile market conditions, including fluctuations to zinc prices.
  • Zinc metal production was 69,289 tonnes, up 3% from 67,286 tonnes in Q2 2015.
  • Zinc metal sales were 61,555 tonnes compared to sales of 71,259 tonnes in Q2 2015, which included spot sales that positively impacted its totals.
  • Declared monthly cash distributions from May to July 2016 of $0.025 per Priority Unit.
  • Reduced debt by $42.1 million from end of December 2015.
  • Production costs before changes in inventory were $48.5 million, down 3% or $1.3 million from $49.8 million in Q2 2015.
(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 our Q2 results were impacted by volatile market conditions and fluctuating zinc prices, we made progress against our goal of preparing for the successful transition to market terms in 2017," said Eva Carissimi, President and Chief Executive Officer of Canadian Electrolytic Zinc Limited, the Fund's Manager. "Most notably, we increased zinc metal production by 3% to 69,289 tonnes, reduced production costs by $1.3 million and lowered our debt by $42.1 million from year end. This progress puts us on well on track to reach our production and zinc metal sales targets for the year of 265,000 to 275,000 tonnes."

Developments Subsequent to Q2 2016

The Fund has terminated its discussions (through the Independent Committee and its advisors) with Glencore Canada Corporation ("Glencore Canada") on the negotiation of an amended and restated supply agreement. The Supply and Processing Agreement (the "Agreement") with Glencore Canada and its affiliates automatically renews with Glencore Canada for successive periods of five years unless Glencore Canada provides the Fund with a written notice to the contrary at least 180 days prior to the expiry of the applicable term (by November 3, 2016).

Second Quarter 2016 Financial and Operating Results

In Q2 2016, the Fund reported a loss before income taxes of $3.2 million, down from earnings before income taxes of $20.4 million in Q2 2015. Q2 results were impacted by volatile market conditions, including fluctuations to zinc prices. On a six-month basis, the Fund reported earnings before income taxes of $1.1 million in 2016, down from $35.7 million in 2015.

Adjusted Net Revenues in Q2 2016 were $56.4 million, down from $78.5 million in Q2 2015. The decrease was mainly due to reduced zinc metal sales volume, lower premiums, lower by-product selling prices and the impact of inventory margin during the quarter. The decrease in adjusted net revenues was partially offset by a weaker average Canadian dollar compared to the US dollar in Q2 2015. Adjusted Net Revenues for the six month period ended June 30, 2016 were $136.8 million, down from $149.0 million in the same period of 2015.

Adjusted Net Revenues for Q2 and the first six months of 2016 excluded the impact of a $3.1 million and $14.2 million concentrate payable settlement adjustments relating to a change in the fair value of raw material purchase costs. The changes were due to rising zinc prices. The adjustment, which is based on accounting standards treating the provisional pricing feature of the Fund's Supply and Processing Agreement, requires the Fund to revalue payables specifically due to raw material purchases based on the price of zinc at quarter end. All adjustments are made against the Fund's raw material purchase costs. The accounting standards only permit the Fund to revalue its inventory to market prices once product is sold. Increases in zinc prices, as occurred in the first half of 2016, contributed to the Fund's lower Net Revenue, lower inventory value compared to the June 30, 2016 market value for zinc and lower earnings before taxes.

"Our raw material purchase costs increased throughout the quarter as we value them according to the market price of zinc, which continued to rise throughout Q2," said Michael Boone, CFO of Canadian Electrolytic Zinc Limited, Noranda Income Fund's Manager. "As we sell these higher market valued inventories in the coming months, we expect to record positive impacts to our results in the periods ahead."

Zinc metal sales in Q2 2016 were 61,555 tonnes, down from 71,259 in Q2 2015 when the Fund had some large, spot sales that were made following low zinc metal sales volumes in Q1 2015. Excluding these spot sales, zinc metal sales were relatively flat on a year-over-year basis for the quarter. Zinc metal sales in the first six months of 2016 were 134,194 tonnes, up 8% from the 123,756 tonnes sold in the same period in 2015.

Zinc metal production in Q2 2016 increased 3% to 69,289 tonnes from 67,286 tonnes in Q2 2015. Zinc metal production for the six months ended June 30, 2016 was 136,916 tonnes, up 1% from 135,090 tonnes produced in the same period of 2015.

Production cost before changes in inventory in Q2 was $48.5 million, down 3% or $1.3 million from the $49.8 million recorded for the same period in 2015. The decrease was mostly due to lower operating supplies and contractor expenses as a result of increased operating stability and reduced outages at the facility. The Fund also benefited from a $0.2 million reduction in energy costs when compared to Q2 2015. Production costs before changes in inventory for the six months ended June 30, 2016 were $95.8 million, down $0.1 million from the $95.9 million recorded in the same period of 2015.

Cash used in operating activities in the second quarter was $17.7 million, compared to cash provided by operating activities of $2.8 million in Q2 2015. The decline was mainly due to a negative $20.7 million increase in non-cash working capital, resulting from an increase in accounts receivable and an increase in inventories although partly offset by an increase in accounts payable. Cash provided by operating activities in the six months ended June 30, 2016 was $51.8 million. In the same period of 2015, cash used in operating activities was $25.5 million.

Cash distributions of $3.4 million were declared in Q2 2016 compared to $4.7 million declared in the same period of 2015. Cash distributions of $8.1 million were declared in the first six months of 2016 compared to $9.4 for the same period of 2015.

At the end of Q2 2016, the Fund's debt, net of deferred financing fees was $50.7 million, down from $92.8 million at the end of December 2015. The Fund's debt decreased primarily as a result of the decrease in non-cash working capital during the period. The Fund's cash as at June 30, 2016 decreased to $1.8 million from $1.9 million as at December 31, 2015.

Outlook for the Fund

"With a commitment now in place for dependable access to zinc concentrate supply throughout 2017, our near -term focus will be to prepare our operations for the successful transition to market terms expected next year," said Ms. Carissimi. "Keys to our success will be to continue to increase plant capacity, reduce operating costs and improve plant safety. Over the longer term, our strategic location, plant capacity and strong customer relationships position us favourably to compete in a lower zinc supply environment."

As previously announced in May 2016, 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 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 Agreement between the Noranda Income Limited Partnership ("Partnership") and Glencore Canada on May 2, 2017.

Recent Developments - Update on Negotiation with Glencore Canada on a Renewed Supply Agreement

The Fund has terminated its discussions (through the Independent Committee and its advisors) with Glencore Canada on the negotiation of an amended and restated supply agreement. The Independent Committee and its advisors have concluded that there is very little likelihood of reaching a mutually acceptable agreement at this time.

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

Given 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 a written notice to the contrary at least 180 days prior to the expiry of the applicable term (by November 3, 2016), the Independent Committee had initiated discussions on an amended and restated agreement with Glencore Canada in a manner that would incentivize Glencore Canada to declare its intention in a timeframe that would not expose the Fund to enhanced commercial risks in securing zinc supply. To date, Glencore Canada has not confirmed its intention in this regard.

The Fund now faces two distinct scenarios: either (i) Glencore Canada does not provide the Fund with the written notice referred to above and the relationship continues for the next five years, from May 2, 2017 to May 2, 2022, with Glencore Canada acting as Agent to the Fund in securing the required zinc concentrate and in selling the finished products or (ii) such a written notice is provided and the relationship and the related agreements terminate on May 2, 2017. The Fund would then be on its own and would need to establish the commercial infrastructure required to procure the zinc concentrate it needs to operate and to sell the finished products. Should this scenario arise, the Fund would know by November 3, 2016 and would quickly proceed accordingly.

The risks arising from this latter scenario are mitigated by the fact that, regardless of the decision Glencore Canada reaches, as previously announced, 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 31, 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 to but are expected to represent a significant change from the stable processing fee the Fund has enjoyed since its inception. The Independent Committee remains hopeful that the parties will reach an agreement for the zinc concentrate supply for the period between May 2, 2017 to December 31, 2017 based on the best terms and conditions available in the market. 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.

The Independent Committee will continue to actively work to ensure a continued supply of zinc concentrate to the Processing Facility beyond 2017.

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.

As a result of this change in pricing for the period between May 2, 2017 and December 31, 2017 and as previously announced, the Fund's financial results could differ materially in the later part of 2017 and beyond. Cash distributions of the Fund could also be negatively impacted by the fact that as of May 2, 2017, the Ordinary Units owned by Glencore Canada could be exchanged for Priority Units, resulting in the cessation of the subordination of distributions to Priority Units.

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 July of $0.025 per Priority Unit. 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.

Second Quarter 2016 Results Conference Call:

When: July 26, 2016 at 10:30 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/7747

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

The conference ID is 49299713 and you will be prompted to provide your name and company.

The recording will be available until midnight on August 9, 2016.

A full version of the second 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 Six months ended
June 30, June 30,
2016 2015 2016 2015
Zinc concentrate processed (tonnes) 129,027 126,255 264,754 251,624
Zinc secondary feed processed (tonnes) 3,896 7,126 5,133 12,036
Zinc grade (%) 51.8 53.0 51.7 53.2
Zinc recovery (%) 97.4 97.7 97.4 97.3
Zinc metal production (tonnes) 69,289 67,286 136,916 135,090
Zinc metal sales (tonnes) 61,555 71,259 134,194 123,756
Processing fee (cents/pound) 41.0 40.5 41.0 40.5
Realized zinc price (US$/pound) 0.94 1.10 0.88 1.07
Average LME zinc price (US$/pound) 0.87 1.00 0.81 0.97
By-product revenues ($ millions) 5.3 8.6 11.6 16.2
Copper in cake production (tonnes) 817 670 1,519 1,295
Copper in cake sales (tonnes) 748 612 1,544 1,217
Sulphuric acid production (tonnes) 107,619 99,786 219,544 198,886
Sulphuric acid sales (tonnes) 113,170 107,790 219,148 199,617
Average LME copper price (US$/pound) 2.15 2.74 2.13 2.68
Sulphuric acid netback (US$/tonne) 21 50 24 51
Average US/Cdn. exchange rate 1.29 1.23 1.33 1.24
* 1 tonne = 2,204.62 pounds

SELECTED FINANCIAL AND OPERATING INFORMATION

Three months ended June 30, Six months ended June 30,
($ thousands) 2016 2015 2016 2015
Statements of Comprehensive Income Information
Revenues 156,299 214,362 328,880 374,833
Raw material purchase costs 101,532 138,024 214,073 215,169
Revenues less raw material purchase costs 54,767 76,338 114,807 159,664
Other expenses:
Production 44,406 52,413 93,916 88,116
Selling and administration 6,264 6,123 12,528 11,959
Foreign currency loss (gain) 1,467 (3,708 ) (11,985 ) 10,306
Derivative financial instruments (gain) loss (4 ) (7,712 ) 4,184 (5,063 )
Depreciation of property, plant and equipment 6,331 8,708 13,911 15,207
Rehabilitation (recovery) expense (1,388 ) (1,366 ) (798 ) 638
(Loss) earnings before finance costs and income taxes (2,309 ) 21,880 3,051 38,501
Finance costs, net 910 1,486 1,910 2,752
(Loss) earnings before income taxes (3,219 ) 20,394 1,141 35,749
Current and deferred income tax (recovery) expense (791 ) 4,357 (318 ) 7,672
(Loss) earnings attributable to Unitholders and Non-controlling interest (2,428 ) 16,037 1,459 28,077
Distributions to Unitholders 3,436 4,686 8,123 9,373
(Decrease) increase in net assets attributable to Unitholders and Non-controlling interest (5,864 ) 11,351 (6,664 ) 18,704
Other comprehensive (loss) gain (3,498 ) 2,471 (7,453 ) 1,146
Comprehensive (loss) income (9,362 ) 13,822 (14,117 ) 19,850
Statements of Financial Position Information June 30, 2016 December 31, 2015
Cash 1,826 1,878
Inventories 173,184 171,086
Accounts receivable 85,316 87,909
Property, plant and equipment 205,350 211,542
Total assets 480,728 480,331
Accounts payable and accrued liabilities 108,416 59,669
Total bank and other loans 50,664 92,836
Total liabilities excluding net assets attributable to unitholders 215,311 200,797
Three months ended June 30, Six months ended June 30,
Statements of Cash Flows Information 2016 2015 2016 2015
Cash provided by operating activities before cash distributions and net change in non-cash working capital items 6,517 13,290 34,623 34,626
Cash distributions (3,436 ) (4,686 ) (8,123 ) (9,373 )
Net change in non-cash working capital items (20,739 ) (5,775 ) 25,260 (50,764 )
Cash (used in) provided by operating activities (17,658 ) 2,829 51,760 (25,511 )
Cash used in investing activities (5,514 ) (7,532 ) (9,430 ) (12,100 )
Cash provided by (used in) financing activities 22,281 3,040 (42,382 ) 37,337
Net decrease in cash (891 ) (1,663 ) (52 ) (274 )
Cash distributions declared per Priority Unit 0.09167 0.12501 0.21668 0.25002

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