Noranda Income Fund
TSX : NIF.UN

Noranda Income Fund

November 11, 2016 07:45 ET

Noranda Income Fund Reports Third Quarter Financial Results

SALABERRY-DE-VALLEYFIELD, QUEBEC--(Marketwired - Nov. 11, 2016) - Noranda Income Fund (TSX:NIF.UN) (the "Fund") today reported its financial results for the three- and nine-month periods ended September 30, 2016. All amounts are in Canadian currency unless otherwise stated.

2016 Third Quarter and Subsequent Highlights

  • Glencore Canada renewed the Supply and Processing Agreement (see below)
  • Adjusted Net Revenues1 were $65.9 million, up 8% from $60.9 million in Q3 2015
  • Earnings before income taxes of $11.2 million down from $13.1 million in Q3 2015, excluding a $21 million non-cash impairment charge
  • Zinc metal production of 67,815 tonnes, up 3% from 65,800 tonnes in Q3 2015
  • Zinc metal sales of 69,662 tonnes, up 17% from 59,411 tonnes sold in Q3 2015
  • Declared monthly cash distributions from August to October 2016 of $0.025 per Priority Unit
  • Reduced debt by $8.3 million from December 2015
  • Non-cash working capital increased by $36.4 million mostly due to an increase in accounts receivable and inventories resulting from increasing zinc prices
(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.

Glencore Canada Renewed the Supply and Processing Agreement

On November 3, 2016, the Fund announced that it received written notification from Glencore Canada indicating that it will renew the Supply and Processing Agreement for a period of five years through May 2, 2022. In accordance with the Supply and Processing Agreement, under the renewed term commencing on May 3, 2017, Glencore Canada will arrange, as Agent on behalf of the Fund, for the purchase of the zinc concentrate required by the Fund. The Fund is expecting that such purchases will be at market terms. Purchase arrangements, including market terms, have yet to be agreed. The transition to market terms will represent a significant change from the fixed processing fee the Fund has benefited from since its inception. As a result of the change to market term pricing, the Fund's financial results will differ materially, beginning in the second quarter of 2017. Glencore Canada will continue to act as Manager of Noranda Operating Trust and of the Partnership and as Administrator of the Fund, in accordance with the Operating and Management Agreement, the Management and Services Agreement and the Administration Agreement, respectively, which have all been extended for a period of five years ending on May 2, 2022.

Now that the Supply and Processing Agreement has been renewed, the Fund has begun to work with its Agent (Glencore Canada) for the sourcing of concentrate starting on May 3, 2017.

"Renewing our Supply and Processing Agreement with Glencore Canada represents a significant milestone and removes a considerable amount of uncertainty for our operations," said Ms. Eva Carissimi, President and Chief Executive Officer of Canadian Electrolytic Zinc Limited, the Fund's Manager. "We have made concerted efforts over the past two years to control unit costs and improve efficiency at the plant and the Fund's transition to market terms means that we will have to continue to do so."

"While keeping our operating costs in line, we increased adjusted net revenues by 8% to $65.9 million, grew zinc metal sales by more than 17% to 69,662 tones, improved zinc metal production by 3% to 67,815 tonnes and maintained our excellent track record of employee safety. Q3's performance paves the way for us to reach our performance and operational targets for 2016 as we prepare for the transition to market terms starting in May 2017."

Third Quarter 2016 Financial and Operating Results

In Q3 2016, the Fund reported earnings before income taxes of $11.2 million, excluding a non-cash impairment charge of $21 million. The earnings were down from earnings before income taxes of $13.1 million in Q3 2015. Q3 2016 results were adversely impacted by lower zinc metal premiums and lower by-product revenues, partially offset by higher sales volumes. For the nine months ended September 30, 2016, the Fund recorded earnings before income taxes of $12.3 million, excluding a non-cash impairment charge of $21 million reported in the quarter, compared to $48.9 million for the same period in 2015.

The $21 million non-cash impairment charge is primarily as a result of the recent significant tightening availability of zinc concentrate supply, that has put downward pressure on both current and expected future treatment charges for zinc smelters (see "Outlook for the Fund" below).

Adjusted Net Revenues in Q3 2016 were $65.9 million, an 8% increase over the $60.9 million in Q3 2015. The growth was largely due to an increase in zinc metal sales to 69,662 tonnes. The increase was offset by lower zinc metal premiums and by-product revenues stemming from the sale of copper products and sulphuric acid. Adjusted Net Revenues for the nine-month period ended September 30, 2016 were $202.7 million, down from $209.8 million in the same period of 2015. The year-over-year decline was due to a number of factors, including lower zinc metal premiums and lower by-product revenues.

Zinc metal sales in Q3 2016 were 69,662 tonnes, up 17% from 59,411 in Q3 2015. Zinc metal sales in the first nine months of 2016 were 203,856 tonnes, up 11% from the 183,167 tonnes sold in the same period of 2015.

Zinc metal production in Q3 2016 increased 3% to 67,815 tonnes from 65,800 tonnes in Q3 2015. Zinc metal production for the first nine months of 2016 was 204,731 tonnes, up 2% from 200,890 tonnes produced in the first nine months of 2015.

Based on its year-to-date performance, the Fund remains on track to meet its production and zinc metal sales of 265,000 to 275,000 tonnes for 2016.

Production cost before changes in inventory for the three months ended September 30, 2016 was $43.6 million, $0.3 million higher than the $43.3 million recorded for the same period in 2015. The increase was mostly due to higher energy costs reflecting higher production levels and higher contractor and other costs, partially offset by lower operating supplies costs. Production costs before changes in inventory for the nine months ended September 30, 2016 were $139.4 million, $0.2 million higher than the $139.2 million recorded in the same period of 2015. The increase was mostly due to higher operating supplies costs partly offset by contractor and other costs.

For the three months ended September 30, 2016, non-cash working capital increased by $36.4 million mostly due to an increase in inventories resulting from increasing zinc prices though partly offset by decrease of approximately 8,800 and 1,800 tonnes of zinc in concentrate inventory and zinc metal inventory, respectively. A $32.1 million increase in accounts receivable reflecting higher zinc prices also contributed to the increase in non-cash working capital.

Cash used in operating activities in the three months ended September 30, 2016 was $30.7 million, compared to cash used in operating activities of $2.2 million in Q3 2015. The increase in cash used was mainly due to a negative $36.4 million increase in non-cash working capital discussed above. Cash provided by operating activities in the first nine months of 2016 was $21.1 million, and included a negative $11.1 million increase in non-cash working capital due to an increase in accounts receivable and inventories partly offset by an increase in accounts payable. This compares to cash used in operating activities of $27.7 million in the same period last year.

As at September 30, 2016, the Fund's debt was $84.5 million (net of deferred financing fees), down from $92.8 million at the end of December 2015. The Fund's debt decreased primarily as a result of operating cash flow being greater than capital expenditures during the period.

Outlook for the Fund

"The near-term outlook for the Fund is positive given that we will continue to operate under the Supply and Processing Agreement through May 2017," said Ms. Carissimi. "In the interim, we will work to renew our collective bargaining agreement with our employees and also expect to achieve our production and zinc metal targets for the year of 265,000 to 275,000 tonnes."

The main challenge facing the Fund is the ability for the Processing Facility to continue to operate profitably after the expiry of the initial term of the Supply and Processing Agreement between the Partnership and Glencore Canada on May 2, 2017. As noted above, Glencore Canada has renewed the Supply and Processing Agreement for a five-year term that will end on May 2, 2022. Under the renewal, Glencore Canada will act as exclusive agent for the Partnership for the purchase of zinc concentrate and the Partnership will be required to purchase zinc concentrate at market terms.

Consequences of Market Terms

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 differ materially and, in addition, be subject to more volatility than under the current Supply and Processing Agreement.

Under market terms, concentrates are typically purchased on a spot basis or under an annual agreement. Declining spot treatment charges throughout 2016 and the reduction in the benchmark treatment charges established for 2016 are evidence of the growing tightness in the concentrate market. There has been an industry trend whereby more concentrate is being purchased on spot terms and it is expected that the zinc concentrate market will continue to tighten in the remainder of 2016 and 2017 as a result of several large mine closures as well as the expected global demand for zinc concentrate. As the zinc concentrate market continues to tighten, purchase conditions will likely be more unfavorable for the Processing Facility and other custom zinc smelters. While there can be no assurance, it is likely these conditions will impact the terms on which Glencore Canada, as Agent, will be able to source concentrate feed for the fund for the period starting in May 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 the transition to market terms for the period after May 2, 2017 and as previously announced, the Fund's financial results will differ materially in the second half of 2017 and beyond. Cash distributions of the Fund would also be negatively impacted if, as expected,, the Ordinary Units owned by Glencore Canada are exchanged for Priority Units as of May 2, 2017, resulting in the cessation of the subordination of distributions to Priority Units.

Third Quarter 2016 Results Conference Call:
When: Friday, November 11 at 9:30 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/8243

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

The conference ID is 8475670 and you will be prompted to provide your name and company.

The recording will be available until midnight on November 25, 2016.

A full version of the third 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 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 Nine months ended
September 30, September 30,
2016 2015 2016 2015
Zinc concentrate processed (tonnes) 130,055 134,808 394,809 386,432
Zinc secondary feed processed (tonnes) 4,218 4,804 9,351 16,840
Zinc grade (%) 53.3 52.6 52.2 53.0
Zinc recovery (%) 98.2 97.2 97.7 97.3
Zinc metal production (tonnes) 67,815 65,800 204,731 200,890
Zinc metal sales (tonnes) 69,662 59,411 203,856 183,167
Processing fee (cents/pound) 41.0 40.5 41.0 40.5
Realized zinc price (US$/pound) 1.10 0.94 0.96 1.03
Average LME zinc price (US$/pound) 1.02 0.84 0.88 0.93
By-product revenues ($ millions) 6.1 9.6 17.7 25.8
Copper in cake production (tonnes) 519 717 2,038 2,012
Copper in cake sales (tonnes) 545 552 2,089 1,769
Sulphuric acid production (tonnes) 108,545 108,160 328,089 307,046
Sulphuric acid sales (tonnes) 122,846 106,545 341,994 306,162
Average LME copper price (US$/pound) 2.17 2.38 2.14 2.59
Sulphuric acid netback (US$/tonne) 32 56 27 53
Average US/Cdn. exchange rate 1.31 1.31 1.32 1.26
* 1 tonne = 2,204.62 pounds
SELECTED FINANCIAL AND OPERATING INFORMATION
Three months ended
Sept. 30,
Nine months ended
Sept. 30,
($ thousands) 2016 2015 2016 2015
Statements of Comprehensive Income Information
Revenues 200,202 183,210 529,082 558,043
Raw material purchase costs 130,000 98,833 344,073 314,002
Revenues less raw material purchase costs 70,202 84,377 185,009 244,041
Other expenses:
Production 45,696 39,270 139,612 127,386
Selling and administration 5,881 5,781 18,409 17,740
Foreign currency loss (gain) 1,852 14,122 (10,133 ) 24,428
Derivative financial instruments (gain) loss (2,721 ) 3,166 1,463 (1,897 )
Depreciation of property, plant and equipment 6,939 7,101 20,850 22,308
Rehabilitation expense (recovery) 491 447 (307 ) 1,085
Impairment of non-financial assets 21,000 - 21,000 -
(Loss) earnings before finance costs and income taxes (8,936 ) 14,490 (5,885 ) 52,991
Finance costs, net 912 1,361 2,822 4,113
(Loss) earnings before income taxes (9,848 ) 13,129 (8,707 ) 48,878
Current and deferred income tax (recovery) expense (2,370 ) 2,942 (2,688 ) 10,614
(Loss) earnings attributable to Unitholders and Non-controlling interest (7,478 ) 10,187 (6,019 ) 38,264
Distributions to Unitholders 2,812 4,687 10,935 14,060
(Decrease) increase in net assets attributable to Unitholders
and Non-controlling interest (10,290 ) 5,500 (16,954 ) 24,204
Other comprehensive (loss) gain (71 ) 701 (7,524 ) 1,847
Comprehensive (loss) income (10,361 ) 6,201 (24,478 ) 26,051
Statements of Financial Position Information Sept. 30, 2016 Dec 31, 2015
Cash 1,468 1,878
Inventories 182,403 171,086
Accounts receivable 117,654 87,909
Property, plant and equipment 182,765 211,542
Total assets 503,297 480,331
Accounts payable and accrued liabilities 111,273 59,669
Total bank and other loans 84,536 92,836
Total liabilities excluding net assets attributable to unitholders 248,241 200,797
Three months ended Sept. 30, Nine months ended Sept. 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 8,515 15,142 43,138 49,768
Cash distributions (2,812 ) (4,687 ) (10,935 ) (14,060 )
Net change in non-cash working capital items (36,405 ) (12,655 ) (11,145 ) (63,419 )
Cash (used in) provided by operating activities (30,702 ) (2,200 ) 21,058 (27,711 )
Cash used in investing activities (3,421 ) (7,437 ) (12,851 ) (19,537 )
Cash provided by (used in) financing activities 33,765 9,083 (8,617 ) 46,420
Net decrease in cash (358 ) (554 ) (410 ) (828 )

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