Noranda Income Fund Reports Second Quarter 2018 Financial Results
SALABERRY-DE-VALLEYFIELD, Québec, July 24, 2018 (GLOBE NEWSWIRE) — Noranda Income Fund (TSX:NIF.UN) (the “Fund”) today reported its financial results for the three-month period ended June 30, 2018. All amounts are in U.S. currency unless otherwise stated.
2018 Second Quarter Financial and Operating Highlights
- Earnings before income taxes were $6.1 million, down 18% from $7.4 million in Q2 2017 as the lower zinc metal sales volumes were partially offset by the positive impact of the decrease in inventory margin. The lower sales volume was due to the one time sale of zinc metal inventory to Glencore Canada in the second quarter of 2017. The lower prices were the result of the lower Net Revenues from market terms compared to the prior processing fee, partially offset by higher by-product prices and premiums.
- Zinc metal production increased 31% to 66,325 tonnes from 50,521 tonnes in Q2 2017 reflecting the return to full capacity in 2018 following the labour disruption that occurred in 2017.
- Zinc metal sales totalled 69,800 tonnes, down 6% from 74,447 tonnes in Q2 2017. In Q2 2017, the Fund sold 27,000 tonnes of its inventory to Glencore Canada.
- By-product revenue from the sale of copper in cake and sulphuric acid was $7.4 million, up from $4.1 million for Q2 2017.
- Unit production costs in Canadian dollars declined by 6.4% from Q2 20161.
- The Fund is currently finalizing an increase to the size of the asset-backed revolving credit facility (“ABL Facility”) from $150 million to $180 million and we expect this increase to be in place shortly.
“The second quarter of 2018 was the first full quarter during which the processing facility operated at normal rates that resulted in an increase to zinc metal production over the same period in 2017,” said Ms. Eva Carissimi, President and Chief Executive Officer of Canadian Electrolytic Zinc Limited, Noranda Income Fund’s manager. “Tightness in the zinc concentrate market has resulted in low treatment charges, negatively impacting our Net Revenues. As a result, we continue to focus our efforts on achieving operating efficiencies and reducing costs, as demonstrated by a six percent reduction in unit production costs when compared to similar production rates achieved in Q2 2016.”
Second Quarter 2018 Financial and Operating Results
Earnings before income taxes were $6.1 million in Q2 2018, compared to earnings before income taxes of $7.4 million in Q2 2017. This decrease, largely due to lower zinc metal sales volumes, was partially offset by the positive impact of the decrease in inventory margin.
Adjusted Net Revenues2 for Q2 2018 was $51.1 million, a 25% decrease from $68.0 million for Q2 2017. The decrease was mainly due to lower zinc metal sales and lower Net Revenues from market terms compared to the prior processing fee, partially offset by higher by-product sales.
Zinc metal production in Q2 2018 increased by 31% to 66,325 tonnes from 50,521 tonnes in Q2 2017.
Zinc metal sales in Q2 2018 decreased by 6% to 69,800 tonnes from 74,447 tonnes sold in Q2 2017. In Q2 2017, the Fund sold 27,000 tonnes of its inventory to Glencore Canada.
Production costs before change in inventory in Q2 2018 were $33.8 million compared to $22.4 million in Q2 2017. The $11.4 million increase was a result of higher labour and operating supplies due to normal operations during the quarter compared to the labour disruption that reduced operating capacity in the three months ended June 30, 2017. These higher costs were partially offset by lower energy costs that resulted from the lower electricity costs in 2018 from the Quebec electricity rate reduction program.
Unit production costs were CAD$655 per tonne in Q2 2018 compared to CAD$700 in the comparable period in 2016. Production cost comparison to 2017 is not meaningful due to the impact of the labour conflict on 2017 production and cost profile.
Cash used in operating activities in Q2 2018 was $2.9 million, including a negative $11.6 million increase in non-cash working capital due to a decrease in accounts payable and accrued liabilities and a decrease in deferred revenues, partially offset by a decrease in inventories. This is compared to $52.5 million cash provided by operating activities during the same quarter last year which was positively impacted by a $30.2 million decrease in non-cash working capital due to a decrease in inventories, partially offset by an increase in accounts receivable and a reduction in accounts payable.
As at June 30, 2018, the Fund’s debt was $125.4 million, up from $108.7 million at the end of December 2017. The Fund’s debt increased mostly due to the increase in non-cash working capital during the period.
The Manager has informed the Fund that Michael Boone will transition from his current role as Vice-President and Chief Financial Officer (“CFO”) back into Glencore Canada effective July 31, 2018. Mr. Boone has held this position since the inception of the Fund back in May 2002.
Effective August 1, 2018, Paul Einarson will assume the role of CFO for the Manager. Paul Einarson joined Glencore Canada in January 2014 in the Zinc Division with finance responsibilities at both the corporate and operations levels. Mr. Einarson was a Senior Audit Manager with PricewaterhouseCoopers and spent several years as a Senior Director of Finance with Molson Inc. Since 2005, Mr. Einarson has focused on the resource sector holding senior management positions in various publicly traded companies. Mr. Einarson holds a Bachelor of Commerce Honours degree from the University of Manitoba and is a Chartered Professional Accountant (CPA).
Outlook for the Fund
The main challenge facing the Fund is the ability for the Processing Facility to continue to operate profitably under current market terms.
According to industry analysts such as Wood Mackenzie and CRU, the zinc concentrate market tightness that began in 2016 continued throughout 2017 and into 2018. The market tightness was a result of several large mine closures in recent years and the global demand for zinc concentrate leading to a shortage of supply. Spot treatment charges declined from $175 per dry metric tonne in December 2015 to $40 per dry metric tonne in December 2016. With the continued tightness in the zinc concentrate market, spot treatment charges averaged approximately $38 per dry metric tonne throughout 2017 and only averaged approximately $20 to $25 per dry metric tonne in the first half of 2018. Reflecting the tightness in the concentrate market, the market pricing terms were not as favourable to the Fund as the fixed pricing enjoyed by the Fund from its inception to May 2, 2017. Miners are typically able to negotiate a lower treatment charge when the zinc concentrate market is tight as it increases competition among smelters for concentrate supply.
Despite the tight market conditions, the Fund was able to secure supply of the required qualities and quantities of zinc concentrates via agreements with Glencore Canada for the 12 month period ended April 30, 2018, and subsequently for a four-year period from May 2018 to April 2022. Under the four-year supply contract, the treatment charges for the supply will be negotiated on an annual basis based on market conditions with the treatment charge for the 12 month period May 2018 to April 2019 being a fixed treatment charge.
Production and Sales Outlook
The Fund’s estimates for 2018 zinc metal production and sales have been revised upwards:
|Production:||255,000 to 265,000 tonnes|
|Sales:||255,000 to 265,000 tonnes|
|Cathode processing:||20,000 tonnes|
The Fund’s ability to meet the targets identified above is subject to various risks, uncertainties and assumptions, some of which can be found in “Forward-Looking Information” below.
Second Quarter 2018 Results Conference Call
When: July 24, 2018 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.php or click on this link: https://edge.media-server.com/m6/p/thuc8uhp.
Conference Call Replay
The recording will be available until midnight on August 7, 2018.
Dial in number: 416-621-4642 or
Toll-free North American number: 1-800-585-8367
The conference ID is 4448539 and you will be prompted to provide your name and company.
A full version of the second quarter 2018 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.
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 US 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,|
|Zinc concentrate and secondary feed processed (tonnes)||127,479||98,437||254,965||220,494|
|Zinc grade (%)||51.8||52.1||51.8||52.1|
|Zinc recovery (%)||97.4||97.0||97.3||97.0|
|Zinc metal production (tonnes)||66,325||50,521||135,186||100,569|
|Zinc metal sales (tonnes)||69,800||74,447||139,436||123,963|
|Zinc cathode converted into zinc metal||5,827||-||5,827||-|
|Realized zinc price (US$/pound)||1.48||1.24||1.54||1.29|
|Average LME zinc price (US$/pound)||1.41||1.18||1.48||1.22|
|By-product revenues ($ millions)||7.4||4.1||13.0||5.8|
|Copper in cake production (tonnes)||497||471||1,155||965|
|Copper in cake sales (tonnes)||663||537||1,094||865|
|Sulphuric acid production (tonnes)||106,142||81,666||210,313||179,732|
|Sulphuric acid sales (tonnes)||115,585||94,858||209,626||189,285|
|Average LME copper price (US$/pound)||3.12||2.57||3.14||2.61|
|Sulphuric acid netback (US$/tonne)||42||27||41||17|
|Average CAD/US exchange rate||0.78||0.75||0.78||0.75|
|* 1 tonne = 2,204.62 pounds|
|SELECTED FINANCIAL AND OPERATING INFORMATION|
|Three months ended June 30,
||Six months ended June 30,
|Statements of Comprehensive Income Information|
|Raw material purchase costs||199,232||154,823||383,059||256,458|
|Derivative financial instruments (gain) loss||(11,858||)||1,711||(27,284||)||724|
|Net revenues less raw material purchase costs and derivative financial
instruments (gain) loss
|Selling and administration||4,054||4,875||8,240||11,047|
|Foreign currency gain||(168||)||(416||)||(798||)||(1,549||)|
|Depreciation of property, plant and equipment||4,787||6,559||8,706||10,552|
|Rehabilitation expense (recovery)||17||154||(133||)||245|
|Earnings before finance costs and income taxes||8,682||8,557||27,979||13,695|
|Finance costs, net||2,570||1,138||5,267||2,167|
|Earnings before income taxes||6,112||7,419||22,712||11,528|
|Current and deferred income tax expense||2,359||1,459||4,914||2,683|
|Earnings attributable to Unitholders and Non-controlling interest||3,753||5,960||17,798||8,845|
|Distributions to Unitholders – net of tax recovery||-||-||-||711|
|Increase in net assets attributable to Unitholders and Non-controlling
|Other comprehensive income||1,718||4,640||1,547||5,959|
|Statements of Financial Position Information||June 30, 2018||Dec. 31, 2017|
|Income taxes receivable||–||9,918|
|Property, plant and equipment||103,608||104,579|
|Accounts payable and accrued liabilities||101,825||124,210|
|Total liabilities excluding net assets attributable to Unitholders||305,196||343,032|
|Three months ended June 30,
||Six months ended June 30,
|Statements of Cash Flows Information||2018||2017||2018||2017|
|Cash provided by operating activities before cash
distributions and net change in non-cash working capital items
|Net change in non-cash working capital items||(11,570||)||30,212||(23,792||)||(16,733||)|
|Cash (used in) provided by operating activities||(2,904||)||52,494||(9,248||)||6,066|
|Cash used in investing activities||(4,430||)||(2,637||)||(8,397||)||(6,327||)|
|Cash provided by (used in) financing activities||7,427||(48,381||)||16,743||222|
|Effect of functional currency change||-||(38||)||-||(64||)|
|Net increase (decrease) in cash||93||1,438||(902||)||(103||)|
|Net Revenues Reconciled to Adjusted Net Revenues|
|For the three months ended June 30|
|Change in fair value of embedded derivatives||(1.3||)||4.4|
|(Decrease) increase in inventory margin net of change in fair value of embedded derivatives||(4.0||)||4.8|
|Adjusted Net Revenues||$||51.1||$||68.0|
For further information, please contact:
Michael Boone, Vice President & Chief Financial Officer of Canadian Electrolytic Zinc Limited, Noranda Income Fund’s Manager
1 Production costs compared to 2017 is not meaningful due to the impact of the labour conflict on 2017 production and cost profile.
2 Adjusted Net Revenues means revenues less raw material purchase costs plus (minus) derivative financial instruments gain (loss) (“Net Revenues”) excluding change in fair value of embedded derivatives and after the change in the inventory margin. Adjusted Net Revenues is reconciled to Adjusted Net Revenues below. The Fund uses Adjusted Net Revenue as it believes it provides the best indication of the net revenues generated in a period and provides the ability to compare net revenues generated in different periods.