Noranda Income Fund (TSX:NIF-UN.TO) (the "Fund") today reported its financial results for the three-month period ended June 30, 2019. Except where otherwise indicated, all amounts in this press release are expressed in US dollars.
Q2 2019 Financial and Operating Overview
-- Loss before income taxes of $0.9 million in Q2 2019 compared to earnings before income taxes of $6.1 million in Q2 2018.
-- Adjusted EBITDA of $(7.5) million in Q2 2019 compared to Adjusted EBITDA of $7.8 million in Q2 2018.
-- Zinc metal production decreased 6% to 62,226 tonnes from 66,325 tonnes in Q2 2018.
-- Zinc metal sales totaled 62,233 tonnes, down 11% from 69,800 tonnes in Q2 2018.
-- Stronger by-product revenues from the sale of copper in cake and sulphuric acid were $8.4 million, up from $7.4 million for Q2 2018.
-- Unit production costs increased by 21% from Q2 2018 due to production challenges.
-- Inventories decreased to $173.2 million at quarter end down from $208.5 million at previous quarter end as off-shore inventory was consumed and no vessels were received.
"Production in the second quarter was impacted by unplanned maintenance events and limitations in filtration capacity resulting in lower production levels. We are adjusting our feed mix and continue to focus on our process optimization efforts," said Liana Centomo, the Fund's Chief Executive Officer. "As a result of the impact of these continued challenges on our production levels, coupled with some unplanned maintenance in the second quarter, we are revising our production and sales estimate for 2019 to a range of 255,000 to 265,000 tonnes. We are confident that we will meet this new guidance range, as we continue to evaluate medium to longer-term modifications to our operations to adjust to the processing of higher volumes of offshore zinc concentrate which generally contains higher levels of impurities."
Second Quarter 2019 Financial and Operating Results
Loss before income taxes was $0.9 million in Q2 2019 compared to earnings before income taxes of $6.1 million in Q2 2018. This reflects lower production volumes, zinc prices and commercial terms compared to the second quarter of 2018, which was positively impacted by the processing of opening cathode inventories. Production challenges due to increased impurity levels and unplanned maintenance negatively impacted volumes processed and zinc sales in the second quarter. Adjusted EBITDA for the second quarter of 2019 was impacted for the same reasons.
Production costs before changes in inventory in Q2 2019 were $38.4 million, $4.6 million higher than the $33.8 million recorded for the same period in 2018. This increase was a result of higher energy and operating supplies costs, mainly due to unplanned maintenance and an increase in the use of reagents required to treat solutions through the water treatment plant as a result of higher than normal precipitations and lower production volumes.
Unit production costs were $617 per tonne in Q2 2019 compared to $510 per tonne in the comparable period in 2018, a combination of higher costs and lower production volumes.
As at June 30, 2019, the Fund's debt was $128.8 million, down from $133.7 million at the end of December 2018. The Fund's cash as at June 30, 2019 increased to $1.9 million from $0.7 million as at December 31, 2018. The Fund's debt decreased as a result of cash provided by operating activities during the period.
Outlook for the Fund
According to industry analysts such as Wood Mackenzie and CRU, the zinc concentrate market tightness that began in 2016 continued throughout 2017 and 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.
Wood Mackenzie has reported that as a result of the market tightness, Chinese smelters curtailed production. A widespread crackdown from China's environmental agencies has resulted in further production decreases and, in some cases, the closure of smelters. As per Wood Mackenzie, the indicative spot treatment charges on Chinese imported concentrates rose to $187 per tonne in December 2018, $257 per tonne in March 2019 and $270 per tonne in June 2019. Wood Mackenzie also forecasts Chinese smelter growth and increased mine production in 2019.
On February 28, 2019, the Fund reached an agreement with Glencore on the terms under which zinc concentrate will be purchased and zinc metal will be sold for the period of May 1, 2019 to April 30, 2020. While treatment charges had rebounded in favour of smelters in the last several months, the pricing environment continued to threaten to be volatile. In this context, the Fund negotiated a combination of 50% of the concentrate feed at a fixed treatment charge and the remaining 50% at a variable treatment charge that will reflect market movement during that period, in addition to other provisions in its new agreement with Glencore. The market terms of the agreement have not been disclosed, as these are deemed commercially sensitive as reflected in the contractual requirement and market practice that the pricing information be kept confidential.
The Fund does not expect to realize the full impact of the terms of its February 2019 agreement until all inventory purchased prior to May 1, 2019 has been fully processed. We expect these inventories to be largely consumed by year end.
Production and Sales Outlook
The Fund's estimates for 2019 zinc metal production and sales, as revised effective July 22, 2019, are as follows:
Production: 255,000 to 265,000 tonnes Sales: 255,000 to 265,000 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.
Illustrative Adjusted EBITDA
In the first quarter of 2019, the Fund provided an Illustrative Adjusted EBITDA range to help illustrate the impact of its recently negotiated terms. The Illustrative Adjusted EBITDA range has been updated to reflect revised production and sales guidance of 255,000 and 265,000 tonnes of zinc. All other assumptions, summarized below, remain unchanged. As a result, Illustrative Adjusted EBITDA for a full twelve-month period would be between $39 million and $67 million. Note that it excludes any impact of concentrate purchased under the terms of the previous contract.
Illustrative Adjusted EBITDA assumptions: Zinc price (US$ per pound) $1.13 to $1.36 US$/CAD$ exchange rate $0.77 Zinc metal production and sales (tonnes) 255,000 to 265,000 Zinc concentrate and secondary feed processed (tonnes) 505,000 to 525,000
Assuming capital expenditures between $30 million and $35 million within the same twelve-month period, cash flow from operations after capital expenditures would be between $4 million and $37 million.
Note that the Illustrative Adjusted EBITDA range provided is an estimate that may not be indicative of future results, which will be impacted by future prices of zinc metal, variations in treatment charges as well as other factors such as levels of production, foreign exchange, zinc premiums, by-product prices and production costs. Nor is Illustrative Adjusted EBITDA to be construed as guidance for the 2019 calendar year results as the contractual period and calendar year are not coterminous. Further, the actual achieved cash flow within reporting periods may differ significantly due to changes in working capital including changes in financial derivative instruments among other balances and capital expenditures.
Quality and Availability of Zinc Concentrates
The global quality of zinc concentrates has been declining in terms of zinc grade and the level of impurities contained within. The impact on a smelter is an increase in the level of residues to be treated per tonne of zinc produced. The Fund is currently assessing the impact of this global trend on its operating capacities to determine what capital investments could be made to improve production capacity and overall profitability.
Concentrate inventory levels continue to be variable, due to large and irregular offshore deliveries of concentrate and the requirement to mix feed qualities to maximize the Processing Facility's production. The availability of domestic concentrates, which tend to have lower levels of impurities, could also impact production and inventory levels.
Second Quarter 2019 Results Conference Call
When: July 23, 2019 at 8:30 a.m. ET
Dial-in: 1 (877) 291-4570 (toll-free North America) or 647-788-4919
Webcast: https://snwebcastcenter.com/webcast/nifq22019
or http://www.norandaincomefund.com/investor/conference.php
The recording will be available approximately until midnight on July 30, 2019, conference ID 8989185 at 1-800-585-8367 (toll-free North America) or 416-621-4642.
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, Quebec. 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.
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,
2019 2018 2019 2018
Zinc concentrate and secondary feed processed (tonnes) 122,928 127,479 255,520 254,965
Zinc grade (%) 52.3 51.8 52.3 51.8
Zinc recovery (%) 96.5 97.4 96.4 97.3
Zinc metal production (tonnes) 66,226 66,325 126,880 135,186
Zinc metal sales (tonnes) 62,233 69,800 126,879 139,436
Zinc cathode converted into zinc metal - 5,827 - 5,827
Realized zinc price (US$/pound) 1.32 1.48 1.31 1.54
Average LME zinc price (US$/pound) 1.25 1.41 1.24 1.48
By-product revenues ($ millions) 8.4 7.4 16.0 13.0
Copper in cake production (tonnes) 614 497 1,382 1,155
Copper in cake sales (tonnes) 676 663 1,219 1,094
Sulphuric acid production (tonnes) 95,152 106,142 192,473 210,313
Sulphuric acid sales (tonnes) 93,661 115,585 184,590 209,626
Average LME copper price (US$/pound) 2.77 3.12 2.80 3.14
Sulphuric acid netback (US$/tonne) 70 42 66 41
Average CAD/US exchange rate 0.75 0.78 0.75 0.78
* 1 tonne = 2,204.62 pounds
SELECTED FINANCIAL AND OPERATING INFORMATION
Three months ended Six months ended
June 30, June 30,
($ thousands) 2019 2018 2019 2018
Statements of Comprehensive (Loss) Income Information
Net revenues 179,696 243,771 366,591 473,785
Raw material purchase costs 160,598 199,232 298,067 383,059
Derivative financial instruments (gain) loss (29,511 ) (11,858 ) 740 (27,284 )
Net revenues less raw material purchase costs and derivative financial instruments (gain) loss 48,609 56,397 67,784 118,010
Other expenses:
Production 37,865 39,025 70,270 74,016
Selling and administration 4,140 4,054 7,896 8,240
Foreign currency loss (gain) 393 (168 ) 448 (798 )
Depreciation of property, plant and equipment 3,784 4,787 7,581 8,706
Rehabilitation expense (recovery) 1,100 17 1,687 (133 )
Earnings (loss) before finance costs and income taxes 1,327 8,682 (20,098 ) 27,979
Finance costs, net 2,225 2,570 3,883 5,267
(Loss) earnings before income taxes (898 ) 6,112 (23,981 ) 22,712
Current and deferred income tax (recovery) charge (873 ) 2,359 (4,829 ) 4,914
(Loss) earnings attributable to Unitholders and Non-controlling interest (25 ) 3,753 (19,152 ) 17,798
Distributions to Unitholders - net of tax recovery - - - 0
(Decrease) increase in net assets attributable to Unitholders and Non-controlling interest (25 ) 3,753 (19,152 ) 17,798
Other comprehensive income - 1,718 - 1,547
Comprehensive (loss) income (25 ) 5,471 (19,152 ) 19,345
Statements of Financial Position Information June 30, 2019 Dec. 31, 2018
Cash 1,913 732
Inventories 173,187 149,916
Accounts receivable 101,903 163,635
Income taxes receivable 6,250 -
Property, plant and equipment 106,805 106,807
Total assets 409,407 439,177
Accounts payable and accrued liabilities 92,217 97,707
Deferred revenues 779 2,412
ABL revolving facility 128,794 133,672
Total liabilities excluding net assets attributable to Unitholders 263,207 269,912
Three months ended Six months ended
June 30, June 30,
Statements of Cash Flows Information 2019 2018 2019 2018
Cash (used in) provided by operating activities before cash
distributions and net change in non-cash working capital items (12,851 ) 8,666 (9,626 ) 14,544
Cash distributions - - (1,099 ) -
Net change in non-cash working capital items 20,040 (11,570 ) 25,381 (23,792 )
Cash provided by (used in) operating activities 7,189 (2,904 ) 14,656 (9,248 )
Cash used in investing activities (3,823 ) (4,430 ) (8,597 ) (8,397 )
Cash (used in) provided by financing activities (1,594 ) 7,427 (4,878 ) 16,743
Effect of functional currency change - - - -
Net increase (decrease) in cash 1,772 93 1,181 (902 )
Net Revenues Reconciled to Adjusted Net Revenues For the three months ended June 30 ($ millions) 2019 2018 Net Revenues $ 48.6 $ 56.4 Change in fair value of embedded derivatives (2.0 ) (1.3 ) Decrease in inventory margin net of change in fair value of embedded derivatives (12.1 ) (4.0 ) Adjusted Net Revenues $ 34.5 $ 51.1
-- Adjusted EBITDA is used by the Fund as an indication of cash generated from operations. Adjusted EBITDA is not a recognized measure under International Financial Reporting Standards and therefore the Fund's method of calculating Adjusted EBITDA is unlikely to be comparable to methods used by other entities. The Fund's Adjusted EBITDA is calculated by starting from earnings before finance costs and income taxes and adjusting for non-cash items such as depreciation, gain or loss on the sale of assets and changes in fair value of embedded derivatives. In addition, an adjustment is made to reflect the net change in the rehabilitation liabilities (reclamation (recovery) expense less site restoration expenditures), the increase (decrease) in inventory margin and the net change in employee benefits (non-cash employee benefit expenses less employer contributions).
-- Unit production costs is not a recognized measure under International Financial Reporting Standards and therefore the Fund's method of calculating unit production costs may not be comparable to methods used by other entities. Unit production costs means production costs divided by total tonnes of zinc produced. The Fund uses unit production costs as it believes it provides the best indication of the costs of production in a period and provides the ability to compare production costs in different periods.
For further information, please contact:
Paul Einarson,
Chief Financial Officer of Canadian Electrolytic Zinc Limited, Noranda Income Fund's Manager
Tel: 514-745-9380
info@norandaincomefund.com
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