Noranda Income Fund Announces Third Quarter 2020 Results and Extension of Agreements With Glencore Canada

Noranda Income Fund Announces Third Quarter 2020 Results and Extension of Agreements With Glencore Canada




Noranda Income Fund Announces Third Quarter 2020 Results and Extension of Agreements With Glencore Canada

TORONTO, Nov. 05, 2020 (GLOBE NEWSWIRE) — Noranda Income Fund (TSX:NIF.UN) (the “Fund”) today reported its financial results for the third quarter ended September 30, 2020. The Fund also announced the extension of its exclusive agreements with Glencore Canada for the purchase of zinc concentrate and the sale of zinc metal for an additional period of three years through to April 30, 2025. In addition, the Supply and Processing Agreement (“SPA”) non-renewal notice period has been amended to 540 days before April 30, 2025 or any subsequent renewal date thereafter, an increase from the 180 days required by the original agreement. Except where otherwise indicated, all amounts in this press release are expressed in US dollars.

Third Quarter 2020 Highlights

  • Loss before income taxes was $4.1 million in the third quarter of 2020 compared to earnings before income taxes of $15.5 million in the third quarter of 2019.
  • Adjusted EBITDA1 was $14.3 million in the third quarter of 2020 compared to Adjusted EBITDA of $20.4 million in the third quarter of 2019.
  • Zinc metal production decreased 2% to 64,748 tonnes compared to 66,032 tonnes in the third quarter of 2019.
  • Zinc metal sales decreased 2% to 64,749 tonnes, compared to 66,016 tonnes in the third quarter of 2019.
  • Sulphuric acid sales decreased to 93,588 tonnes in the third quarter of 2020, compared to 106,609 tonnes in the third quarter of 2019.
  • In the quarter, the Fund entered into a senior secured metal liability agreement with BaseCore Metals LP (“BaseCore”) in which BaseCore agrees to make advance payments of $40 million against the future purchase of zinc. The proceeds of the liability will be used to improve the Processing Facility’s filtration and cooling processes in order to support increased zinc production capacity. The Fund received $12 million of the advance payments on closing of the agreement.

“The Fund continues to maintain a rigorous approach to operating as the COVID-19 pandemic persists, to ensure the health of our onsite workforce and to maintain our operating cadence. While measures implemented have added costs and complexity, sales and production volumes in the third quarter remained stable, construction work on our strategic expansion projects began, and we remain on track to achieve our 2020 sales and production targets. I continue to be proud of the flexibility, commitment and strong effort from our employees, contractors and suppliers,” said Liana Centomo, Chief Executive Officer of Canadian Electrolytic Zinc Limited, the Fund’s manager.

Ms. Centomo added, “Zinc prices were volatile in the quarter and trended upwards notwithstanding the curtailed demand, impacted by the broader financial markets. Although market-based treatment charges decreased dramatically in the last two months of the quarter, the Fund’s realized treatment charges decreased less sharply as a substantial amount of the concentrate consumed in the quarter was from inventory purchased during periods when market treatment charges were higher. In the current context, we anticipate continued volatility in zinc prices and treatment charges in the near term.”

“We are extremely pleased that the agreement with Glencore Canada for the exclusive purchase of concentrate and the sale of zinc metal has been extended through to April 30, 2025. The extension avoids any uncertainty regarding our source of supply through to that period and allows us to put all of our focus on our operations in these unusual times and safely moving forward with our strategic expansion projects,” said Ms. Centomo.

“Confirming the extension of our agreements with Glencore Canada at this time represents an important development for the Fund, bringing added stability as we move forward with strategic expansion projects that aim to strengthen our processing facility’s market positioning,” said Anthony Lloyd, Chairman of the Board of Trustees of Noranda Operating Trust. “We are also very pleased with the amended non-renewal notice period and Glencore Canada’s undertaking to provide transitional assistance. This provides the Fund with a longer period of time to plan an orderly transition in the event that Glencore Canada elects for the agreements not to be automatically renewed.”

Third Quarter 2020 Financial and Operating Results
The Fund reported a loss before income taxes of $4.1 million for the three months ended September 30, 2020 compared to earnings before income taxes of $15.5 million in the same period last year.

Adjusted Net Revenues2 were 49.3 million for the three months ended September 30, 2020 compared to $58.0 million in the same period last year. Lower Adjusted Net Revenues in the third quarter of 2020 primarily reflect slightly lower volumes and lower zinc prices. The third quarter of 2020 was also negatively impacted by lower sulphuric acid prices at $55 per tonne compared to $62 per tonne in the same period of 2019.

Adjusted EBITDA for the three months ended September 30, 2020 was $14.3 million compared to $20.4 million in the third quarter of 2019. The lower Adjusted EBITDA for the three months ended September 30, 2020 primarily reflects slightly lower volumes, lower zinc prices and lower sulphuric acid prices when compared to the same period in 2019.

Production costs before change in inventory in the three months ended September 30, 2020 were $31.4 million, $2.1 million lower than the $33.5 million recorded for the same period in 2019. The lower production costs in 2020 were a result of lower operating supplies to a reduction in the use of reagents and lower maintenance supplies compared to 2019.

Unit production costs3 were $485 per tonne in the three months ended September 30, 2020 compared to $507 per tonne in the comparable period in 2019, reflecting the decreased production costs offset by lower production volumes.

Cash used in operating activities for the three months ended September 30, 2020 was $3.1 million, including a positive $18.6 million decrease in non-cash working capital due to an increase in accounts payable and a decrease in inventories, partially offset by an increase in accounts receivables. In the same period for 2019, cash provided by operating activities was $20.9 million, which was positively impacted by a $0.5 million decrease in non-cash working capital due to a decrease in inventories and an increase in accounts payables and accrued liabilities partially offset by an increase in accounts receivables.

The Fund’s cash as at September 30, 2020 decreased to $0.5 million from $1.1 million as at December 31, 2019.

As at September 30, 2020, there was $170.1 million drawn down on the ABL (including letters of credit of $18.6 million (CAD$24.8 million)), leaving an excess availability of $9.9 million.

On July 31, 2020, the Fund entered into senior secured metal liability with BaseCore which is considered to be a related party as Glencore Canada Corporation is a limited partner in BaseCore. BaseCore agreed to make advance payments of $40 million against the purchase of zinc under the agreement. The proceeds of the liability will be used to improve the Processing Facility’s filtration and cooling processes in order to support increased zinc production capacity. The Fund received $12 million of the advance payments on closing of the agreement with the remainder to be paid upon achievement of certain milestones.

Extension of Agreements with Glencore Canada
In January 2017 and March 2018, the Fund entered into agreements pursuant to which Glencore Canada, as principal, will supply the Fund with all of its zinc concentrate requirements and purchase all of the Fund’s metal for the twelve-month period ended April 30, 2018 and the four-year period ending April 30, 2022, which aligns with the end of the current term of the SPA.

Today, the Fund extended its exclusive agreements with Glencore Canada for the purchase of zinc concentrate and the sale of zinc metal for an additional period of three years through to April 30, 2025. In addition, the SPA has been amended so that its current term will end on April 30, 2025, and it will renew automatically for five-year terms thereafter, unless Glencore Canada provides a written non-renewal notice at least 540 days prior to the renewal date, an increase from the 180 days required by the original agreement. Corresponding amendments have been made to the Operating and Management Agreement, the Management Services Agreement and the Administration Agreement. In the event that Glencore Canada provides a written non-renewal notice, Glencore Canada is to use reasonable commercial efforts to assist the Fund in putting into place such arrangements as may be reasonably required by the Fund to secure zinc concentrate and market the zinc metal it produces, following the expiry of the SPA.

The extension and amendments have been unanimously approved by the independent trustees of Noranda Operating Trust, after consultation with their independent industry consultants and legal advisors.

Asset-based Revolving Credit Facility
On May 13, 2020, the Fund announced the amendment of its asset-based revolving credit facility (“ABL”) for a term to maturity of July 20, 2023 or February 1, 2022 if the Supply and Processing Agreement with Glencore Canada is not renewed past May 1, 2022. As a result of the extension of the term of the Supply and Processing Agreement announced today and subject to the approval of the ABL lenders, the maturity date for the ABL becomes July 20, 2023.

Potential impact of COVID-19
The World Health Organization (WHO) declared the novel coronavirus (COVID-19) to be a pandemic on March 11, 2020. Major health issues and pandemics, such as COVID-19, may adversely affect national or global economies, global trade and commercial activity, and could result in a general or sharp decline in economic activity.

As a result of COVID-19, many companies and local and national governments have imposed restrictions, such as closures, quarantines, cancellations and travel restrictions. Although additional costs have been incurred as a result, impacts on our supply chain have not resulted in production reduction and the sale and delivery of zinc and by-products have not been significantly impacted. Recently, restrictions have begun to be lifted by Quebec Public Health officials and certain jurisdictions have seen increases in the number of cases which may result in the reinstatement of previous restrictions. The Fund has contingency plans in place to minimize impact to operations which include strategies to adapt to various potential scenarios, including but not limited to securing adequate resources in terms of manpower, supplies, logistics and concentrate, however the Fund may incur losses or expenses relating to such events outside of its control despite maintaining measures within the Processing Facility. Given the evolving and dynamic nature of COVID-19, it is difficult to predict how significant or adverse the impact of the pandemic may be on the Fund’s business, its operations, and the market for its securities.

Outlook for the Fund
As per Wood Mackenzie, the indicative spot treatment charges on Chinese imported concentrates fell from $305 per tonne in December 2019 to $265 per tonne in March 2020, continued to fall in the second quarter but rebounded slightly to $170 per tonne in June 2020 and $185 per tonne in July 2020 before sharply declining in August and September 2020 to $150 per tonne and $115 per tonne, respectively.

The general global economic disruption and uncertainty caused by the COVID-19 pandemic resulted in a decrease in zinc prices throughout the first half of the year. Both mine supply of concentrate and refined zinc metal consumption decreased during the year, but smelter production has been relatively unaffected with modest growth forecasts being published for 2020. Concentrate supply in the market is expected to be an issue for the remainder of 2020 as mines continue to experience disruptions due to COVID-19 outbreaks and as such the current tightness in the concentrate market is expected to continue negatively impacting treatment charges. Analysts are expecting mine production to improve over the next two years and a return to a situation where mine production exceeds smelter consumption. The refined zinc market is also expected to remain in surplus but zinc prices are expected to be supported by investor confidence, infrastructure spending and a weaker US dollar.

Given the evolving and dynamic nature of COVID-19, it is difficult to predict how significant or adverse the impact of the pandemic may be on the Fund’s business, its operations and the market for its securities.

2020 Production and Sales Estimates
The Fund’s estimates for its 2020 zinc metal production and sales continues to be between 260,000 to 270,000 tonnes. The Fund’s ability to meet these targets is subject to various risks, uncertainties and assumptions, some of which can be found in “Forward-Looking Information”.

Quality and Availability of Zinc Concentrates
Concentrate inventory levels continue to be variable, due to large and irregular offshore deliveries of concentrate, variability in local mine deliveries and the requirement to mix feed qualities to maximize the Processing Facility’s production. Variations in feed quality and feed mix could impact production and inventory levels.

Local mines delivered more than their forecasted amounts in the quarter, combined with higher than forecasted consumption of secondary material. The Fund took title to a large parcel of zinc oxide in the first half of the year which had the impact of increasing the inventory levels but will allow the fund to secure the availability of high zinc content feed. The quantity and quality of concentrate mix currently held by the Fund will reduce the risk of feed shortages or sub-optimal feed mix thus assisting the operations to optimize zinc production and profitability.

Third Quarter 2020 Earnings Conference Call
When: Friday, November 6, 2020, at 8:30 a.m. ET
Dial-in: 1-877-291-4570 (toll-free North America) or 647-788-4919
To access webcast: http://www.norandaincomefund.com/investor/conference.php

The recording will be available until midnight on November 13, 2020, conference ID 3766357 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

Certain information in this press release, including statements regarding the Fund’s production and sales, future business plans and operation of the Processing Facility, future liabilities and obligations of the Fund (including capital expenditures), the ability of the Fund to operate profitably, the dependence upon the continuing supply of zinc concentrates and competition relating thereto, the ability of the Processing Facility to treat a more varied feed quality stream, anticipated trends in zinc concentrate supply and demand, smelting capacity, sulphuric acid market demand and supply, zinc concentrate treatment charges, the anticipated financial and operating results of the Fund, distributions to Unitholders, the scope, timing and completion of the Expansion Projects, the impact of the Expansion Projects on the operations of the Processing Facility, the operating and financial results of the Fund, and the impact of the amendments to the SPA, the Operating and Management Agreement, the Management Services Agreement, the Administration Agreement and the agreements relating to purchases of zinc concentrate and sale of zinc metal are forward-looking information. In some cases, but not necessarily in all cases, forward-looking information can be identified by the use of forward-looking terminology such as “plans”, “targets”, “expects” or “does not expect”, “is expected”, “an opportunity exists”, “is positioned”, “estimates”, “intends”, “assumes”, “anticipates” or “does not anticipate” or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might”, “will” or “will be taken”, “occur” or “be achieved”. Statements containing forward looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding future events.

Forward-looking information is necessarily based on a number of opinions, assumptions and estimates that, while considered reasonable as of the date of this press release, are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including but not limited to the factors described in greater detail in the “Risk Factors” section of the Fund’s Annual Information Form dated March 30, 2020 for the year ended December 31, 2019 and the Fund’s other periodic filings available at www.sedar.com. These factors are not intended to represent a complete list of the factors that could affect the Fund; however, these factors should be considered carefully. There can be no assurance that such estimates and assumptions will prove to be correct. The forward-looking statements contained in this press release are made as of the date of this press release, and the Fund expressly disclaims any obligation to update or alter statements containing any forward-looking information, or the factors or assumptions underlying them, whether as a result of new information, future events or otherwise, except as required by law.

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 Salaberryde-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. 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 key drivers for the three months and nine months ended September 30, 2020 and 2019.

           
  Three months ended Nine months ended  
  September 30, September 30,  
  2020 2019 2020 2019  
Zinc concentrate and secondary feed processed (tonnes) 134,026 130,576 392,168 386,096  
Zinc grade (%) 54.4 53.0 53.5 52.5  
Zinc recovery (%) 97.0 96.7 96.9 96.5  
Zinc metal production (tonnes) 64,748 66,032 199,166 192,912  
Zinc metal sales (tonnes) 64,749 66,016 199,800 192,895  
Realized zinc price (US$/pound) 1.13 1.13 1.04 1.25  
Average LME zinc price (US$/pound) 1.06 1.06 0.97 1.18  
By-product revenues ($ millions) 7.9 8.7 18.7 24.7  
Copper in cake production (tonnes) 583 650 1,892 2,032  
Copper in cake sales (tonnes) 657 675 1,571 1,894  
Sulphuric acid production (tonnes) 95,247 105,238 239,200 297,711  
Sulphuric acid sales (tonnes) 93,588 106,609 295,750 291,199  
Average LME copper price (US$/pound) 2.96 2.63 2.65 2.74  
Sulphuric acid netback (US$/tonne) 55 62 47 64  
Average CAD/US exchange rate 0.75 0.76 0.74 0.75  
* 1 tonne = 2,204.62 pounds          

SELECTED FINANCIAL AND OPERATING INFORMATION                                  
      Three months ended       Nine months ended    
      September 30,       September 30,    
($ thousands)     2020       2019       2020       2019    
                                   
Statements of Comprehensive (Loss) Income Information                                  
Net revenues   $    132,266     $ 191,844     $     469,483     $ 558,435    
Raw material purchase costs          95,807       116,081           338,842       414,148    
Derivative financial instruments (gain) loss           (2,690 )     15,280                6,338       16,020    
Net revenues less raw material purchase costs and derivative financial instruments (gain) loss     39,149       60,483       124,303       128,267    
Other expenses:                                  
Production          30,548       33,829             98,448       104,099    
Selling and administration            4,489       3,529             13,682       11,425    
Foreign currency loss (gain)                410       (151 )               (432 )     297    
Depreciation of property, plant and equipment            3,498       3,824             10,897       11,405    
Derivative financial instruments loss                318                         318          
Senior secured metal liability – embedded derivative change in fair value            2,932                      2,932          
Rehabilitation (recovery) expense              (470 )     1,480                5,342       3,167    
(Loss) earnings before finance costs and income taxes           (2,576 )     17,972              (6,884 )     (2,126 )  
Finance costs, net            1,551       2,459       6,200       6,342    
(Loss) earnings before income taxes           (4,127 )     15,513            (13,084 )     (8,468 )  
Current and deferred income tax (recovery) charge           (1,646 )     3,942              (1,304 )     (887 )  
(Loss) earnings attributable to Unitholders and Non-controlling interest           (2,481 )     11,571            (11,780 )     (7,581 )  
Distributions to Unitholders – net of tax recovery                     –                               –          
(Decrease) increase in net assets attributable to Unitholders and Non-controlling interest         (2,481 )     11,571            (11,780 )     (7,581 )  
Other comprehensive gain (loss)                160       130              (4,446 )     (3,783 )  
Comprehensive (loss) income    $        (2,321 )   $ 11,701      $       (16,226 )   $ (11,364 )  
                                   
Statements of Financial Position Information                     Sept. 30, 2020       Dec. 31, 2019    
Cash                    $              502     $ 1,082    
Inventories                         202,873       157,975    
Accounts receivable                         126,852       144,157    
Income taxes receivable                              4,240       4,187    
Property, plant and equipment                         117,791       113,776    
Total assets                         464,582       437,779    
Accounts payable and accrued liabilities                           98,640       96,286    
Deferred revenues                              1,316       879    
Asset-based revolving credit facility                         151,549       136,019    
Senior secured metal liability                           14,427          
Total liabilities excluding net assets attributable to Unitholders                         312,269       269,240    
                                   
      Three months ended       Nine months ended    
      September 30,       September 30,    
Statements of Cash Flows Information     2020       2019       2020       2019    
Cash (used in) provided by operating activities before cash                                  
distributions and net change in non-cash working capital items    $     (21,625 )   $ 20,307     $       10,420     $ 10,681    
Cash distributions                     –                    (1,155 )     (1,099 )  
Net change in non-cash working capital items     18,557       546       (21,058 )     25,927    
Cash (used in) provided by operating activities     (3,068 )     20,853       (11,793 )     35,509    
Cash used in investing activities           (4,158 )     (5,092 )          (15,661 )     (13,689 )  
Cash  provided by (used in) financing activities            6,149       (17,236 )           26,874       (22,114 )  
Net decrease in cash    $        (1,077 )     (1,475 )    $            (580 )   $ (294 )  
                                   

 

1Adjusted 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).

                   
Q3                  
                   
    Three months ended  
Adjusted EBITDA   September 30,  
($ millions)     2020       2019    
(Loss) earnings before finance costs and income taxes   $ (2.6 )   $ 18.0    
Depreciation of property, plant and equipment     3.5       3.8    
Net change in residue ponds rehabilitation liabilities     (0.6 )     1.2    
Senior secured metal liability – embedded derivative change in fair value     2.9          
Derivative financial instrument loss     0.3          
Change in fair value of embedded derivatives     (1.0 )     (0.1 )  
(Decrease) increase in inventory margin net of change in fair value of embedded derivatives     11.2       (2.4 )  
Loss on sale of assets     0.1       0.1    
Net change in employee benefits     0.5       (0.2 )  
    $ 14.3     $ 20.4    
                   

2 Adjusted Net Revenues is not a recognized measure under International Financial Reporting Standards and therefore the Fund’s method of calculating Adjusted Net Revenues is unlikely to be comparable to methods used by other entities. Adjusted Net Revenues means net revenues less raw material purchase costs plus (minus) derivative financial instrument gain (loss) (“Net Revenues”) excluding change in fair value of embedded derivatives and after the change in the inventory margin. The Fund uses Adjusted Net Revenues 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.

                   
Net Revenues Reconciled to Adjusted Net Revenues                  
For the three months ended September 30                  
($ millions)     2020       2019    
                   
Net Revenues   $       39.1     $ 60.5    
Change in fair value of embedded derivatives            (1.0 )     (0.1 )  
Increase (decrease) in inventory margin net of change in fair value of embedded derivatives           11.2       (2.4 )  
Adjusted Net Revenues   $       49.3     $ 58.0    

3 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