Noranda Income Fund Announces Third Quarter 2022 Results
Noranda Income Fund
Updated 14 min read
Noranda Income Fund
TORONTO, Nov. 14, 2022 (GLOBE NEWSWIRE) -- Noranda Income Fund (TSX:NIF.UN) (the “Fund”) today reported its financial results for the third quarter ended September 30, 2022. Except where otherwise indicated, all amounts in this press release are expressed in US dollars.
Third Quarter 2022 Highlights (compared to same period in 2021)
Loss before income taxes of $16.9 million, including an unrealized derivative financial instrument loss of $33.4 million and an impairment of non-financial assets of $30.0 million, compared to earnings before income taxes of $5.9 million, including an unrealized derivative financial instrument loss of $0.1 million
Adjusted EBITDA1 of $40.4 million, compared to $7.8 million
Zinc metal production of 53,003 tonnes, compared to 64,063 tonnes
Zinc metal sales of 54,235 tonnes, compared to 63,676 tonnes
“Our third quarter results for 2022 reflect the ongoing operational challenges we are facing, resulting in lower zinc production and sales. Positive market conditions, such as strong zinc prices and treatment charges, helped generate strong Adjusted EBITDA performance year over year. In addition to low production volumes, our earnings were also negatively impacted by a high unrealized derivative financial instrument loss and an impairment charge that was driven by lower production and increased cellhouse capital expenditures,” said Paul Einarson, Chief Executive Officer of Canadian Electrolytic Zinc Limited, Noranda Income Fund’s Manager.
“As previously announced, because of the accelerated deterioration of cellhouse operating conditions, we have temporarily shut down operations to proceed with a proactive cell repair program aimed at mitigating risk while we finalize and implement plans to replace all cells. Two weeks into the shutdown, the team is making progress repairing previously identified damaged cells and undertaking a cell-by-cell integrity assessment to determine if further cell repairs will be necessary. At this time, the shutdown is expected to last an additional three to four weeks, subject to change should additional cells need to be repaired or should other issues be discovered,” concluded Mr. Einarson.
Cellhouse Maintenance Shutdown and Revitalization Project On October 19, 2022, the Fund announced a maintenance shutdown to perform identified cell repairs in the cellhouse as well as a cell-by-cell integrity assessment to determine whether additional repairs are necessary. While the Fund believes that this extensive cell repair program will contribute to stabilizing near term cellhouse operating conditions, it will not fully address the underlying issues impacting operating conditions. Evaluations undertaken thus far have led to the conclusion that a replacement of all cells in the cellhouse will be necessary to stabilize and improve operating conditions, in addition to the planned crane replacements. A careful review to assess potential replacement options, related capital investment requirements and financing options is ongoing. The cost of a full cell and crane replacement is currently estimated to be approximately $100 million and replacement would not commence before 2024. The timeline may be influenced by supply chain constraints and by securing appropriate financing. More updates will follow once a decision on the plan for long-term cellhouse revitalization has been finalized.
Production and Sales Outlook As a result of the cellhouse maintenance shutdown currently underway and uncertainty regarding its duration, and as announced on October 19, 2022, the Fund does not expect to meet its previously disclosed annual production and sales guidance for 2022, last updated on July 25, 2022, of between 225,000 and 240,000 tonnes of zinc. Furthermore, the Fund does not intend to provide annual production and sales guidance for the foreseeable future, as the Processing Facility’s production capacity will remain constrained and difficult to predict until the underlying production issues are fully addressed.
Financial Results for the Third Quarter 2022 For the three months ended September 30, 2022, revenues were $255.0 million, compared to $204.8 million for the same period of 2021. The increase of 24.5% is mainly due to an increase in the zinc metal premium, higher zinc price and higher acid net back partly offset by lower zinc and acid sales volume.
Net revenues less raw material purchase costs and derivative financial instruments loss in the three months ended September 30, 2022 was $61.7 million, compared to $44.9 million for the same period of 2021. Excluding the derivative financial instruments gain, the increase resulted from an increase in the zinc metal premium, higher zinc price, higher acid net back and higher treatment charges partly offset by lower zinc and acid sales.
Production costs before change in inventory for the three months ended September 30, 2022 were $36.1 million, $3.3 million higher than the $32.8 million recorded for the same period in 2021.
Unit production costs2 were $681 per tonne for the three months ended September 30, 2022, compared to $512 per tonne in the same period of 2021 mainly explained by lower production, increase in maintenance supplies and contractor costs mostly due to cellhouse repairs.
For the three months ended September 30, 2022 an impairment of non-financial assets of $30.0 million was recorded, compared to nil for the same period in 2021. Management concluded that indicators of impairment existed relating to its cash-generating unit due to cellhouse operating conditions which require an extensive repair program to stabilize near term operations, lower production and increased cellhouse capital expenditures.
Liquidity Position and Distribution Policy Cash provided by operating activities for the three months ended September 30, 2022 was $17.7 million, including a $19.1 million increase in non-cash working capital mainly due to a decrease in accounts payables partly offset by a decrease in accounts receivables and in inventories. In the same period of 2021, cash provided by operating activities was $29.8 million, including a $21.3 million decrease in non-cash working capital mainly due to a decrease in inventories and a decrease in accounts receivables.
As at September 30, 2022, the Fund’s asset-based revolving credit facility was $151.9 million, up from $141.7 million at the end of December 31, 2021. The Fund’s senior secured metal liability, as at September 30, 2022 was $32.9 million, down from $44.6 million as at December 31, 2021. The Fund’s cash as at September 30, 2022 increased to $4.5 million from $0.3 million as at December 31, 2021.
Based on the Fund’s current liquidity position and capital requirements, as well as continued challenging market conditions, the Fund has limited ability to pay regular distributions, which are subject to the approval of its ABL Facility lenders. The Board continues to carefully monitor and review the Fund’s financial performance, capital requirements, business environment and prospects on a periodic basis as well as its required levels of reserves and expected future cash flows on a monthly basis, in order to determine the Fund’s ability to pay special or regular distributions to unitholders in future.
Market Outlook The prices of zinc, copper and sulphuric acid have been strong through 2022. Zinc prices have been strong in 2022, but volatile after falling significantly in June from $4,000 per tonne at the beginning of the month to $3,300 per tonne at month end off negative market sentiment and growing concerns about the global economy. Volatility continued with price recoveries in the third quarter, however during the quarter the price had fallen below $3,000 per tonne and then recovered to $3,000 per tonne by the end of the quarter. CRU has noted that energy prices in Europe will continue to put downward pressure on smelter output, however demand will also be negatively affected through steel mill production curtailments also due to energy prices. Further, lower vehicle production is reducing the demand for galvanized steel impacting both the steel and zinc markets. Analysts expect the United States economy to soon join Europe’s in a recession. The Asian markets are at continued risk due to China’s Zero-COVID policy and the impact that lockdowns have on both production and demand. Regardless, smelters remain a bottleneck in the zinc production cycle supporting strong zinc prices. CRU is forecasting zinc prices to decrease in 2023 to $2,975 per tonne and to continue decreasing with a target price in 2027 of $2,050 per tonne. Wood Mackenzie cites similar factors affecting zinc prices such as China’s Zero-COVID policy, high energy prices in Europe and demand pressure from an economic recession, however they forecast zinc price levels to remain strong in 2023 and 2024 before starting to decrease in 2025 and onwards with a target price in 2027 of $2,825 per tonne.
Globally, zinc smelter output has been affected by energy-price disruption particularly in Europe, Industrias Penoles’ Torreon smelter unexpected roaster shutdown, the closure of the smelter in Flin Flon, Manitoba, continuing problems at the Sun Metals smelter in Australia, and the cellhouse and labour constraints experienced at the Fund’s Valleyfield smelter. The key factors to watch going forward according to CRU are China’s Zero-COVID policy, the war in Ukraine and its impact on the European recession and whether the European smelter cutbacks will become permanent closures.
CRU previously reported that zinc premiums may have peaked in the second quarter of 2022. However, low zinc inventories in North America and continued zinc production shortfalls have contributed to a continued increase in the North American premium which has averaged $0.37 per pound over the last six months. Fastmarkets cites economic uncertainty and recession as factors that will flatten premiums in the near term.
CRU is predicting the concentrate market to reach a surplus of 379,000 tonnes in 2022, but decline to a surplus of 121,000 tonnes in 2023 and forecasts a benchmark treatment charge of $300 per tonne in 2023 with an average treatment charge of $248 per tonne from 2024 to 2027. Wood Mackenzie predicts smelter production will remain constrained and the treatment charge benchmark will increase to $303 per tonne in 2023 and with new mines moving into production that treatment charges will peak in 2025 at $370 per tonne with a long term forecast in the following years of $275 per tonne.
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.
Third Quarter 2022 Results Conference Call
When:
Tuesday, November 15, 2022, at 8:30 a.m. (EDT)
Dial-in:
1-888-886-7786 (toll-free North America) or 1-416-764-8658
The recording will be available until midnight on November 22, 2022, conference ID 267496 at 1-877-674-7070 (toll-free North America) or 1-416-764-8692.
Forward-Looking Information Certain information in this press release, including statements regarding the Fund’s production and sales, the Fund’s operational challenges, the scope, timing and completion of the cellhouse repairs and revitalization, the operating and financial results of the Fund, and the market outlook 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, 2022 for the year ended December 31, 2021 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.
About the Noranda Income Fund
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.
For more information:
Paul Einarson Chief Executive Officer of Canadian Electrolytic Zinc Limited, Noranda Income Fund’s Manager Tel.: 514-745-9380 info@norandaincomefund.com
Reconciliation of Non-IFRS Financial Measures 1Adjusted EBITDA (“Earnings before income taxes, depreciation and amortization”) is used by the Fund as an indication of cash generated from operations. Adjusted EBITDA is not a recognized measure under IFRS 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, impairment of non-financial assets, gain or loss on the sale of assets, senior secured metal liability change in estimate, derivative financial instrument loss or gain 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), write down of inventories, inventory management program unrealized gain or loss, metal sales management program unrealized gain or loss and the net change in employee benefits (non-cash employee benefit expenses less employer contributions).
Reconciliation of Adjusted EBITDA ($ millions)
Three months ended September 30,
2022
2021
(Loss) earnings before finance costs and income taxes
(11.0
)
7.8
Depreciation of property, plant and equipment
4.1
3.7
(Reversal) write down of inventories
(10.1
)
-
Impairment on non-financial assets
30.0
-
Net change in residue ponds rehabilitation liabilities
-
(0.6
)
Senior secured metal liability change in estimate
(2.9
)
-
Derivative financial instrument loss
0.5
0.1
Change in fair value of embedded derivatives
(4.0
)
(3.9
)
Inventory management program - unrealized
32.9
0.1
Metal sales management program - unrealized
0.6
-
Loss on sale of assets
0.1
0.1
Net change in employee benefits
0.2
0.5
$
40.4
$
7.8
2Unit 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.
