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 ProjectOn 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 OutlookAs
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
2022For 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
PolicyCash 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 OutlookThe 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 |
To access webcast: |
http://www.norandaincomefund.com/investor/conference.php or
https://app.webinar.net/GBaA9Ye9PNp |
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 EinarsonChief Executive Officer of Canadian Electrolytic
Zinc Limited, Noranda Income Fund’s ManagerTel.:
514-745-9380info@norandaincomefund.com |
Reconciliation of Non-IFRS Financial
Measures1Adjusted 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 endedSeptember
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.
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