Noranda Income Fund Reports First Quarter 2018 Financial Results

SALABERRY-DE-VALLEYFIELD, Quebec, April 27, 2018 (GLOBE NEWSWIRE) — Noranda Income Fund (TSX:NIF.UN) (the “Fund”) today reported its financial results for the three-month period ended March 31, 2018. All amounts are in U.S. currency unless otherwise stated.

2018 First Quarter Financial and Operating Highlights

  • Reached an agreement with Glencore Canada to supply the Fund with all zinc concentrate requirements and purchase all of the Fund’s zinc metal for a four-year period ending April 30, 2022.
  • Earnings before income taxes were $16.6 million, a 305% increase from $4.1 million in Q1 2017.
  • Adjusted Net Revenues1 was $50.6 million, a 36% increase from $37.3 million in Q1 2017.
  • Zinc metal production increased 38% to 68,861 tonnes from 50,048 tonnes in Q1 2017.
  • Zinc metal sales totaled 69,636 tonnes, an increase of 41% from 49,516 tonnes in Q1 2017.
  • By product revenue from the sale of copper in cake and sulphuric acid was $5.6 million, up from $1.7 million for Q1 2017.
  • Unit production costs in Canadian dollars declined by 11% from Q1 2016.

1 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. 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.

“Following a challenging 2017, the first quarter was a positive turning point for the Fund as we ramped up operations and achieved normal operating rates by the end of January,”  said Ms. Eva Carissimi, President and Chief Executive Officer of Canadian Electrolytic Zinc Limited, the Fund’s manager. “We are encouraged by the cooperation demonstrated by all of our stakeholders.”

“During the quarter, we announced that we had reached an agreement with Glencore Canada for both supply and sales,” continued Ms. Carissimi. “With certainty of supply of zinc concentrate paired with regular metal sales, we will be able to further focus on our investment plan to increase capacity and reduce unit operating costs.”

Highlights subsequent to the quarter ended March 31, 2018

  • On April 12, 2018, the Fund announced that the lenders exercised their subsequent maturity extension on the Fund’s asset-backed revolving credit facility (“ABL Facility”) resulting in the maturity being extended from April 13, 2018 to July 20, 2020. The terms of the $150 million ABL Facility remain the same.

First Quarter 2018 Financial and Operating Results

Earnings before income taxes were $16.6 million in Q1 2018, compared to earnings before income taxes of $4.1 million in Q1 2017. The increase was in large part due to higher volumes as a result of higher zinc metal sales and the positive impact of the decrease in inventory margin as some lower cost inventory was consumed.

Adjusted Net Revenues for Q1 2018 was $50.6 million, a 36% increase from $37.3 million for Q1 2017. The increase was mainly due to higher volumes as a result of higher zinc metal sales. The increase was partially offset by lower prices, primarily a result of the lower Net Revenues from market terms compared to the prior processing fee and lower premiums, offset by higher by-product sales.

Zinc metal production in Q1 2018 increased by 38% to 68,861 tonnes from 50,048 tonnes in Q1 2017.

Zinc metal sales in Q1 2018 increased by 41% to 69,636 tonnes from 49,516 tonnes sold in Q1 2017.

Production costs before change in inventory in Q1 2018 were $33.8 million compared to $30.1 million recorded in Q1 2017. The $3.7 million increase were a result of higher labour and operating supplies due to operating at normal operations during the quarter compared to the labour disruption that reduced operating capacity for the period from February 12, 2017 to March 31, 2017. These higher costs were partially offset by lower energy costs that resulting from the lower electricity costs in 2018 from the Quebec electricity rate reduction program.

As noted above, the Fund is participating in the Quebec electricity rate reduction program for large industrial electricity consumers. In October 2017, the Fund submitted its first report on eligible investment projects to the Quebec Ministry of Finance. The Fund received notification that the report on eligible investment projects was accepted by the Ministry of Finance. As a result, the Fund’s electricity bill was reduced by 20% starting in October 2017. The period of reduced electricity from the initial report is expected to be about nine to twelve months. The Fund expects to be able to benefit from the electricity rate reductions until 2021, provided it can continue to spend capital and meet the program milestones going forward.

Unit production costs were CAD$621 per tonne in Q1 2018 compared to CAD$699 in the comparable period in 2016. Production cost comparison to 2017 is not meaningful due to the impact of the strike on 2017 production.

Cash used in operating activities in Q1 2018 was $6.3 million, including a negative $10.4 million increase in non-cash working capital due to an increase in accounts receivable, partially offset by a decrease in inventories. This is compared to $46.4 million cash used in operating activities during the same quarter last year which was negatively impacted by a $46.9 million increase in non-cash working capital due to an increase in inventories and a reduction in accounts payable, partially offset by a decrease in accounts receivable. No cash distributions were declared for Q1 2018 compared to $0.7 million declared in the same period of 2017.

As at March 31, 2018, the Fund’s debt was $118.0 million, up from $108.7 million at the end of December 2017. The Fund’s debt increased mostly due to the increase in the Fund’s non-cash working capital that has resulted from the increase in the zinc price.

Subsequent to the quarter, on April 12, 2018, the Fund extended the maturity of the ABL Facility to July 20, 2020, providing availability of up to $150 million. The terms of the ABL Facility remain the same.

Outlook for the Fund

The main challenge facing the Fund is the ability for the Processing Facility to continue to operate profitably under market terms, including market treatment charges.

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 per dry metric tonne in the first quarter 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 12 months’ and four-year supply of zinc concentrate for the periods May 2017 to April 2018 and 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 twelve 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 continue to be as follows:

Production:  250,000 to 260,000 tonnes
Sales:  250,000 to 260,000 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.

Annual General Meeting Webcast and Dial-In

When: April 27, 2018 at 11:00 a.m. E.T.

To access the webcast and view the slide presentation from the Noranda Income Fund website, please visit http://www.norandaincomefund.com/investor/presentations.php or click the link below:
http://webcast.servicewebdiffusion.com/noranda-eng. (English)
http://webcast.servicewebdiffusion.com/noranda-fr (French)

To access the webcast by telephone, dial 1-866-830-9441, access code 9192413 (English) or 1-866-518-5884, access code 3722750 (French). Please connect approximately 10 minutes prior to the beginning of the call to ensure participation. The webcast will be archived on the Fund’s website following the meeting date.

A conference call to discuss first quarter 2018 financial results will be held Monday, April 30, 2018 at 10:00 a.m. ET. Webcast and call-in details are below.

First Quarter 2018 Results Conference Call

When: April 30, 2018 at 10:00 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/4ap36svh.

Conference Call Replay
The recording will be available until midnight on May 14, 2018.

Dial in number: 416-621-4642 or 
Toll-free North American number: 1-800-585-8367

The conference ID is 3780219 and you will be prompted to provide your name and company.

A full version of the first 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.php 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.

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, 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 March 31 2018 2017
Zinc concentrate and secondary processed (tonnes) 127,486 122,057
Zinc grade (%) 51.7 52.1
Zinc recovery (%) 97.2 96.9
Zinc metal production (tonnes) 68,861 50,048
Zinc metal sales (tonnes) 69,636 49,516
Realized zinc price (US$/pound) 1.61 1.33
Average LME zinc price (US$/pound) 1.55 1.26
By-product revenues ($ millions) 5.6 1.7
Copper in cake production (tonnes) 658 494
Copper in cake sales (tonnes) 431 328
Sulphuric acid production (tonnes) 104,171 98,066
Sulphuric acid sales (tonnes) 94,041 94,427
Average LME copper price (US$/pound) 3.16 2.65
Sulphuric acid netback (US$/tonne) 41 7
Average CAD/US exchange rate 0.79 0.76
* 1 tonne = 2,204.62 pounds    

SELECTED FINANCIAL AND OPERATING INFORMATION        
  Three months ended March 31,
 
($ thousands) 2018   2017  
         
Statements of Comprehensive Income Information        
Net revenues   230,014     137,739  
Raw material purchase costs   183,827     101,635  
Derivative financial instruments gain   (15,426 )   (987 )
Net revenues less raw material purchase costs and derivative financial instruments gain 61,613   37,091  
Other expenses:        
Production   34,991     22,830  
Selling and administration   4,186     6,172  
Foreign currency gain   (630 )   (1,133 )
Depreciation of property, plant and equipment   3,919     3,993  
Rehabilitation (recovery) expense   (150 )   91  
Earnings before finance costs and income taxes   19,297     5,138  
Finance costs, net 2,697   1,029  
Earnings before income taxes   16,600     4,109  
Current and deferred income tax expense   2,555     1,224  
Earnings attributable to Unitholders and Non-controlling interest   14,045     2,885  
Distributions to Unitholders – net of tax recovery   –   711  
Increase in net assets attributable to Unitholders and Non-controlling interest   14,045     2,174  
Other comprehensive (loss) income   (171 )   1,319  
Comprehensive income   13,874     3,493  
         
Statements of Financial Position Information March 31, 2018   Dec. 31, 2017  
Cash   824     1,819  
Inventories   214,075     232,031  
Accounts receivable   166,510     136,823  
Income taxes receivable   6,872     9,918  
Property, plant and equipment   103,661     104,579  
Total assets   508,847     500,840  
Accounts payable and accrued liabilities   121,200     124,210  
Deferred revenues   63,898     61,459  
ABL facility   118,012     108,696  
Total liabilities excluding net assets attributable to Unitholders   337,165     343,032  
         
  Three months ended March 31,
 
Statements of Cash Flows Information 2018   2017  
Cash provided by operating activities before cash        
distributions and net change in non-cash working capital items   4,033     1,228  
Cash distributions   –     (711 )
Net change in non-cash working capital items (10,377 ) (46,945 )
Cash used in operating activities (6,344 ) (46,428 )
Cash used in investing activities   (3,967 )   (3,690 )
Cash provided by financing activities   9,316     48,603  
Effect of functional currency change   –     (26 )
Net decrease in cash   (995 )   (1,541 )

         
Net Revenues Reconciled to Adjusted Net Revenues        
For the three months ended March 31        
($ million) 2018   2017  
Net Revenues $   61.6   $   37.1  
Change in fair value of embedded derivatives   (1.2 )   (4.9 )
(Decrease) increase in inventory margin net of
change in fair value of embedded derivatives
  (9.8 )   4.0  
Foreign exchange gain   –     1.1  
Adjusted Net Revenues $   50.6   $   37.3  


For further information, please contact:

Michael Boone, Vice President & Chief Financial Officer of Canadian Electrolytic Zinc Limited, Noranda Income Fund’s Manager
Tel: 416-775-1561
info@norandaincomefund.com