Noranda Income Fund Reports First Quarter 2020 Financial Results

TORONTO, May 13, 2020 (GLOBE NEWSWIRE) -- Noranda Income Fund (TSX:NIF.UN) (the “Fund”) today reported its financial results for the first quarter ended March 31, 2020. Except where otherwise indicated, all amounts in this press release are expressed in US dollars.  

First Quarter 2020 Highlights

• At the outset of the COVID-19 pandemic, the Fund’s processing facility was recognized as an essential service due to its priority manufacturing activities and continued operations during the quarter. Numerous precautions to curb the spread of COVID‑19 and to protect the health of its workforce and contractors have been implemented onsite, in accordance with the directives of public health officials.
• Earnings before income taxes were $11.5 million in Q1 2020 compared to a loss before income taxes of $23.1 million in Q1 2019.
• Adjusted EBITDA¹ was $17.2 million in Q1 2020 compared to Adjusted EBITDA of $(0.8) million in Q1 2019.
• Zinc metal production increased 4% to 67,425 tonnes compared to 64,654 tonnes in Q1 2019.
• Zinc metal sales increased 5% to a total of 68,059 tonnes, compared to 64,646 tonnes in Q1 2019.
• Sulphuric acid sales increased to 97,880 tonnes in Q1 2020, compared to 90,929 tonnes in Q1 2019.
• On March 12, 2020, the Fund reported the terms with Glencore Canada under which zinc concentrate will be purchased and zinc metal will be sold for the period of May 1, 2020 to April 30, 2021.
• Subsequent to quarter-end, the Fund agreed to an 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 (“SPA”) with Glencore Canada is not renewed past May 1, 2022. The ABL limit remains at $180 million, with improved terms surrounding the borrowing base calculation.

“The team’s success in improving maintenance and production in the second half of 2019, combined with effective cost control throughout the quarter, resulted in a strong operational and financial performance in the first quarter of 2020. This achievement is even more impressive in the context of COVID-19, which has required our teams to adopt new operating procedures to respect public health directives. Through the strong collaboration of processing facility employees, contractors and suppliers, we maintained operating rates while keeping everyone safe, and I wish to acknowledge the effort of all involved,” said Liana Centomo, Chief Executive Officer of Canadian Electrolytic Zinc Limited, the Fund’s manager.

“Entering the second quarter of 2020, we remain on target to reach our annual production and sales guidance; however, our ability to sustain our current performance is subject to significant uncertainty due to factors beyond our control caused by COVID-19 and the current worldwide economic disruption. This includes the potential impact on our supply of concentrate, and, since we operate on market terms, lower commodity prices and zinc processing fees. We continue to monitor the situation closely and to focus on the elements we can control, by operating efficiently and safely in these unprecedented circumstances,” added Ms. Centomo.

First Quarter 2020 Financial and Operating Results

The Fund reported earnings before income taxes of $11.5 million in the three months ended March 31, 2020 compared to a loss before income taxes of $23.1 million in the same period a year ago. The $34.6 million increase is in part due to an increased production volume in the first quarter of 2020 along with improved treatment charges.  Zinc prices were lower in the first quarter 2020 compared to 2019, however, fluctuations in zinc prices resulted in a lower negative impact on quarter end balances and earnings of $14.5 million (an unrealized derivative instrument gain of $20.9 million in 2020 versus a loss of $30.3 million in 2019 and a write down of inventories of $26.1 million in 2020 versus a reversal of a write down of inventories of $10.6 million in 2019).

Adjusted EBITDA¹ for the three months ended March 31, 2020 was $17.2 million compared to Adjusted EBITDA of $(0.8) million in the same period of 2019. The higher Adjusted EBITDA in the first quarter of 2020 is a reflection of higher volumes and treatment charges when compared to the first quarter of 2019, offset by lower zinc prices.

Production costs before change in inventory in the three months ended March 31, 2020 were $33.0 million, $0.4 million higher than $32.6 million recorded for the same period in 2019. The higher production costs in 2020 were a result of higher costs of energy (higher production and lower electricity rebates), partly offset by lower costs of operating supplies.

Unit production costs² were $490 per tonne in the three months ended March 31, 2020 compared to $504 per tonne in the comparable period in 2019.

Cash provided by operating activities for the three months ended March 31, 2020 was $8.6 million, including a negative $9.7 million increase in non-cash working capital due to an increase in inventories, partially offset by an increase in accounts payable and a decrease in accounts receivables. In the same period of 2019, cash provided by operating activities was $7.5 million, which was positively impacted by a $5.3 million decrease in non-cash working capital due to a decrease in accounts receivables and an increase in accounts payables and accrued liabilities, partially offset by an increase in inventories.

As at March 31, 2020, the Fund’s debt was $134.5 million, down from $136.0 million at the end of December 2019. The Fund’s cash as at March 31, 2020 decreased to $0.9 million from $1.1 million as at December 31, 2019. The Fund’s debt decreased as a result of cash provided by operating activities during the period.

Amendment of ABL
Subsequent to quarter-end, the Fund agreed to an amendment of its ABL for a term to maturity of July 20, 2023 or February 1, 2022 if the Supply and Processing Agreement (“SPA”) with Glencore Canada is not renewed past May 1, 2022. The ABL limit remains at $180 million with improved terms surrounding the borrowing base calculation.

The terms of the ABL Facility remain substantially the same, except for the following:

• Borrowing base augmented by 85% of the appraised net orderly liquidation value of anodes and cathodes owned by the Fund
• The additional reserve of CAD$15 million has been reduced to nil
• Excess availability threshold revised from 20% to 15% of availability (average over 30 consecutive days).

Outlook for the Fund

As per Wood Mackenzie, the indicative spot treatment charges on Chinese imported concentrates rose from $187 per tonne in December 2018 to $305 per tonne in December 2019 and fell to $265 per tonne in March 2020.  

The general global economic disruption and uncertainty caused by the COVID-19 pandemic has resulted in a decrease in zinc prices throughout March. The refined zinc market is under pressure due to curtailment of activity in the automotive manufacturing and construction sectors. CRU and Wood Mackenzie are forecasting zinc prices between $0.80 per pound to $0.95 per pound throughout the remainder of 2020.  Mine closures have reduced concentrate inventories and put downward pressure on treatment charges specifically in March and April, down from approximately $270-300 per tonne in early March to approximately $240-250 per tonne by late March. Wood Mackenzie has reported the Chinese imported spot treatment charges for April was $185 per tonne but expected a rebound in the latter half of the year as mines restart and increase concentrate supply.

Given the evolving and dynamic nature of COVID-19, it is difficult to predict how significant or adverse the impact of the outbreak may be, including 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 remains unchanged at 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”.

2020/2021 Contractual Period Terms with Glencore Canada
On March 8, 2018, the Fund reached an agreement pursuant to which Glencore Canada, as principal, supplies the Fund with all of its zinc concentrate requirements, and purchases all of the Fund’s zinc metal for the four-year period ending April 30, 2022. The terms are to be agreed upon annually in-line with prevailing market conditions and in consultation with the Independent Trustees’ independent industry consultants.

For the period between May 1, 2020, and April 30, 2021, the purchases of primary zinc concentrates will be made at variable treatment charges that fluctuate in-line with market movements, as well as with other provisions in the four-year agreement. The Fund and Glencore Canada agreed upon a fixed premium price on zinc metal sales for the same May 1 to April 30 contractual period. The terms have not been disclosed as the terms are considered commercially sensitive and subject to the contractual requirement and the market practice of keeping pricing information confidential.

Potential impact of COVID-19 on the Fund
As a result of COVID-19, many companies and local and national governments have imposed restrictions, such as closures, quarantines, cancellations and travel restrictions. The Fund may incur losses or expenses relating to such events outside of its control. Given the evolving and dynamic nature of COVID-19, it is difficult to predict how significant or adverse the impact of the outbreak may be, including on the Fund’s business, its operations, and the market for its securities.

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 continually focused on optimizing its existing facilities and is 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. Variations in feed quality and feed mix could impact production and inventory levels.

Local mines delivered in excess of their forecasted amounts in the quarter which benefited the smelter in terms of zinc production but also had the impact of increasing the inventory levels during the quarter. 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 in optimizing zinc production and profitability.

First Quarter 2020 Earnings Conference Call

When: Thursday, May 14, 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 May 21, 2020, conference ID 3845469 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, 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.

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).

² 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