Noranda Income Fund Reports Third Quarter 2019 Financial Results

TORONTO, Nov. 07, 2019 (GLOBE NEWSWIRE) -- Noranda Income Fund (TSX:NIF.UN) (the “Fund”) today reported its financial results for the third quarter ended September 30, 2019. Except where otherwise indicated, all amounts in this press release are expressed in US dollars.  

Q3 2019 Financial and Operating Overview

• Earnings before income taxes of $15.5 million in Q3 2019 compared to $1.8 million in Q3 2018
• Adjusted EBITDA¹ of $20.4 million in Q3 2019 compared to $7.1 million in Q3 2018
• 10% increase in zinc metal production to 66,032 tonnes, from 60,214 tonnes in Q3 2018
• 8% increase in zinc metal sales to 66,016 tonnes, from 60,975 tonnes in Q3 2018
• By-product revenues from the sale of copper in cake and sulphuric acid of $8.7 million, compared to $8.8 million in Q2 2018
  
• 3% decrease in unit production costs² from Q3 2018 as a result of an increase in production

“We are pleased with our financial and operating results in the third quarter with higher production volumes and prices, after facing production challenges in the first half of the year. Our quarterly results reflect improvements in treatment charge and by-product market terms compared to the prior year, in addition to the positive impact of the processing of higher volumes of concentrate purchased under the renewed agreement with Glencore,” said Liana Centomo, Chief Executive Officer of Canadian Electrolytic Zinc Limited, the Fund’s manager.

“From an operational standpoint, the Processing Facility’s team successfully stabilized production and improved equipment performance in the quarter, as we continue to adjust our operations to the processing of higher volumes of higher-impurity zinc concentrate. Based on our current visibility through to year-end, we expect to maintain our production levels in the fourth quarter, in order to meet our annual production and sales target of between 255,000 to 265,000 tonnes for 2019,” added Ms. Centomo.

Third Quarter 2019 Financial and Operating Results

Earnings before income taxes was $15.5 million in Q3 2019 compared to earnings before income taxes of $1.8 million in Q3 2018. This reflects higher production volumes and prices compared to the third quarter of 2018. Higher prices were the result of improvements in concentrate processing and by-product market terms compared to the prior year, partially offset by lower zinc prices. Higher volumes of higher-treatment-charge concentrate, purchased under the February 28, 2019 agreement with Glencore, were processed in the quarter.

Higher Adjusted EBITDA¹ for the third quarter of 2019 reflects higher prices and volumes when compared to the third quarter of 2018. Price impact was a combination of higher market terms on concentrates and by-products offset by lower zinc prices compared to the third quarter of 2018.

Production costs before changes in inventory for the three months ended September 30, 2019 were $33.5 million, $2.0 million higher than the $31.5 million recorded for the same period in 2018. The increase was due to higher operating supplies and contractor costs.

Unit production costs² were $507 per tonne in the three months ended September 30, 2019 compared to $523 per tonne in the comparable period in 2018, as a result of higher volumes, partially offset by higher production costs.

As at September 30, 2019, the Fund’s debt was $111.6 million, down from $133.7 million at the end of December 2018. The Fund’s cash as at September 30, 2019 decreased to $0.4 million from $0.7 million as at December 31, 2018. The Fund’s debt decreased as a result of cash provided by operating activities during the period.

Outlook for the Fund

According to industry analysts such as Wood Mackenzie and CRU, the zinc concentrate market tightness that began in 2016 continued throughout 2017 and 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.

Wood Mackenzie has reported that as a result of the market tightness, Chinese smelters curtailed production. A widespread crackdown from China’s environmental agencies has resulted in further production decreases and, in some cases, the closure of smelters.

The concentrate tightness constrained worldwide metal production in 2017 and into 2018, leading to higher prices. These prices incentivized new mine production, and so in early 2019 the industry forecast was for a surplus of concentrate in the market and the expectation of rising treatment charges.

As per Wood Mackenzie, the indicative spot treatment charges on Chinese imported concentrates rose from $15 per tonne in December 2017 to $187 per tonne in December 2018, $257 per tonne in March 2019, $270 per tonne in June 2019 and $290 per tonnes in September 2019. Wood Mackenzie also forecasts Chinese smelter growth and increased mine production in 2019.

The industry analysts’ outlook for 2020 is for increased concentrate surplus which is supportive of the recent high treatment charges, a major source of revenues for smelters.

On February 28, 2019, the Fund reached an agreement with Glencore on the terms under which zinc concentrate will be purchased and zinc metal will be sold for the period of May 1, 2019 to April 30, 2020. While treatment charges had rebounded in favour of smelters in the last several months, the pricing environment continued to threaten to be volatile. In this context, the Fund negotiated a combination of 50% of the concentrate feed at a fixed treatment charge and the remaining 50% at a variable treatment charge that will reflect market movement during that period, in addition to other provisions in its new agreement with Glencore. The market terms of the agreement have not been disclosed, as these are deemed commercially sensitive as reflected in the contractual requirement and market practice that the pricing information be kept confidential.

The Fund does not expect to realize the full impact of the terms of its February 2019 agreement until all inventory purchased prior to May 1, 2019 has been fully processed. We expect these inventories to be largely consumed by year end.

Production and Sales Outlook
The Fund’s estimates for 2019 zinc metal production and sales, as revised effective July 22, 2019, are as follows:

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.

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.

Third Quarter 2019 Results Conference Call

When: Friday, November 8, 2019 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 15, 2019, conference ID 7276404 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