Noranda Income Fund Announces Second Quarter 2021 Results

July 26, 2021 8:00 PM EDT
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TORONTO, July 26, 2021 (GLOBE NEWSWIRE) -- Noranda Income Fund (TSX: NIF.UN) (the “Fund”) today reported its financial results for the second quarter ended June 30, 2021. Except where otherwise indicated, all amounts in this press release are expressed in US dollars.

Second Quarter 2021 Highlights (compared to same period in 2020)

  • Loss before income taxes of $13.3 million compared to a loss of $20.5 million
  • Adjusted EBITDA1 was a negative $0.2 million compared to $9.7 million
  • Zinc metal production of 67,579 tonnes compared to 66,993 tonnes
  • Zinc metal sales of 67,348 tonnes compared to 66,992 tonnes
  • Sulphuric acid sales of 94,652 tonnes compared to 104,282 tonnes
  • The Fund received the final advance payment of $16 million from its stream agreement with BaseCore Metals LP (“BaseCore”)

“While we continue to face challenging market conditions on treatment charges – one of our principal revenue and cash flow drivers – the Fund is focused on successfully managing the elements within its control. We are keeping a tight control on operational costs and actively managing our balance sheet, all while maintaining safe operations and our annual sales and production levels in the context of the ongoing pandemic. Our strategic expansion projects are also advancing as planned, having recently reached a project milestone triggering the final advance payment from BaseCore,” said Paul Einarson, Interim Chief Executive Officer and Chief Financial Officer of Canadian Electrolytic Zinc Limited, the Fund’s manager.

Mr. Einarson added, “Although we expect market terms on treatment charges to remain low through the remainder of the year, we are confident that following the completion and commissioning of our strategic projects at the beginning of 2022, we will be in a solid position to capitalize on improving market conditions, with increased production capacity and robust operations better adapted to treating more varied and higher-impurity zinc concentrate.”

Financial Results for the Second Quarter 2021Revenues were $207.2 million compared to $166.9 million for the same period of 2020. The main factors explaining this increase of 24% were higher zinc prices and, to a lesser extent, higher zinc metal sales volume.

Revenues less raw material purchase costs and derivative financial instruments gain (loss) (“Net Revenues”) were $38.0 million compared to $28.6 million for the same period of 2020. The increase was a net result of higher zinc prices, lower treatment charges and the small gain in 2021 versus a loss on derivative instruments in 2020.

Adjusted Net Revenues2 were $42.4 million compared to $48.4 million in the same period last year. Lower Adjusted Net Revenues2 reflect lower treatment charges partly offset by higher zinc prices compared to 2020. The three months ended June 30, 2021 were also negatively impacted by lower sulphuric acid volume compared to the same period of 2020.

Production costs before change in inventory for the three months ended June 30, 2021 were $37.8 million, $4.1 million higher than the $33.7 million recorded for the same periods in 2020.

Unit production costs3 were $559 per tonne for the three months ended June 30, 2021 compared to $503 per tonne in the same period of 2020 mainly explained by the impact of the strengthening of the Canadian dollar compared to the US dollar.

The Fund reported a loss before income taxes of $13.3 million in the three months ended June 30, 2021 compared to loss before income taxes of $20.5 million in the same period a year ago.

Adjusted EBITDA1 was a negative $0.2 million compared to $9.7 million in the same period of 2020.

Liquidity Position and Distribution PolicyAs at June 30, 2021, there was $169.5 million drawn down on the ABL Facility (including letters of credit of $22.9 million (CAD$28.4 million)), leaving an excess availability of $10.5 million. The Fund’s debt was $146.6 million, up from $141.8 million at the end of December 31, 2020. The Fund’s senior secured metal liability as at June 30, 2021 was $48.0 million, up from $31.1 million as at December 31, 2020. The Fund’s cash as at June 30, 2021 increased to $0.3 million from $0.2 million as at December 31, 2020.

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, in order to determine its ability to pay distributions to unitholders in future.

2021/2022 Contractual Period TermsAs previously announced, for the period of May 1, 2021, to April 30, 2022 (“2021/2022 contractual period”), the Fund agreed upon a fixed premium price on zinc metal sales with Glencore Corporation Canada (“Glencore Canada”). The purchase of concentrates continues to be made as per the agreement’s fallback position while negotiations with Glencore Canada on these terms are ongoing. The fallback position is a treatment charge based on market variations, among other conditions. Detailed terms are not disclosed as they are considered commercially sensitive and confidential.

Sales and Production Outlook and COVID-19 ImpactTo date, and since the pandemic was declared on March 11, 2020, the Fund has maintained its operations at levels comparable to those prior to the declaration of the pandemic. Additional costs have been incurred but impacts on our supply chain have not resulted in production reduction and the physical sale and delivery of zinc and by-products have not been significantly impacted. The Fund’s annual production and sales target for 2021 remains between 260,000 to 270,000 tonnes.

The Processing Facility continues to maintain strict COVID-19 measures within the Processing Facility in accordance with provincial government and public health directives to protect the health and safety of its onsite employees and contractors. However, disruptions in mine production have dramatically reduced the global availability of concentrate to be processed. The Fund has contingency plans in place to minimize the impact of COVID-19 on its operations, which include strategies to adapt to various potential scenarios, including but not limited to securing adequate resources in terms of manpower, supplies, logistics and concentrate, but the Fund may incur losses or expenses relating to such events outside of its control despite maintaining measures within the Processing Facility. Given the evolving and dynamic nature of COVID-19, it is difficult to predict how significant or adverse the impact of the pandemic may be on the Fund’s business, its operations, and the market for its securities.

Market OutlookAs per Wood Mackenzie, the indicative spot treatment charges on Chinese imported concentrates fell from $305 per tonne in December 2019 to $85 per tonne in December 2020. The decline slowed in the first quarter of 2021 with Wood Mackenzie reporting indicative spot treatment charges on Chinese imported concentrates as low as $70 per tonne in March and then gradually improving through the second quarter of 2021 to $80 per tonne in June as mines continue to increase production and some Chinese smelters curtailed or halted production in the second quarter due to energy consumption control issues or routine maintenance.

The general global economic disruption and uncertainty caused by the COVID-19 pandemic resulted in a decrease in zinc prices throughout the first half of 2020, with the second half of the 2020 experiencing strong increases. Both mine supply of concentrate and refined zinc metal consumption decreased during 2020, but smelter production was relatively unaffected and modest growth is forecasted for 2021. Concentrate supply in the market may remain a risk in 2021 in the event mines experience additional disruptions due to additional COVID-19 waves driven by variants. In certain markets such as Peru, concentrate shipments are also affected by vessel availability and higher freight costs restraining concentrate exports. Wood Mackenzie forecasts that mine production will increase 5.3% in 2021 however due to aforementioned issues, the current tightness in the concentrate market is expected to continue with concentrate markets remaining in a deficit but moving closer to a balance. Analysts are expecting mine production to improve over the next two years (Wood Mackenzie forecasts mine production increases of 3.8% and 2.2% in 2022 and 2023, respectively) and a return to a situation where mine production exceeds smelter consumption.

The refined zinc market is also expected to remain in surplus but zinc prices are expected to be stable as COVID vaccinations result in decreasing restrictions increasing economic activity, as well as expected government stimulus in infrastructure spending. Chip shortages are affecting the automotive industry and curtailing production. However, broader demand across all manufacturing sectors is supporting galvanized steel demand. CRU is forecasting that the 2021 global concentrates market deficit will moderate to a deficit of 51,000 tonnes from a deficit of 152,000 tonnes in 2020 and that the global refined market surplus will decrease to 250,000 tonnes in 2021, following last year’s 528,000 tonne surplus.

Second Quarter 2021 Results Conference Call

When:Tuesday, July 27, 2021, 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 or http://snwebcastcenter.com/webcast/nifq22021

The recording will be available until midnight on August 3, 2021, conference ID 1254367 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 Certain information in this press release, including statements regarding the Fund’s production and sales, future business plans and operation of the Processing Facility, future liabilities and obligations of the Fund (including capital expenditures), the ability of the Fund to operate profitably, the dependence upon the continuing supply of zinc concentrates and competition relating thereto, the ability of the Processing Facility to treat a more varied feed quality stream, anticipated trends in zinc concentrate supply and demand, smelting capacity, sulphuric acid market demand and supply, zinc concentrate treatment charges, the anticipated financial and operating results of the Fund, distributions to Unitholders, the scope, timing and completion of the Expansion Projects, the impact of the Expansion Projects on the operations of the Processing Facility, the operating and financial results of the Fund, and the impact of the amendments to the SPA, the Operating and Management Agreement, the Management Services Agreement, the Administration Agreement and the agreements relating to purchases of zinc concentrate and sale of zinc metal 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 31, 2021 for the year ended December 31, 2020 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 FundNoranda 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 EinarsonInterim Chief Executive Officer and Chief Financial Officer of Canadian Electrolytic Zinc Limited, Noranda Income Fund’s ManagerTel.: 514-745-9380info@norandaincomefund.com

Reconciliation of Non-IFRS Measures1Adjusted 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).

Adjusted EBITDAFor the three months ended June 30
($ millions)2021 2020 
(Loss) earnings before finance costs and income taxes$(11.0)$(18.0)
Depreciation of property, plant and equipment3.8 3.7 
Net change in residue ponds rehabilitation liabilities0.6 3.7 
Senior secured metal liability - embedded derivative change in fair value2.1 - 
Derivative financial instrument gain(0.8)- 
Change in fair value of embedded derivatives(5.9)1.6 
Increase in inventory margin net of change in fair value of embedded derivatives10.3 18.2 
(Gain) loss on sale of assets(0.1)0.1 
Net change in employee benefits0.8 0.4 
 $(0.2)$9.7 

2Adjusted Net Revenues is not a recognized measure under International Financial Reporting Standards and therefore the Fund’s method of calculating Adjusted Net Revenues is unlikely to be comparable to methods used by other entities. Adjusted Net Revenues means net revenues less raw material purchase costs plus (minus) derivative financial instrument gain (loss) (“Net Revenues”) excluding change in fair value of embedded derivatives and after the change in the inventory margin. The Fund uses Adjusted Net Revenues 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.

Reconciliation of Net Revenues to Adjusted Net Revenues   
For the three months ended June 30   
($ millions)2021 2020 
Net Revenues$38.0 $28.6 
Change in fair value of embedded derivatives(5.9)1.6 
Increase in inventory margin net of change in fair value of embedded derivatives10.3 18.2 
Adjusted Net Revenues$42.4 $48.4 

3Unit 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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Source: Noranda Income Fund


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