TORONTO, July 29, 2020 (GLOBE NEWSWIRE) — Noranda Income Fund (TSX:NIF.UN) (the “Fund”) today reported its financial results for the second quarter ended June 30, 2020. Except where otherwise indicated, all amounts in this press release are expressed in US dollars.
Second Quarter 2020 SummaryAt the outset of the COVID-19 pandemic, the Processing Facility was recognized as an essential service due to its priority manufacturing activities and it continued operations. 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.Loss before income taxes was $20.5 million in the second quarter of 2020 compared to a loss before income taxes of $0.9 million in the second quarter of 2019.Adjusted EBITDA1 was $9.7 million in the second quarter of 2020 compared to Adjusted EBITDA of $(7.5) million in the second quarter of 2019.Zinc metal production increased 8% to 66,993 tonnes compared to 62,226 tonnes in the second quarter of Q2 2019.Zinc metal sales increased 8% to 66,992 tonnes, compared to 62,233 tonnes in the second quarter of 2019.Sulphuric acid sales increased to 104,282 tonnes in the second quarter of 2020, compared to 93,661 tonnes in the second quarter of 2019.Subsequent to the end of the quarter, the Fund announced that it has entered into a zinc metal stream agreement with BaseCore Metals LP (“BaseCore”), the proceeds of which will fund strategic long-term investments in the Processing Facility to improve its efficiency and production capacity.“Our operations remained stable throughout the second quarter of 2020, with our team adeptly handling the challenges related to COVID-19 and the higher than usual temperatures. As a result, we remain on plan to achieve our production and sales volume objectives for the year 2020,” said Liana Centomo, Chief Executive Officer of Canadian Electrolytic Zinc Limited, the Fund’s manager.Ms. Centomo added, “Our second quarter financial results were negatively impacted by lower zinc and sulphuric acid prices due to the global economic disruption and continued uncertainty caused by the pandemic. Looking ahead, we anticipate the recovery in zinc prices and treatment charges to remain limited throughout the remainder of the year. We continue to focus on the elements we can control by operating efficiently and ensuring the health of our employees and contractors, so that we are well positioned for the recovery.”“Subsequent to quarter end, we were pleased to announce that the Fund has secured a long-term stream financing agreement with BaseCore that will allow us to improve our capital structure while making strategic investments in our processing facility. These investments will enhance our operational efficiency and production capacity, and ultimately, improve our long-term profitability as a leading, low-cost producer of refined zinc metal in North America. We look forward to proceeding with these strategic projects while maintaining our current production levels and respecting the COVID-19 preventive measures in place,” concluded Ms. Centomo.Second Quarter 2020 Financial and Operating Results
The Fund reported a loss before income taxes of $20.5 million for the three months ended June 30, 2020 compared to a loss before income taxes of $0.9 million in the same period last year.Net Revenues for the three months ended June 30, 2020 were $28.6 million compared to $48.6 million in 2019. For the three months ended June 30, 2020, provisional pricing features negatively impacted Net Revenues by $1.6 million compared to a positive impact of $2.0 million of Net Revenues for the same period of 2019. The decrease or increase in inventory margin, net of the impact of provisional pricing, is subtracted or added back, respectively, to calculate Adjusted Net Revenues. The $18.2 million increase in inventory margin in the quarter resulted from a rising zinc price late in the quarter and compares to a $12.1 million decrease in inventory margin for the same period in 2019. The margin will reverse if zinc prices decrease or will be realized as the inventory is consumed.Adjusted Net Revenues2 were 48.4 million in 2020 compared to $34.5 million in 2019. Higher Adjusted Net Revenues in the second quarter of 2020 reflects higher market terms on concentrates and higher volumes compared to the second quarter of 2019. Higher impurity levels and unplanned maintenance negatively impacted volumes processed in 2019. The second quarter of 2020 was negatively impacted by lower LME zinc prices and by lower sulphuric acid prices when compared to the same period of 2019.Adjusted EBITDA for the three months ended June 30, 2020 was $9.7 million compared to $(7.5) million in 2019. The higher Adjusted EBITDA in 2020 reflects higher market terms on concentrate treatment charges and higher volumes compared to 2019. Higher impurity levels and unplanned maintenance negatively impacted volumes processed in 2019. Adjusted EBITDA in 2020 was also negatively impacted by lower LME zinc price and by lower sulphuric acid prices of $43 per tonne compared to $66 per tonne in the same period of 2019. Sulphuric acid shipments were greater than production and lowered our inventory levels.Production costs before change in inventory in the three months ended June 30, 2020 were $33.7 million, $4.7 million lower than $38.4 million recorded for the same period in 2019. The lower production costs in 2020 were a result of lower energy costs due to higher electricity rebates and lower operating supplies due to unplanned maintenance in the second quarter of 2019 and to the reduction in the use of reagents compared to 2019.Unit production costs3 were $503 per tonne in the three months ended June 30, 2020 compared to $617 per tonne in the comparable period in 2019.Cash used in operating activities for the three months ended June 30, 2020 was $17.4 million, including a negative $29.9 million increase in non-cash working capital due to a decrease in accounts payable and an increase in inventories partly offset by a decrease in accounts receivables. In the same period for 2019, cash provided by operating activities was $7.2 million, which was positively impacted by a $20.0 million decrease in non-cash working capital due to a decrease in accounts receivables and inventories, partially offset by a decrease accounts payable.As at June 30, 2020, the Fund’s debt increased to $156.7 million, up from $136.0 million at the end of December 2019. The Fund’s cash as at June 30, 2020 increased to $1.6 million from $1.1 million as at December 31, 2019. The Fund’s debt increased as a result of cash used by operating activities during the period.Stream Agreement with BaseCore and Investments in Processing Facility
Subsequent to the end of the quarter, the Fund announced that it has entered into a definitive stream agreement with BaseCore. BaseCore will pay cash consideration of $40 million for the Stream and the Fund will deliver to BaseCore LME zinc warrants corresponding to 1.00% of zinc processed and refined at the Processing Facility until the later of (i) June 30, 2030 or (ii) 68 million pounds of LME zinc warrants have been delivered. Proceeds will be used to improve the Processing Facility’s filtration and cooling processes in order to support increased zinc production capacity (the “Expansion Projects”) and for general corporate purposes.In alignment with the Fund’s long-term strategy to decrease its production unit costs and increase profitability, the Fund is moving forward with the installation of additional belt filters and related equipment to increase its filtration capacity, and two additional cooling towers in the cell house to improve cooling capacity in the summer months. The Expansion Projects are estimated to cost $32 million and commissioning is targeted for the first quarter of 2022. Once commissioned, the Expansion Projects will allow the Processing Facility to maintain its current production levels as well as to increase zinc production by approximately 20,000 tonnes per year. Assuming zinc prices of $2,300 per tonne, treatment charges of $200 per tonne of concentrate, and production costs and by-product revenues adjusted for inflation and higher production volumes, these investments are expected to provide an internal rate of return of approximately 30%. The Expansion Projects are included in the recently approved application under Quebec’s L‑20 electricity rate reduction program and will generate approximately 16 months of electricity rate reductions.The transaction is subject to customary closing conditions and is expected to close by July 31, 2020. For more information regarding the Stream terms and Expansion Projects, please consult the press release issued July 27, 2020.Potential impact of COVID-19
The World Health Organization (WHO) declared the novel coronavirus (COVID-19) to be a pandemic on March 11, 2020. Major health issues and pandemics, such as COVID-19, may adversely affect national or global economies, global trade and commercial activity, and could result in a general or sharp decline in economic activity.As a result of COVID-19, many companies and local and national governments have imposed restrictions, such as closures, quarantines, cancellations and travel restrictions. Although additional costs have been incurred as a result, impacts on our supply chain have not resulted in production reduction and the sale and delivery of zinc have not been significantly impacted. Recently, restrictions have begun to be lifted by government officials and certain jurisdictions have seen increases in the number of cases which may result in the reinstatement of previous restrictions. 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. The Fund has contingency plans in place to react to various potential scenarios, including but not limited to securing adequate resources in terms of manpower, supplies, logistics and concentrate.Outlook for the Fund
As per Wood Mackenzie, the indicative spot treatment charges on Chinese imported concentrates fell from $305 per tonne in December 2019 to $265 per tonne in March 2020 and continued to fall to $163 per tonne in May but have rebounded slightly to $170 per tonne in June 2020. The general global economic disruption and uncertainty caused by the COVID-19 pandemic has resulted in a decrease in zinc prices throughout the year. Wood Mackenzie has reported decreases in mine supply of concentrate and a reduction of refined zinc metal consumption, but refined zinc metal production is expected to achieve growth of 5% year-on-year in 2020. These market conditions are expected to result in limited recoveries in zinc prices and treatment charges in 2020. Recoveries in 2021 and thereafter will be dependent on economic recovery and the continuing impact of the pandemic, including any potential second wave.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.2020 Production and Sales Estimates
The Fund’s estimates for its 2020 zinc metal production and sales continues to be 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”.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. Despite improvements, the residue handling section is at capacity. Two belt filters will be added to the section as part of the Expansion Projects that are being financed through the BaseCore stream agreement and are projected 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 more than their forecasted amounts in the quarter which benefited the smelter in terms of zinc production. The Fund took title to a large parcel of zinc oxide in the quarter which had the impact of increasing the inventory levels but will allow the fund to secure the availability of high zinc content feed. 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 to optimize zinc production and profitability.Second Quarter 2020 Earnings Conference Call
When: Thursday, July 30, 2020, at 8:30 a.m. ET
Dial-in: 1 (877) 648-7976 (toll-free North America) or 617-826-1698
To access webcast: http://www.norandaincomefund.com/investor/conference.phpThe recording will be available until midnight on August 6, 2020, conference ID 8794282 at 1-855-859-2056 (toll-free North America) or 404-537-3406.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 InformationCertain 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 expected closing date of the Stream 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, 2020 for the year ended December 31, 2019 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.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.Key Performance Drivers
The following table provides a summary of the performance of the Fund’s key drivers:
1Adjusted 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 Adjusted 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.3 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
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