Noranda Income Fund (TSX:NIF.UN) (the “Fund”) today reported its
financial results for the first quarter ended March 31, 2022.
Except where otherwise indicated, all amounts in this press release
are expressed in US dollars.
First Quarter 2022 Highlights (compared
to same period in 2021)
- Loss before income taxes of $35.6
million, including an unrealized derivative financial instrument
loss of $17.4 million, compared to earnings before income taxes of
$11.0 million, including an unrealized derivative financial
instrument gain of $0.1 million
- Adjusted EBITDA1 of $(1.1) million
compared to $17.1 million
- Zinc metal production of 57,588
tonnes compared to 66,345 tonnes
- Zinc metal sales of 56,826 tonnes,
compared to 66,277 tonnes
“Our first quarter financial results reflect
lower production and sales, and a high unrealized derivative
instrument loss resulting from a large hedge book and the rapid
increase in zinc prices in the quarter. As the derivative
instruments are used to provide zinc price protection, we expect
that the underlying zinc will drive gains in future quarters as
zinc concentrate is processed and refined zinc metal is sold
depending on future zinc prices,” said Paul Einarson, Chief
Executive Officer of Canadian Electrolytic Zinc Limited, Noranda
Income Fund’s Manager. “While the global economic and zinc market
outlook remains difficult to predict, we have seen a steady
increase in indicative spot treatment charges throughout the first
three months of 2022. We look forward to benefitting from this
positive trend in the coming quarters and once our operational
challenges are behind us,” he added.
“As previously disclosed, production quality and
volumes were negatively impacted in the first quarter due to
ongoing operational challenges in the Electrolytic Hall. The
Processing Facility team continues to work diligently to improve
operating conditions, which is a complex process. We are also
forging ahead with the commissioning of our strategic expansion
projects, as planned, in the second quarter of 2022,” concluded Mr.
Einarson.
Financial Results for the First Quarter
2022Revenues were $201.9 million compared to $195.6
million for the same period of 2021. The increase of 3% is mainly
due to an increase in the zinc metal premium, higher zinc price and
higher acid net back, partly offset by lower zinc and acid
sales.
Revenues less raw material purchase costs and
derivative financial instruments loss (gain) was $6.5 million
compared to $50.5 million for the same period of 2021. The decrease
resulted from an increase in the zinc metal premium, higher zinc
price and higher acid net back, partly offset by lower zinc and
acid sales and by an increase in concentrate costs.
Production costs before change in inventory were
$36.4 million, $3.4 million higher than the $33.0 million
recorded for the same period in 2021.
Unit production costs2 were $632 per tonne
compared to $498 per tonne in the same period of 2021, mainly
explained by an increase in operating supplies, contractor costs
and lower production.
Liquidity Position and Distribution
PolicyAs at March 31, 2022, the Fund’s asset-based
revolving credit facility was $147.9 million, up from $141.7
million at the end of December 31, 2021. The Fund’s senior secured
metal liability, as at March 31 2022, was $46.1 million, up from
$44.6 million as at December 31, 2021. The Fund’s cash as at March
31, 2022 increased to $0.8 million from $0.3 million as at December
31, 2021.
Cash provided by operating activities for the
three months ended March 31, 2022, was $3.1 million, including a
$5.6 million decrease in non-cash working capital mainly due to an
increase in inventories, an increase in accounts receivables and an
increase in accounts payables. In the same period of 2021, cash
provided by operating activities was $7.3 million, including a $7.4
million increase in non-cash working capital due mainly to an
increase in inventories and an increase in accounts receivables
partly offset by an increase in accounts payables.
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, to
determine its ability to pay distributions to unitholders in
future.
2022 Production and Sales Outlook
On April 8, 2022, the Fund announced that
operational challenges have negatively impacted zinc production and
sales in the first quarter ended March 31, 2022, resulting in a
revision in its annual production and sales target to between
255,000 and 265,000 tonnes of zinc, from its previously disclosed
target of between 270,000 to 280,000 tonnes for 2022.
2022/2023 Contractual Period Terms
The Fund and Glencore Canada have not reached
terms on the sale of zinc metal or the purchase of primary zinc
concentrates for the period of May 1, 2022, to April 30, 2023. As
such, negotiations between the parties are ongoing.
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.
Expansion Projects
As previously announced, the Fund expects to
complete the commissioning of its strategic expansion projects,
comprised of the installation of additional belt filters and
related equipment to increase the Processing Facility’s filtration
capacity and two additional cooling towers in the cell house to
improve cooling capacity in the summer months, in the second
quarter of 2022.
Market Outlook
The general global economic disruption and
uncertainty caused by the COVID-19 pandemic resulted in a tight
global concentrate market that suppressed treatment charges
throughout 2021. Further instability has been added with the
conflict in Ukraine.
According to Wood Mackenzie, the indicative spot
treatment charges on Chinese imported concentrates have remained
relatively flat throughout 2021. Cutbacks in smelter production,
primarily in Europe, are throwing concentrate back into the market.
A slow-down in import of western concentrates into China due to
high metal prices has further softened the spot concentrate market.
Indicative spot treatment charges have increased $30 per tonne per
month in 2022, from $85 per tonne at the end of 2021 to the current
level in March of $175 per tonne.
The prices of zinc, copper and sulphuric acid
also increased throughout 2021. Most recently, there has been an
increased pressure on the industry in the form of supply chain
issues, energy price increases in Europe, and the availability of
power in China. Specifically in Europe, zinc smelters have been
constraining production due to the high power costs. Similarly,
Chinese zinc production has also been affected by power
availability, which is related to coal availability and carbon
emission controls. The conflict in Ukraine has also created upward
price pressures on metals with zinc peaking at $4,619 per tonne in
April 2022.
Zinc premiums are also being impacted. There is
concern that the zinc tonnages previously imported to North America
from Europe will no longer be available in the same volumes as in
the past. As well, the transportation industry is experiencing
labour shortages and cost increases. With these contributing
factors, CRU indicated that the premium for zinc in North America
doubled throughout 2021 and spot premia are being reported as high
as $0.25 per pound in the first quarter of 2022. As well, in their
market outlooks, many analysts are of the opinion that the zinc
metal market is transitioning from a surplus in 2021 to a deficit
in 2022.
The same supply chain and energy challenges that
are affecting the zinc smelting industry are also expected to have
an impact on other industrial sectors and potentially on the demand
for certain commodities as economies struggle to contain inflation.
As an example, zinc galvanizers in China, another energy-intensive
industry and an important end user of zinc, were asked to curtail
production in September 2021 by 10% to 15%. Overall, Chinese
manufacturing is experiencing challenges due to a slowdown in the
real estate sector, supply chain disruptions, COVID lockdowns and
power shortages. China’s National Bureau of Statistics
Manufacturing Purchasing Manager’s Index decreased again to 48.1%
in March 2022. An index greater than 50 points indication economic
growth while an index lower than 50 points indicates contraction.
The conflict in Ukraine is predicted to impact European
manufacturing as both Ukraine and Russia are exporters of coking
coal and steel inputs, which may ultimately impact galvanized steel
production and ultimately zinc consumption.
For more information on the Fund’s expansion
projects, production and sales outlook, the impact of COVID-19 and
the Russia/Ukraine conflict, please consult our latest Consolidated
Financial Statements and MD&A, available on SEDAR and our
corporate website.
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.
First Quarter 2022 Results Conference Call
When: |
Friday, April 29, 2022, at 8:30
a.m. EDT |
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
https://app.webinar.net/6aRG8628K1m |
The recording will be available until midnight on May 6, 2022,
conference ID 1865658 at 1-800-585-8367 (toll-free North America)
or 416-621-4642.
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 30, 2022 for the year ended December 31, 2021 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 Fund
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, 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 EinarsonChief Executive Officer of Canadian Electrolytic
Zinc Limited, Noranda Income Fund’s ManagerTel.:
514-745-9380info@norandaincomefund.com |
Reconciliation of Non-IFRS Financial
Measures
1Adjusted EBITDA (“Earnings before income taxes,
depreciation and amortization”) is used by the Fund as an
indication of cash generated from operations. Adjusted EBITDA is
not a recognized measure under IFRS and therefore the Fund’s method
of calculating Adjusted EBITDA is unlikely to be comparable to
methods used by other entities. The calculation methodology has
been revised to remove the increase or decrease in inventory margin
and instead adjust for the impact of unrealized derivative
instrument gains or losses. The comparative information also
reflects the revised calculation methodology. 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, senior secured
metal liability embedded derivative change in fair value,
derivative financial instrument loss or gain 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), inventory management program unrealized gain or
loss, metal sales management program unrealized gain or loss and
the net change in employee benefits (non-cash employee benefit
expenses less employer contributions).
Reconciliation of Adjusted EBITDA($ millions) |
Three months endedMarch 31, |
|
|
2022 |
2021 |
|
(Loss) earnings before finance costs and income taxes |
$ |
(32.8 |
) |
$ |
13.0 |
|
|
Depreciation of property, plant and equipment |
|
3.6 |
|
|
3.6 |
|
|
Net change in residue ponds rehabilitation liabilities |
|
(3.0 |
) |
|
(3.9 |
) |
|
Senior secured metal liability change in estimate |
|
(0.9 |
) |
|
- |
|
|
Derivative financial instrument gain |
|
(2.6 |
) |
|
(0.3 |
) |
|
Change in fair value of embedded derivatives |
|
10.9 |
|
|
4.5 |
|
|
Inventory management program - unrealized |
|
17.4 |
|
|
(0.1 |
) |
|
Metal sales management program - unrealized |
|
5.9 |
|
|
- |
|
|
Gain on sale of assets |
|
(0.2 |
) |
|
- |
|
|
Net change in employee benefits |
|
0.6 |
|
|
0.3 |
|
|
|
$ |
(1.1 |
) |
$ |
17.1 |
|
|
2Unit 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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