TORONTO, July 25, 2022 (GLOBE NEWSWIRE) — Noranda Income Fund (TSX:NIF.UN) (the “Fund”) today reported its financial results for the second quarter ended June 30, 2022. Except where otherwise indicated, all amounts in this press release are expressed in US dollars.
Second Quarter 2022 Highlights (compared to same period in 2021)
- Earnings before income taxes of $111.9 million, including an unrealized derivative financial instrument gain of $130.0 million, compared to loss before income taxes of $13.3 million, including an unrealized derivative financial instrument gain of $0.9 million
- Adjusted EBITDA1 of negative $2.3 million compared to negative $11.4 million
- Zinc metal production of 56,988 tonnes compared to 67,579 tonnes
- Zinc metal sales of 57,006 tonnes, compared to 67,348 tonnes
“The second quarter of 2022 has been challenging both from a financial and operational perspective. Our financial results continue to be impacted by lower zinc production and sales, as we also began to see a decrease in zinc prices. While indicative spot treatment charges have remained robust year-to-date, any positive impact will be limited by our lower volumes and related operational challenges, and as we continue to consume inventory acquired last year,” said Paul Einarson, Chief Executive Officer of Canadian Electrolytic Zinc Limited, Noranda Income Fund’s Manager.
“Due to the continued impact of labour availability constraints on operations and an unexpected deterioration in cellhouse conditions during the second quarter, we must lower once again our production and sales guidance for 2022. We continue to actively work on addressing our labour challenges, through increased recruitment, operator training, coaching, and scheduling efforts. Maintenance and housekeeping regimes are being strengthened as well. I would like to recognize the dedication of our employees at the Processing Facility who continue to work towards achieving a return to normal operating conditions in a challenging context,” concluded Mr. Einarson.
Production and Sales Outlook Revision
The Fund has revised its annual production and sales target to between 225,000 and 240,000 tonnes of zinc, from its previously disclosed April 8, 2022 target of between 255,000 and 265,000 tonnes. The downward revision in annual production and sales guidance reflects ongoing labour challenges resulting in lower staffing levels and operator experience as well as higher employee turnover. It also reflects a further deterioration in cellhouse operating conditions and equipment performance in the second quarter of 2022 resulting in lower production and sales. This included a planned cellhouse shutdown in June that took much longer than anticipated and which subsequently negatively impacted operational efficiency for part of the month. Corrective actions implemented in the first quarter of 2022 have not yet fully materialized. With respect to the degradation in cellhouse operations and equipment fragility, management is carefully evaluating the potential capital investments required to address these underlying issues.
The Fund’s ability to achieve the low end of its revised guidance range is dependent on maintaining current production cadence through to the end of the year. The Fund’s ability to achieve the higher end of its revised guidance range is dependent on the Processing Facility successfully mitigating its labour challenges and improving operational efficiency before the end of the year. The Fund’s ability to achieve its revised guidance range is subject to a number of risks and uncertainties, which include but are not limited to, continued labour availability constraints, higher employee turnover, a further deterioration in cellhouse operations and equipment failures, unplanned maintenance events, and increased absenteeism due to a potential new wave of COVID-19, among other factors.
Expansion Projects Completion
The Fund completed 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 cellhouse to improve cooling capacity in the summer months, as planned, in the second quarter of 2022.
Financial Results for the Second Quarter 2022
Revenues in the three months ended June 30, 2022 were $224.5 million compared to $207.2 million for the same period of 2021. The increase of 8% is mainly due to an increase in the zinc metal premium, higher zinc price and higher acid net back, partly offset by lower zinc volume and acid sales volume.
Net revenues less raw material purchase costs and derivative financial instruments gain in the three months ended June 30, 2022 was $165.7 million compared to $38.0 million for the same period of 2021. Excluding the derivative financial instruments gain, the increase resulted from an increase in the zinc metal premium, higher zinc price, higher acid net back and higher treatment charges, partly offset by lower zinc and acid sales.
Production costs before change in inventory for the three months ended June 30, 2022, were $43.0 million, $5.2 million higher than the $37.8 million recorded for the same period in 2021.
Unit production costs2 were $755 per tonne for the three months ended June 30, 2022 compared to $559 per tonne in the same period of 2021 mainly explained by lower production, an increase in reagents, maintenance supplies and contractors costs, partly offset by foreign exchange impact.
Liquidity Position and Distribution Policy
As at June 30, 2022, the Fund’s asset-based revolving credit facility was $155.7 million, up from $141.7 million at the end of December 31, 2021. The Fund’s senior secured metal liability, as at June 30, 2022 was $39.9 million, down from $44.6 million as at December 31, 2021. The Fund’s cash as at June 30, 2022 increased to $0.5 million from $0.3 million as at December 31, 2021.
Cash provided by operating activities for the three months ended June 30, 2022 was $6.3 million, including a $10.4 million increase in non-cash working capital mainly due to an increase in accounts payables and a decrease in inventories, partly offset by an increase in accounts receivables. In the same period of 2021, cash used by operating activities was $5.9 million, including a $7.0 million increase in non-cash working capital due mainly to a decrease in inventories, partly offset by a decrease in accounts payables and an increase in accounts receivables.
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.
Market Outlook
The prices of zinc, copper and sulphuric acid have been strong through 2022. Most recently, zinc prices fell significantly in June from $4,000 per tonne at the beginning of the month to $3,300 per tonne at month end off negative market sentiment and growing concerns about the global economy. A slow recovery from Q2 COVID-19 lockdowns in China is another contributing factor with China’s demand growth being downgraded. There has been an increased pressure on the industry related to the war in Ukraine, supply chain issues, inflationary pressures and energy price increases in Europe. Specifically in Europe, zinc smelters have been constraining production due to the high power costs. Smelters remain a bottleneck in the zinc production cycle. CRU highlights that future impacts to the zinc market may include a prolonged war in Ukraine, potential further COVID-19 lockdowns in China, Chinese government stimulus spending, continued energy supply disruptions in Europe and delays in new mine production.
CRU reports that zinc premiums may have peaked in the second quarter of 2022. Zinc inventories in North America will continue to be reliant on imports from Europe which CRU is expecting to return to a balance in 2023. CRU further expects freight rates to decline in H2 2022 and into 2023.
According to Wood Mackenzie, a slow-down in import of western concentrates into China due to high metal prices has further softened the spot concentrate market in 2022. Indicative spot treatment charges have increased from $85 per tonne at the end of 2021 to the current level in June of $235 per tonne. CRU is predicting the concentrate market to reach a surplus of 311,000 tonnes in 2022 but declining to a surplus of 223,000 tonnes in 2023.
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.
Second Quarter 2022 Results Conference Call
| When: | Tuesday, July 26, 2022, at 8:30 a.m. (EDT) |
| Dial-in: | 1-888-886-7786 (toll-free North America) or 1-416-764-8658 |
| To access webcast: | http://www.norandaincomefund.com/investor/conference.php or https://app.webinar.net/m4WR924OXxZ |
The recording will be available until midnight on August 2, 2022, conference ID 983990 at
1-877-674-7070 (toll-free North America) or 1-416-764-8692.
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 Einarson Chief Executive Officer of Canadian Electrolytic Zinc Limited, Noranda Income Fund’s Manager Tel.: 514-745-9380 info@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 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 change in estimate, 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), write down of inventories, 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 ended June 30, |
|
| 2022 | 2021 | |
| Earnings (loss) before finance costs and income taxes | $116.8 | $(11.0) |
| Depreciation of property, plant and equipment | 4.0 | 3.8 |
| Write down of inventories | 16.8 | – |
| Net change in residue ponds rehabilitation liabilities | (0.9) | 0.6 |
| Senior secured metal liability change in estimate | – | – |
| Derivative financial instrument loss (gain) | 3.1 | (0.8) |
| Change in fair value of embedded derivatives | (12.7) | (3.8) |
| Inventory management program – unrealized | (122.3) | (0.9) |
| Metal sales management program – unrealized | (7.8) | – |
| Loss (gain) on sale of assets | 0.1 | (0.1) |
| Net change in employee benefits | 0.6 | 0.8 |
| $(2.3) | $(11.4) | |
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.
