Noranda Income Fund Reports Fourth Quarter and FY 2017 Financial Results

SALABERRY-DE-VALLEYFIELD, Québec, March 15, 2018 (GLOBE NEWSWIRE) -- Noranda Income Fund (TSX:NIF.UN) (the “Fund”) today reported its financial results for the three-month period and full-year ended December 31, 2017. All amounts are in U.S. currency unless otherwise stated.

2017 Fiscal Year Highlights

  • On January 31, 2017, the Board of Trustees announced the suspension of monthly distributions to unitholders, due to adverse market conditions.
  • Glencore Canada Corporation (“Glencore Canada”) and the Fund reached an agreement whereby Glencore Canada is supplying all of the Processing Facility’s zinc concentrate requirements and purchasing all the zinc metal production for the 12-month period ending April 30, 2018.
  • On February 12, unionized workers initiated a strike at the Processing Facility. During the strike, management operated the Processing Facility at partial production levels with eligible staff. On December 1, 2017, a new collective agreement was ratified, effective from December 1, 2017 to November 30, 2023.
  • Zinc metal production decreased 35% to 180,375 tonnes from 277,022 tonnes in 2016.
  • Zinc metal sales were 203,106 tonnes, down 26% from 273,052 tonnes in 2016.
  • The second half 2017 represented the first period where almost all of the zinc metal was produced from concentrate purchased at market terms. Prior to that, the zinc metal was produced from concentrate purchased under the favourable fixed processing fee applicable during the initial term of the Supply and Processing Agreement.
  • Adjusted Net Revenues1 for 2017 was $152.5 million, down 30% from $218.1 million for 2016. The $65.6 million decrease was predominantly the results of the negative impact of the lower sales volumes due to the strike and the negative impact of market terms on the Fund’s results in the second half of 2017, compared to the favourable fixed processing fee that was applicable under the initial terms of the Supply and Processing Agreement. See “Net Revenues Reconciled to Adjusted Net Revenues” table below.
  • Loss before income taxes of $35.1 million in 2017, compared to loss before income taxes of $28.9 million in 2016. The 2017 loss included a $15.0 million derivative financial instrument loss and an $8.8 million increase in labour costs related to early retirement provisions in the new collective agreement. The 2016 loss included a $55 million non-cash impairment charge.
  • On July 20, 2017, the Fund extended the maturity of the asset-based revolving credit facility (“ABL Facility”) from November 15, 2017 to March 15, 2018.

“The past year has been a challenge for the Fund with the ending of our long-term supply agreement and the transition to market pricing in a tight zinc concentrate market, compounded by the strike at our Processing Facility for most of the year,” said Ms. Eva Carissimi, President and Chief Executive Officer of Canadian Electrolytic Zinc Limited, the Fund’s manager. “Moving into 2018, we have a collective agreement in place until 2023 and a contract with Glencore to supply our concentrate needs and purchase all of our zinc metal production until 2022. This, along with our participation in the Quebec government’s electricity rebate program for large industrial consumers, we are confident that we will be able to execute our strategic plan to increase capacity and reduce unit operating costs.”

Fourth Quarter 2017 Highlights

  • Adjusted Net Revenues1 were $31.5 million, down from $49.7 million for Q4 2016.
  • Zinc metal production decreased to 46,004 from 72,291 tonnes for Q4 2016.
  • Zinc metal sales were 45,748, down from 69,196 tonnes for Q4 2016

Highlights Subsequent to Year ended December 31, 2017

  • Glencore Canada and the Fund reached an agreement whereby Glencore Canada is supplying all of the Processing Facility’s zinc concentrate requirements and purchasing all the zinc metal production for the four-year period ending April 30, 2022.
  • The Fund extended the maturity of the ABL Facility from March 15, 2018 to April 13, 2018. With the long-term concentrate and metal agreements now in place, the Fund is working on meeting the conditions that would result in a subsequent maturity extension to July 20, 2020.

Fiscal Year 2017 Financial and Operating Results

Loss before income taxes was $35.1 million in 2017, compared to loss before income taxes of $28.9 million in 2016, which in large part was due to the negative impact of the increase in inventory margin throughout 2017 as the inventory cost became significantly lower than the current LME zinc price and the negative impact of market terms on the Fund’s results in the second half of 2017, compared to the favourable fixed processing fee that was applicable under the initial terms of the Supply and Processing Agreement. The 2016 loss included an asset impairment charge of $55.0 million. The year-over-year decline in earnings was also due to lower sales volumes as a result of the strike that occurred in 2017.

This increase in the inventory margin is a result of inventory that is recorded at cost being significantly below the market value of the LME zinc price as of December 31, 2017. During the strike, the concentrate consumed by the Processing Facility largely came from the zinc concentrate shipments received in 2017 by rail. This resulted in stockpile concentrate remaining in storage throughout 2017. Since this stockpiled concentrate was purchased in 2016 or early 2017, the cost of the inventory is at the lower LME zinc prices at the time of their arrival. As at December 31, 2017, the payable zinc in inventory is valued at $1.36 per pound compared to a December 31, 2017 LME zinc price of $1.51 per pound. The $0.15 per pound extra margin will be realized when the lower cost inventory is converted into metal and sold. As at December 31, 2016, the payable zinc in inventory and the LME zinc price were both at $1.16 per pound.

Adjusted Net Revenues for 2017 were $152.5 million, down 30.1% from $218.1 million for 2016. The decline was mainly due negative impact of the lower sales volumes due to the strike and the negative impact of market terms on the Fund’s results in the second half of 2017.

Zinc metal production in 2017 declined by 34.9% to 180,375 tonnes from 277,022 tonnes in 2016.

Zinc metal sales in 2017 declined by 25.6% to 203,106 tonnes from 273,052 tonnes sold in 2016.

Cash used in operating activities in 2017 was $43.9 million, including negative $56.3 million increase in non-cash working capital due mainly to an increase in accounts receivables and a decrease in accounts payable, partially offset by a decrease in inventory. In 2016, cash provided by operating activities was $35.0 million, including a negative $0.6 million increase in non-cash working capital due mainly to an increase in inventory and accounts receivables, offset by an increase in accounts payable and accrued liabilities.

Production costs before change in inventory in 2017 were $110.4 million compared to $141.1 million recorded in 2016. The $30.7 million decrease was due to lower production and the strike, partially offset by an $8.8 million increase in labour costs related to early retirement provisions in the new collective agreement.

In November 2016, the Fund submitted an application to the Quebec Ministry of Finance for its electricity rate reduction program for large industrial electricity consumers. In February 2017, the Fund received notice that its application had been accepted conditional to meeting additional milestones. In October 2017, the Fund submitted its first report on eligible investment projects to the Quebec Ministry of Finance. The Fund received notification that the report on eligible investment projects was accepted by the Ministry of Finance. As a result, the Fund’s electricity bill was reduced by 20% starting in October 2017. The period of reduced electricity from the initial report is expected to be about nine to twelve months.

As at December 31, 2017, the Fund’s debt was $108.7 million, up from $47.7 million at the end of December 2016. The Fund’s debt increased mostly due to the increase in the Fund’s non-cash working capital that has resulted from the increase in the zinc price. The Fund’s cash as at December 31, 2017 decreased to $1.8 million from $1.9 million as at December 31, 2016.

On July 20, 2017, the Fund extended the maturity of the ABL Facility to March 15, 2018, providing availability of up to $150 million. The terms of the ABL Facility remain essentially the same. The Fund further extended the ABL Facility to April 13, 2018 and with the long-term concentrate and metal agreements now in place, the Fund is currently working on meeting the conditions that would result in a subsequent maturity extension to July 20, 2020.

Outlook for the Fund

The main challenge facing the Fund is the ability for the Processing Facility to continue to operate profitably under market terms, including market treatment charges.

According to industry analysts such as Wood Mackenzie and CRU, the zinc concentrate market tightness that began in 2016 continued throughout 2017 and into 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. Spot treatment charges declined from $175 per dry metric tonne in December 2015 to $40 per dry metric tonne in December 2016. With the continued tightness in the zinc concentrate market, spot treatment charges averaged approximately $38 per dry metric tonne throughout 2017 and only averaged $15 to $20 per dry metric tonne in the fourth quarter of 2017. Despite the tight market conditions, the Fund was still able to secure supply of the required qualities and quantities of zinc concentrates via an agreement with Glencore Canada for 12 months’ supply of zinc concentrate for the 12-month period May 2017 to April 2018 at a fixed treatment charge. Reflecting the tightness in the concentrate market, the market pricing terms were not as favourable to the Fund as the fixed pricing enjoyed by the Fund from its inception to May 2, 2017. Miners are typically able to negotiate a lower treatment charge when the zinc concentrate market is tight as it increases competition among smelters for concentrate supply.

In addition, the Fund was able to secure supply of the required qualities and quantities of zinc concentrates via an agreement with Glencore Canada for the four-year supply of zinc concentrate for the period May 2018 to April 2022. The treatment charges for the supply will be negotiated on an annual basis based on market conditions with the treatment charge for the twelve month period May 2018 to April 2019 being a fixed treatment charge. Through the most recent negotiations, the Fund has the option to diversify its supplier base beginning in 2020. The Fund can decide to exercise this option depending on market conditions.
The third quarter of 2017 marked the first quarter where the majority of zinc metal sold was produced from concentrate that was purchased at market terms, resulting in greater sensitivity to zinc price and to treatment charges and more variable operating results going forward.

Fourth Quarter and Fiscal Year 2017 Results Conference Call:

When: March 15, 2018 at 10:30 a.m. E.T
Dial in number: 647-788-4919 or
Toll-free North American number: 1-877-291-4570

To access the webcast and view the slide presentation from the Noranda Income Fund website: http://www.norandaincomefund.com/investor/conference.php or click on this link: https://edge.media-server.com/m6/p/qf4eg6b9.

Dial in number: 416-621-4642 or
Toll-free North American number: 1-800-585-8367

Conference Call Replay
The conference ID is 4499949 and you will be prompted to provide your name and company.

The recording will be available until midnight on March 29, 2018.

A full version of the fourth quarter and fiscal year 2017 Management’s Discussion and Analysis (MD&A) and unaudited Consolidated Financial Statements will be posted on http://www.sedar.com and on the Fund’s website at http://www.norandaincomefund.com/investor/financials.html later today.

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.

Annual General Meeting

The Fund will be holding its Annual General Meeting (“AGM”) on April 27, 2018 at the Hotel Plaza Valleyfield, 40 Avenue du Centenaire, Salaberry-de-Valleyfield, Quebec, in the Gault room. After the AGM, a plant tour will be held for interested Unitholders and Analysts. There are limited places available and advance registration is required. To register, please contact Valerie Bourdon at valerie.bourdon@glencore.ca.

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.

All amounts are in U.S. currency unless otherwise stated.

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:
Three months ended Dec. 31,Twelve months ended Dec. 31,
Three months ended December 312017201620172016
Zinc concentrate and secondary feed processed (tonnes)97,632125,585414,912529,745
Zinc grade (%)51.851.952.252.2
Zinc recovery (%)95.497.096.597.5
Zinc metal production (tonnes)46,00472,291180,375277,022
Zinc metal sales (tonnes)45,74869,196203,106273,052
Zinc cathode sales (tonnes)20,000 - 20,000 -
LME zinc price plus premium ($/pound)1.531.211.381.02
Average LME zinc price ($/pound)1.471.141.310.95
By-product revenues ($ millions)2.46.912.220.3
Copper in cake production (tonnes)4138031,8802,841
Copper in cake sales (tonnes)2201,0251,5803,114
Sulphuric acid production (tonnes)79,56695,344340,980423,433
Sulphuric acid sales (tonnes)72,05984,710343,480426,704
Average LME copper price ($/pound)3.092.402.802.21
Sulphuric acid netback ($/tonne)20492030
Average US$/CA$ exchange rate1.271.331.301.33
* 1 tonne = 2,204.62 pounds


SELECTED FINANCIAL AND OPERATING INFORMATION
Three months ended Dec. 31,
Twelve months ended Dec. 31,
($ thousands) 2017 2016 2017 2016
Statements of Comprehensive Income Information
Revenues 215,755 177,805 663,656 579,769
Raw material purchase costs 181,127 113,974 523,058 375,480
Revenues less raw material purchase costs34,628 63,831 140,598 204,289
Other expenses:
Production 40,175 36,122 118,902 142,061
Selling and administration 4,525 4,691 20,382 18,638
Foreign currency loss (gain) 208 5,120 (1,507) (2,475)
Derivative financial instruments loss (gain) 13,585 (3,601) 15,011 (2,546)
Depreciation of property, plant and equipment 4,338 5,102 18,100 20,919
Rehabilitation expense (recovery) 398 (1,389) (423) (1,644)
Impairment of non-financial assets - 39,012 - 55,032
Loss before finance costs and income taxes (28,601) (21,226) (29,867) (25,696)
Finance costs, net1,803 1,050 5,211 3,182
Loss before income taxes (30,404) (22,276) (35,078) (28,878)
Current and deferred income tax recovery (6,960) (4,373) (8,267) (6,410)
Loss attributable to Unitholders and Non-controlling interest (23,444) (17,903) (26,811) (22,468)
Distributions to Unitholders - net of tax recovery - 1,696 711 9,932
Decrease in net assets attributable to Unitholders
and Non-controlling interest
(23,444) (19,599) (27,522) (32,400)
Other comprehensive (loss) income (470) 1,270 7,737 6,543
Comprehensive loss (23,914) (18,329) (19,785) (25,857)
Statements of Financial Position Information Dec. 31, 2017 Dec. 31, 2016
Cash 1,819 1,912
Inventories 171,655 180,670
Accounts receivable 136,823 76,920
Income taxes receivable 9,918 3,724
Property, plant and equipment 104,579 103,008
Total assets 439,101 384,312
Accounts payable and accrued liabilities 125,405 130,723
ABL revolving facility 108,696 47,655
Total liabilities excluding net assets attributable to Unitholders 282,768 208,194
Three months ended Dec. 31,
Twelve months ended Dec. 31,
Statements of Cash Flows Information2017 2016 2017
2016
Cash (used in) provided by operating activities before
cash distributions and net change in non-cash working capital items
(7,357) 13,879 13,170 46,008
Cash distributions - (2,108) (711) (10,344)
Net change in non-cash working capital items (1,220) 11,336 (56,327)(633)
Cash (used in) provided by operating activities (8,577) 23,107 (43,868)35,031
Cash used in investing activities (6,269) (10,114) (15,813) (19,823)
Cash provided by (used in) financing activities 16,387 (12,237) 59,652 (14,618)
Effect of functional currency change - 37 (64) (35)
Net increase (decrease) in cash 1,541 793 (93) 555


Net Revenues Reconciled to Adjusted Net Revenues
For the three months ended December 31
($ thousands)2017 2016
Net Revenues 34,628 63,831
Concentrate payable settlement/metal receivable adjustments (9,258) (18)
Increase in inventory margin net of concentrate payable settlement/metal receivable adjustments 19,731 (12,595)
Foreign currency loss - (5,120)
Derivative financial instruments (loss) gain (13,585) 3,601
Adjusted Net Revenues 31,516 49,699
Net Revenues Reconciled to Adjusted Net Revenues
For the years ended December 31
($ thousands)2017 2016
Net Revenues 140,598 204,289
Concentrate payable settlement/metal receivable adjustments (2,347) 6,658
Increase in inventory margin net of concentrate payable settlement/metal receivable adjustments 27,731 2,105
Foreign currency gain 1,549 2,475
Derivative financial instruments (loss) gain (15,011) 2,546
Adjusted Net Revenues 152,520 218,073

For further information, please contact:
Michael Boone, Vice President & Chief Financial Officer of Canadian Electrolytic Zinc Limited, Noranda Income Fund’s Manager
Tel: 416-775-1561
info@norandaincomefund.com

1 Adjusted Net Revenues means revenues less raw material purchase costs (“Net Revenues”) excluding unrealized concentrate settlement adjustments and after the change in the inventory margin, foreign exchange gain/loss and derivative financial instruments gain/loss. Net Revenues is reconciled to Adjusted Net Revenues below. The Fund uses Adjusted Net Revenue as it believes it provides the best indication of the revenues generated in a period and provides the ability to compare revenues generated in different periods.

Source: Fonds de revenu Noranda