Noranda Income Fund’s (NNDIF) CEO Paul Einarson on Q4 2021 Results – Earnings Call Transcript
Noranda Income Fund (OTC:NNDIF) Q4 2021 Earnings Conference Call February 25, 2022 8:30 AM ET
Company Participants
Paul Einarson – CEO, Canadian Electrolytic Zinc Limited, Noranda Income Fund’s Manager
Sylvain Lirette – CFO, Canadian Electrolytic Zinc Limited, Noranda Income Fund’s Manager
Conference Call Participants
Daniel McConvey – Rossport Investments
Ben Franklin – Riverstyx Capital
Operator
Welcome to the Noranda Income Fund Fourth Quarter and Fiscal 2021 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Following management’s presentation, there will be a question-and-answer session open to financial analysts and investors, only. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]. I would like to remind everyone that this conference call is being recorded, today, February 25 at 8:30 A.M. Eastern time.
I will now turn the conference over to Paul Einarson, CEO of Canadian Electrolytic Zinc Limited, Noranda Income Fund’s Manager. Please go ahead.
Paul Einarson
Thank you, operator, and good morning, everyone. Thank you for joining us. Also joining me this morning is our CFO, Sylvain Lirette.
Before we start, I’d like to draw your attention to Slide 3 of the presentation regarding forward-looking information. During the course of today’s presentation, we will be making a number of forward-looking statements that are based on certain assumptions and subject to a number of Risk Factors outlined on this slide. As a result, Noranda Income Fund cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Please note that all dollar amounts in this presentation are in U.S. dollars, unless otherwise indicated.
Turning to Slide 4, 2021 was a challenging year for the Fund in the context of the ongoing pandemic, unfavorable dynamics in the global zinc concentrate market, as well as inflationary and supply chain pressures impacting businesses globally. We nonetheless stay focused on achieving our production targets and moving forward with our strategic expansion projects while mitigating the challenges we face.
For the quarter, loss before income taxes came in at $42.8 million compared to a loss of $13.7 million in the comparable period. After removing the unrealized derivative loss of $31.4 million and $6 million respectively, and other adjustments, adjusted EBITDA was nil compared to negative $0.9 million in the same quarter last year.
For the year, loss before income taxes was $39.1 million compared to a loss of $26.7 million in the prior-year. After removing the unrealized derivative loss of $30.5 million and $6.9 million, respectively, and other adjustments, adjusted EBITDA was $13.5 million compared to $17.4 million last year.
This past December 17, the trustees approved a special cash distribution of $0.02 per unit based on the Fund’s 2021 unconsolidated taxable income, calculated in accordance with our Trust Indenture.
Our financial results reflect a tight global concrete market which negatively impacted one of our key revenue sources treatment charges, which were significantly lower in 2021 compared to historical averages. Higher zinc, copper and sulphuric acid prices only partially offset the lower treatment charges.
Our fourth quarter results were also impacted by the high unrealized derivative instrument losses which were driven by a larger zinc hedged book and sharp zinc price increases late in the quarter. These unrealized losses resulted from zinc forward sales that are entered into as part of our inventory management program that is designed to protect the price of zinc purchased until it is sold.
Fluctuations in zinc prices can create timing differences between the gains or losses on derivative instruments versus its eventual realization when the corresponding zinc is sold. Increased input costs and the strengthening of the Canadian dollar compared to the U.S. dollar have added to the pressure on profits.
In this context and as we closely monitor zinc concentrate market dynamics impacting our revenues in 2022, the team is working diligently to maintain production cadence and complete our strategic projects, both of which face challenges late in the year.
We met the mid-range of our 2021 production target of between 260,000 and 270,000 tonnes of zinc metal. However, our operating efficiency was negatively impacted in Q4 due to unplanned maintenance events. As you well know, our operations are very complex and this complexity has only increased in the context of the ongoing pandemic. Unfortunately, we encountered some production issues, which resulted from lost tonnage.
Turning to Slide 5, let’s take a look at our strategic projects. In alignment with our long-term strategy to decrease production costs and increase profitability, the Fund has been in the process of installing additional belt filters and related equipment to increase filtration capacity. We’re also adding two additional cooling towers in the cell house to improve cooling capacity in the summer months.
The cost of the expansion projects was originally estimated at about $32 million, but following some setbacks late in the year, and the unfavorable exchange rate, the total cost is now estimated at around $38 million. The cost increases were primarily incurred in the fourth quarter, and were due to materials and labor availability challenges, which also caused a delay in the overall project timeline.
Commissioning is now targeted for the second quarter of 2022, after which we will ramp up our production capacity.
Despite the project delays, we’re maintaining our increased production target for 2022 of between 270,000 and 280,000 tonnes. Assuming no further delays in project completion, and taking into account some cold weather-related impacts in the quarter underway, our forecasted volume is now at the mid-range of this target, down from the upper end that was anticipated during our budgeting process.
The following step and not before 2023 sorry, but not before 2023 is the further ramp-up of production up to between 280,000 and 290,000 tonnes annually, given the complexity of our smelting operations production capacity increases, our gradual process.
I will now turn it over to Sylvain to review our financial and operating results in more detail.
Sylvain Lirette
Thank you, Paul, and good morning everyone.
Let’s start with our key performance drivers in Q4 on Slide 7. Zinc concentrate and secondary feed process was slightly lower than in the same period in 2020. Zinc grade and zinc recovery were slightly lower compared to the same period last year. The lower zinc grade is explained by lower local mine deliveries during the quarter. Average LME zinc price was at $1.53 per pound, so significantly higher than in the same period last year. By-product revenue increased as a result of higher sulphuric acid and copper prices. Finally, the average exchange rate was at $0.79, reflecting a stronger Canadian dollar which had a significant impact on our production costs.
Turning now to Slide 8. In Q4, zinc metal production and sales decreased year-over-year by about 3,000 tonnes. This is in large part due to lower zinc grade and unplanned maintenance in the quarter. Lower sulphuric acid sales volume is a combination of lower volume of concentrate process, lower sulfur content in the concentrate, and the higher level of internal consumption.
Unit production costs were $602 per tonne compared to $481 per tonne in their same period in 2020. The increase is mainly due to lower production, higher input costs and a stronger Canadian dollar.
For the year, production and sales were at mid-range of our annual target whereas sulphuric acid sales volume for the year were lower compared to 2020.
Turning now to Slide 10. Note that the adjusted EBITDA method of calculation has changed to net new non-GAAP measure rules. The main change is replacing inventory margin impact with unrealized gain or loss. This has introduced some volatility to this metric. Based on the new calculation and after removing the unrealized derivative loss of $31.4 million and $0.6 million respectively and other adjustment, adjusted EBITDA in Q4 was nil compared to a negative $0.9 million in Q4 of 2020. After removing the unrealized loss of $30.5 million and $6.9 million, respectively, and other adjustments, adjusted EBITDA for the year was $13.5 million compared to $17.4 million in 2020.
Overall, our earning in Q4 were positively impacted by commodity price increase, but as more than offset by lower treatment charges, lower opinions, foreign exchange impact and a higher production costs.
In Q4 CapEx was $13.9 million, $6.8 million was related to our strategic projects. The balance is sustaining CapEx necessary for the maintenance of our operations. For the full-year, capital spending was $47 million; $22.5 million was for the strategic projects. These projects mainly account for the year-over-year increase. Going forward, our sustaining CapEx is expected to creep higher due to required ongoing maintenance and periodic equipment upgrades in order to meet higher standards and factoring in inflation.
Turning now to Slide 12, excluding changes in working capital, interest, tax payment, and distributions, cash flow from operation was negative $0.1 million in Q4. This is compared to a negative $1.1 million for the same period last year. Cash flow in Q4 of 2021 was mainly impacted by lower treatment charges partially offset by higher commodity prices. Cash flow for the year remains relatively in line with prior year at $13.9 million compared to $14.8 million in 2020.
Looking now at our ABL, as of December 31, 2021, it was at $165.5 million, including letters of credit, leaving an excess availability of $14.5 million. Our senior secured metal liability stood at $44.6 million. Working capital was $156.2 million at year-end compared to $214.3 million at the end of 2020.
Paul, back to you.
Paul Einarson
Thank you, Sylvain.
Looking ahead at 2022, and consistent with late 2021, our sector continues to be impacted by global supply chain pressures, rising energy prices in Europe, metal production curtailments and power availability issues in China and Europe. In Europe, zinc smelters have limited production due to high power costs and in some cases have been put into care and maintenance.
Chinese zinc production has been affected by power availability related to coal supply and carbon emission controls. While zinc and copper prices increased sharply in late 2021, treatment charges have stayed suppressed. Industry experts are forecasting somewhat higher treatment charges in 2021 on the basis that their supply and demand analysis project to concrete surplus in 2022. But much uncertainty remains on as to how and when this might materialize.
Refined zinc premiums are also being impacted. In 2022, HudBay will close its Flin Flon smelter, and there is concern that zinc metal previously imported into North America from Europe will no longer be available in the same volume due to the tightness in that market. Finally, the transportation industry is also experiencing labor shortages and cost increases. With these contributing factors, CRU reported that the premium for zinc in North America has doubled since the end of 2020. 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.
Closer to home on the supply chain front, we’re seeing input cost increases and we’ve had some inventory impacts. As you know we must balance large offshore higher impurity concentrate inventories with lower impurity local concentrate deliveries. The availability and mix of both of these concentrate sources is essential to our operations.
Unfortunately, we’ve experienced a notable decrease in local mine deliveries due to production interruptions at those sites. This has required us to dip into contingency stock to mix feed qualities to maximize the processing facilities production. This is something we will continue to monitor closely and we are working on ensuring we have the right contingency plan in place where possible.
In this continued challenging context, we are closely monitoring zinc market dynamics, our inventory levels and our feed mix and we’re working on maintaining our current production cadence after facing some operational efficiencies late last year and early this year. We’re also moving ahead with the completion of our strategic projects over the next quarter so that we have — can have more stable operation, ramp up production in the second half of the year.
I’d like to reiterate my thanks to our management team and our employees across the plant for working safely and with dedication and what have been challenging circumstances. The pandemic is not yet behind us and we are all committed to commissioning these strategic projects, which we’re confident will put us in a solid position when market dynamics start to improve. That concludes our formal remarks.
Operator, back to you for the Q&A.
Question-and-Answer Session
Operator
[Operator Instructions].
Please hold for your first question. Your first question comes from Daniel McConvey with Rossport Investments.
Daniel McConvey
Hello. Good morning, everyone. Thanks for the presentation. I’m a little rusty, but with the strategic expansion being finished this year, and the shortage of energy around the world. I guess number one, what — from your standpoint remind us what the caveat, how the expansion is going to help your economics? And second, even though spot prices are low now, maybe just give us an update on that baseline with the HudBay refinery smelting how that might impact you. And just if the — where is the shutdown and more refineries in Europe with — because the gas prices, how that could help your situation on spot in renewing your contract?
Paul Einarson
Yes, so it’s I mean to the first question, Daniel. Thanks for those questions and for joining today. For the economics, the plant here is a largely fixed costs — has a very high fixed cost structure. We enjoy relatively low electricity costs. And therefore as we get additional tonnage, the incremental profit on that is fairly beneficial to us. So every additional time, there’s a high-level of payback. So generally, what we can do is just take our electricity costs, and that’s our major variable cost. There’s not a lot of additional fixed costs that are added to the addition of those tonnes. So depending on all of the other metrics of zinc price and treatment charges, et cetera, you’ll look for an uptake. And you just got to — you got to look at what your projections are on those revenue drivers. Add those tonnes and add the electricity cost. And you can see that there’s a fairly high-level uptake on those costs. So we’re looking again another 10,000 tonnes this year and another 10,000 tonnes on top of that next year, if the ramp up works as it should, and everything else goes forward as planned. So there’s a pretty good additional profit driver for us on — on those projects.
It’s not a huge game changer, necessarily. But it does allow us to be in a more defensive position as we see local stocks reducing. So instead of having a reduced production profile, the smelting project actually allow us to increase our production profile, which is very beneficial.
If you’re only adding maximum 20,000 tonnes, if everything goes well to our $260,000, $270,000, 270 tonne run rate. So we’re looking at about a 10%, 20% additional 10%, 15% additional production. So it’s certainly not doubling the capacity of the plant, but it does help again from a defensive position and allows us to forward of a traditional profitability.
With respect to what’s happening in Flin Flon, and in Europe, certainly having less zinc in the North American market is beneficial from a premium point of view. It’s not necessarily free money. As we’ve noted, there’s, and as everyone knows, there’s a lot of pressure on the supply chain markets at the current time. So there is additional complexity for us to organize both our concentrate coming in and the zinc going out as well as of our — all of our other products. So there is additional costs that are being incurred on a logistics front. So the additional premiums that come through aren’t necessarily pre-money, but as we’ve said there’s a little bit of zinc that currently gets imported from Europe into North American market and with the shutdowns and pressures in Europe, that’s certainly going to change and as well as Flin Flon coming off that will also change.
From a zinc concentrate point of view and treatment charges, one would expect that if there’s less smelter capacity in Europe, and here in Canada, that there may be some impact on — positive impact on treatment charges. But there are other smelting operations around the world that are increasing capacity. So it’s really a supply/demand issue. And all the reading, certainly we’re not experts on that here. I can only sort of recount what I’ve read from Wood Mackenzie, CRU, and other sources that the analysts seem to be positive on the increases in the treatment charge front, but they are tempering their increases, at least for 2021 are somewhat tempered. And they’re always sort of making other qualitative or qualification comments that anything could happen as we’re seeing with Russia entering the Ukraine that additional uncertainty as to what can be happening in Europe and around the world. And there are other impacts as well, that could potentially impact the treatment charge situation. So the treatment charge area for us is a key driver and it’s important for our overall profitability that that number increases. So we’re looking forward to seeing some improvement in that front. But as I’ve mentioned, the analysts are all pointing to a lot of uncertainty and they’re not sticking their heads out too far when they’re looking at increases in the treatment charges.
I hope that that gives you some helpful color.
Daniel McConvey
That’s helpful. Thank you. I just might add, what’s you’re given all that, what’s your level of optimism for 2022 performance –?
Paul Einarson
Pardon me.
Daniel McConvey
What is your level of optimism for 2022 performance with all those factors combined?
Paul Einarson
No, I think that that we are generally an optimistic bunch here. And we’re certainly focused on achieving from a production point of view, what we say we’re going to do maximizing our production and reducing our costs. In this environment, we’ve done a pretty good job over the last couple of years. But as we get to the pandemic here, there’s certainly strains from all fronts. On the supply chain operations, et cetera, we saw some outside maintenance events in last — late last year and some continued blips in January and February here was called with [ph] it. So we’re remaining optimistic from an operations and cost point of view and also on the treatment charge front. But again, there’s a lot of complexities both here internally, and also in the global economy that could have some negative impact on us here.
The only thing we can do here is try to do the best we can on our operations and cost front, try to reduce any negative impact and optimize any opportunity that we have, like the two expansion projects and to make them work as best as possible. And that’s all we can do from our front and the rest is in the market hands.
Operator
[Operator Instructions].
Your next question comes from Ben Franklin with Riverstyx Capital.
Ben Franklin
Hey, Paul, I just had a question about the moving parts with the doubling of the premiums and trying to understand where that leads Noranda. I think in the last couple information forums, it was a sensitivity of about $6 million in pretax cash for every penny. And I don’t think you still disclose what the premiums were. But I think they’re in the sort of $0.06 to $0.10 range historically. But they were fixed at one point with Glencore. So how do I take all of that information and see what that’s going to look like for the future and what that means for Noranda?
Paul Einarson
Thanks. Thanks, Ben for that. Yes, I think you can back into those numbers if you look at the MD&A tables. There’s the price of zinc. There’s two zinc prices there, one realized in the market, I think it’s called. Sylvain is helping me out here as realized zinc price and your average LME zinc price, if you look at the difference between those two, you’ll have the effective premium that we’ve realized. So I think you can look at, yes, you’re right, we have a fixed deal with Glencore gets revised twice during the year. So I think you can take a stab at the difference what you see in the MD&A there and use the CRU because the deal with Glencore does follow market, so we can take those that information, apply the factor that we give you on CRU and anything else you can find in the market and apply those metrics to the backend calculation related to the MD&A.
Ben Franklin
Excellent, excellent. So the sensitivity hasn’t really changed on that. There’s nothing else, no other moving parts that we can think of. I think you mentioned some increased costs that it’s not completely flow-through like we would expect, but it sounds pretty positive.
Paul Einarson
Yes, I think there’s a there’s a bit of — there’s going to be some positive impact there on the bottom line. We got to take a little bit of a thicker pencil to the logistics side of things. I think that we’re looking at inflation of 2%, 3% this year, I think that our logistics costs are going to have sort of stripped out a little bit not excessively but somewhat. So I think you can add some buffer in your model for that.
Operator
[Operator Instructions].
At this time, there are no further questions.
Operator
Thank you for participating. You may disconnect at this time.
