Noranda Income Fund Unit T.NIF.UN

RE:RE:RE:RE:Supply and Processing Agreement: Current vs Market Terms

[BuenaSuertaAtod]

Thanks BB - I found the free metal part especially informative - I'd only compared the TC vs. processing fee in my spreadsheet so far as I was unclear as to how the "free metal" would change.

Adding free metal to my SS (and ignoring Glencore's agent fee as it is unknown) I get breakeven (Market terms EBITDA = EBITDA under fixed processing fee) at 27% smelter share and $1.32/lb zinc, or 26% for the smelter with a $1.36 zinc price.

That is much better. Market terms may be better for NIF than the fixed processing fee sometime in 2017.

I'll look for your spreadsheet so I can compare & check my work.

Bigbird9999 wrote: In May along with the new market terms supply agreement two other things will change.

First is the relationship between Glencore and NIF.  Under the current SPA Glencore is contracted to supply 550,000 tpa (180,000 t for Jan - Apr) of concentrate at the current fixed TC of 41 cents CAD per lb Zn.  Glencore is the concentrate supplier.  Glencore has no choice they MUST supply the contracted amount of concentrate no matter if there is a glut or shortage of concentrate on the world market.   In May, Glencore ceases to be the concentrate supplier and becomes the AGENT to procure Zn concentrates on the world market for NIF.  Some of this concentrate will come from Glencore mines but a bunch of it will come from the mines of other companies.  Glencore will purchase concentrate from the world market at "market terms" on behalf of NIF...... As the Agent, Glencore will charge a fee for this service. 

The second thing that will change is that Glencore will convert their ordinary shares into priority shares which means that they will share in the monthly distribution. 

As Homer has said, the current SPA was structured to smooth out the volatility  and provide STABILITY to allow monthly distributions.  For the most part it has done just that for the past 15 years.  The vast majority of the total revenue was from the fixed treatment charge of 41 cents CAD per pound = ~$230 million per year.  About $13 million came from "frre metal" (they pay for 96% and recover 97.2%) which is sold in US$. 

Under market terms things are much differrent.  Treatment charges revenue will be less, (maybe 50%) but will be in US$ so the low $CAD helps.  And the free metal component will be much higher (by a factor of 10 - 12) because under market terms they will pay for 85% of the Zn but will recover 97.2%.  Depending on the Zn metal price and the US/CAD FX, the "free metal" gain will be $100 - $150 million per year which will cover a similar $100 - $130 million reduction in Treatment charges.

For any given Zn price, US/CAD FX  and market terms TC the cash flow can be calculated.  The problem is that we do not yet know the market terms TC (it has not been determined yet)   At the same time the Zn price and FX are constantly moving up and down. 

Homer, if you search my posts as Bigbird999 (my account got corrupted so I am now Bigbird9999) of about 1 year ago you will find a spreadsheet that makes this calculation.

I remain convinced that NIF will be profitable under the new terms but there will be huge swings as the Zn price and FX gyrate.

BB