A Word on Treatment Charges and NIF performanceThere has been much speculation and considerable misunderstanding of the effect of "market terms and/or benchnmark terms" on NIF's future performance. For those that are interested, I will attempt to explain what this means to NIF in the future.
In the past, under the current SAP, NIF's earnings have been virtually unaffected by the LME price of Zn and only marginally affected by the $US FX rate. Nif paid for 96% of the contained zinc and recovered ~97.7% so they have about 4000 tonnes of "free zinc" which they can sell. NIF also received a fixed stable treatment charge of 41 cents CAD) per lb of zinc. They also receive a metal premium of 8 US cents per pound for ALL of the Zn produced and $8 million in by product revenue.
Using Q3 values for LME $1940/ t and FX 1.32 (.76 US/CAD) and Doing the math for 270000 tonnes for 2016 we see $CAD Revenues of
- Treatment charges 41 cents/lb ................ $240 million
- Free Metal of 4700 tonnes......................... $12 million
- Premium of 8 cents US on 270000 tonnes ............. $63 million
- By product revenues...................................................... $8 million
- Total Revenues $323 million
This is ofset by
- Total operating sales and admin costs of.......... $228 million
- CAPEX......................................................................... $30 million
- Reserves for ponds and pensions...................... $1 million
- Total Costs.............................................................. $259 million
EBITDA 323 - 259 ............................................................................ $64 million From this they distributed about 40 cents per share to million to 37 million shareholders ($16 million) and paid long term debt of $22.5 million
Annual EBITA exposure to LME and FX is limited to ~$500k for 1 cent change in FX or $100 change in LME.
Conventional market terms supply of concentrate contracts are structured as follows:
- Smelter pays for 85% of the contained Zinc @ LME in USD
- Smelter receives a treatment charge as an incentive (kick back) from the miner. This TC is paid in USD per dmt of con and is negotiated with each individual mine. The range of this TC is historicaly ~US$200 - $250 per dmt (discussed below). This is much lower than the current SPA treatment charge of 41 cents per pound Zn which equates to ~US$340 per dmt
- There is usually, but not always a price participation factor which increases or decreases the TC when the LME price moves up/down fromthe baisis LME price. Typically this term is: TC moves up/down by 3 cents for each $1 above/below the basis price. This would result in an increased TC of $3 for a $100 increase in the LME from the basis price.
- Under "market terms", NIF will continue to recover 97.7% percent of the Zn but since they are only paying for 85% of the Zn they will have a free metal gain of 35,000 tonnes which they will sell at LME price. This is 9x the free metal gain under the current SPA.
The EBITDA for 2017 can be calulated based on the
ANNUAL AVERAGE PROJECTED VALUES for the US/CAD FX, TC and LME Zn price. In the past, they have done this calculation each quarter where they compare the results under the SPA with those that would have been achieved with market terms.
The big problem is that we do not know what the AVERAGE TC will be going forward. The "market" TC cannot be simplified to a single number, rather it wi a
projection of the future tms based on signed contracts and assumptions of market conditions in the future. of The TC will vary month by month (sometimes day by day) and depends on the "market". Spot TCs are much lower than contracts but they do not tell the whole story because there are often escallators )that depend on the LME price) of up to $150 per dmt where the miner pays a kickback to the smelter. For instance Nyrstar in thier Q3 conference call indicated that their 2017 concentrate requirements (approximately 2,000,000 tonnes) is booked at a $30 - $50 discount from 2016 rates which would indicate a TC in the range of $160.
Doing the same calculation as above with an average Treament charge of $160, and generally accepted values of 0.745 US/CAD FX and $2400 LME
- Treatment charges US$160/dmt................ $118 million
- Free Metal of 35000 tonnes......................... $113 million
- Premium of 8 cents US on 270000 tonnes ............. $64 million
- By product revenues...................................................... $8 million
- Total Revenues $303 million
This is ofset by
- Total operating sales and admin costs of.......... $228 million
- CAPEX......................................................................... $30 million
- Reserves for ponds and pensions...................... $1 million
- Total Costs.............................................................. $259 million
EBITDA 303 - 259 ............................................................................ $44 million From this they can easily maintain a distribution of 30 - 50 cents per share on 50 million shares ($15 - $25 million) because the long term debt of $22.5 million has been paid off.
The sensitivities of NIF's EBITDA as reported by NIF and confirmed by my calculations are:
- A change of 1 cent in the AVERAGE ANNUAL US/CAD FX rate changes the EBITDA by $2.7 million
- A change of US$10 in the AVERAGE ANNUAL realized treatment charge changes the EBITDA by $7.0 million
- A change of 1 cent in the AVERAGE ANNUAL LME Zn Price of US$100 (4.5 us cents per pound) changes the EBITDA by $4.7 million
As we have seen The LME zinc price can change $100 in a day and $1000 in a year which could lead to volatile results for any individual month. However, the "experts" tsay that the AVERAGE LME Zn price will in excess of $2200 (Currently the Dec 2017 future price is $2560).
Similarly the FX rate is predicted to stay at or below the current level of 0.75 US/CAD. Many are predicting a sub 70 cent dollar and nobody is predicting anything above 76 cents. This provides an upside potential of up to $13 million bases on FX.
The final piece of the puzzle is the the
AVERAGE Treatment Charge. The board and the speculators are throwing around numbers like $50. But in reality there are very few Zinc plants on the planet that can survive at an AVERAGE TC under $140 . NIF is one of these few. It will still have an EBITDA of $20 million at a TC $140. I do not expect much in the way of clarity because I do not expect that the board will release the actual terms of the individual contracts for supply of concentrate. I am quite certain that contracts have been negotiated for at least the first half of 2017 and that they are down to the short strokes on the balance of the year's requirements.
I continue to be bullish on NIF. It will probably be a bumpy ride, but I expect that the AVERAGE TC for 2017 will be $140 - $160 with an LME of $2200 - $2500 and a 75 cent US?CAD FX. This will produce an EBITDA between $20 million and $50 million with the potential of an increase of $13 million if the $CAD drops to 70 cents.
BB