RE:TC controversy does it matter?I believe it does matter and here is why…….
They have provided us with a Pro Forma calculation of EBITDA which states that the EBITDA would have been $14 million if 2016 was replayed with the new SPA, with an unknown/secret TC
(“trust us folks, you don’t need to know the TC) in place. From my understanding the calculation has been done with all of the other variables (concentrate receipts, metal production, metal sales, by-product sales, LME, FX, etc.) being held constant at 2016 actual values.
The calculation is impossible to verify or compare without knowing the TC (which they have redacted) and inventory tonnages which they do not report (they report only value of con and metal at cost and occasionally the increase or decrease in tonnage but never an inventory tonnage figure). The effects of changes in the inventory tonnage, the LME and FX and gains or losses due to the inventory management system (hedging, derivatives, and FX gains) all greatly affect the calculated EBITDA. In 2016, the inventory increased by $71 million to $233 million. This is a function of both a steadily increasing LME ($1400 to $2800) over the year and an increase in tonnage of both concentrate (5900 t Zn) and finished goods (4000 t Zn).
In my opinion, a far more meaningful calculation would be the projected EBITDA using projected LME, FX and TC values assuming NO CHANGE IN INVENTORY (I.E. tonnes Zn received = tonnes Zn produced = tonnes Zn sold). I previously posted my EBITDA calculation on a no inventory change basis with LME = $2850 (US$1.29 per lb) and FX =1.33 for the 12 month term of the new supply agreement. The calculated EBITDA ranged from $16 million at TC = $40 to $64 million at TC = $100.
Note: Since Dec 2012 they have reported an inventory increase of 36,000 t of contained Zn = 70000 t concentrate and 18000 t of finished goods. From this I have estimated the Dec 2016 tonnage of Zn in inventory to be ~100000 t Zn (70000 t Zn in con, 5000 t Zn as WIP and 25000 t as salable metal). These tonnages translate to ~140,000 t concentrate = 14 weeks of RM, 5 weeks of FG and 1 week of WIP. This means that a tonne of Zn in con purchased today will be processed and available for sale ~20 weeks (5 months) from now. Zincinvestor states “Looks like adjusted EBITDA will be between Nil - $30 million - depending on zinc price, by product credits, f/x and production & sales volumes This range will generate negative to break even cash flow net of interest expense and maintenance capex. I trust their PF numbers to be correct even though we don't know the treatment charge”
The problem that I see with this is that the PF EBITDA is based on 2016 circumstances rather than a full year of operation under the new deal and projected LME. In the absence of the calculation details it is possible that a TC anywhere between $40 and $100 could produce the $14 million PF EBITDA they have calculated. We simply do not know how they have arrived at this result. Furthermore, a $40 TC flies in the face of what is reportedly being negotiated globally. The negotiated 2106 benchmark TC was $188 but price participation has raised this to $244 over 2016. Negotiations of 2017 TCs are reportedly in the $150 range with no price participation. Even if this $150 TC is discounted by $50 per tonne, it would still mean that the TC would be $100.
EBITDA = Total Sales Revenue – The Total Cost of Raw Materials + OPEX + Distribution + Sales & GA.
The EBITDA is the difference between two very large numbers as follows:
- Total sales revenues for 275,000 tonnes and byproducts at current LME, FX and premiums will be $1.123 billion CAD (Yes, billion with a ‘B’) = $1123 million CAD.
- Total Costs will be between $1106 million (at TC = $40) and $1059 million (at TC = $100).
- The fact is that the EBITDA represents between $16 million and $64 million (1.5% - 5.5%) of the total sales revenue.
- At TC $40 there is a cash burn.
- At TC$100 there is cash available for distribution.
The fact that they have refused to release the negotiated TC makes me believe that it is higher than the $40 that keeps being put forward as fact. Rather than the negative to break even cash flow stated by Zincinvestor, I believe it will be more like break even to positive $30 million.
If they signed a deal at a $40 TC for all of the concentrate they should be in jail……
BB
I believe it does matter and here is why…….
They have provided us with a Pro Forma calculation of EBITDA which states that the EBITDA would have been $14 million if 2016 was replayed with the new SPA, with an unknown/secret TC
(“trust us folks, you don’t need to know the TC) in place. From my understanding the calculation has been done with all of the other variables (concentrate receipts, metal production, metal sales, by-product sales, LME, FX, etc.) being held constant at 2016 actual values.
The calculation is impossible to verify or compare without knowing the TC (which they have redacted) and inventory tonnages which they do not report (they report only value of con and metal at cost and occasionally the increase or decrease in tonnage but never an inventory tonnage figure). The effects of changes in the inventory tonnage, the LME and FX and gains or losses due to the inventory management system (hedging, derivatives, and FX gains) all greatly affect the calculated EBITDA. In 2016, the inventory increased by $71 million to $233 million. This is a function of both a steadily increasing LME ($1400 to $2800) over the year and an increase in tonnage of both concentrate (5900 t Zn) and finished goods (4000 t Zn).
In my opinion, a far more meaningful calculation would be the projected EBITDA using projected LME, FX and TC values assuming NO CHANGE IN INVENTORY (I.E. tonnes Zn received = tonnes Zn produced = tonnes Zn sold). I previously posted my EBITDA calculation on a no inventory change basis with LME = $2850 (US$1.29 per lb) and FX =1.33 for the 12 month term of the new supply agreement. The calculated EBITDA ranged from $16 million at TC = $40 to $64 million at TC = $100.
Note: Since Dec 2012 they have reported an inventory increase of 36,000 t of contained Zn = 70000 t concentrate and 18000 t of finished goods. From this I have estimated the Dec 2016 tonnage of Zn in inventory to be ~100000 t Zn (70000 t Zn in con, 5000 t Zn as WIP and 25000 t as salable metal). These tonnages translate to ~140,000 t concentrate = 14 weeks of RM, 5 weeks of FG and 1 week of WIP. This means that a tonne of Zn in con purchased today will be processed and available for sale ~20 weeks (5 months) from now. Zincinvestor states “Looks like adjusted EBITDA will be between Nil - $30 million - depending on zinc price, by product credits, f/x and production & sales volumes This range will generate negative to break even cash flow net of interest expense and maintenance capex. I trust their PF numbers to be correct even though we don't know the treatment charge”
The problem that I see with this is that the PF EBITDA is based on 2016 circumstances rather than a full year of operation under the new deal and projected LME. In the absence of the calculation details it is possible that a TC anywhere between $40 and $100 could produce the $14 million PF EBITDA they have calculated. We simply do not know how they have arrived at this result. Furthermore, a $40 TC flies in the face of what is reportedly being negotiated globally. The negotiated 2106 benchmark TC was $188 but price participation has raised this to $244 over 2016. Negotiations of 2017 TCs are reportedly in the $150 range with no price participation. Even if this $150 TC is discounted by $50 per tonne, it would still mean that the TC would be $100.
EBITDA = Total Sales Revenue – The Total Cost of Raw Materials + OPEX + Distribution + Sales & GA.
The EBITDA is the difference between two very large numbers as follows:
- Total sales revenues for 275,000 tonnes and byproducts at current LME, FX and premiums will be $1.123 billion CAD (Yes, billion with a ‘B’) = $1123 million CAD.
- Total Costs will be between $1106 million (at TC = $40) and $1059 million (at TC = $100).
- The fact is that the EBITDA represents between $16 million and $64 million (1.5% - 5.5%) of the total sales revenue.
- At TC $40 there is a cash burn.
- At TC$100 there is cash available for distribution.
The fact that they have refused to release the negotiated TC makes me believe that it is higher than the $40 that keeps being put forward as fact. Rather than the negative to break even cash flow stated by Zincinvestor, I believe it will be more like break even to positive $30 million.
If they signed a deal at a $40 TC for all of the concentrate they should be in jail……
BB