TD lowers price target to $2.00One of the few analysts covering NIF.un didn't like the latest quarter...
Noranda Income Fund (NIF.UN-T) C$1.23
Reducing Estimates on Operational Issues and Lower Zinc Price
Event
We are updating our estimates following Noranda's Q2/22 results.
Impact: NEGATIVE
We have updated our model to reflect the Q2/22 results, as well as the revised 2022
guidance and new contractual agreement. Expected positive exposure to high zinc
TCs has been overshadowed by a reduction in planned production and a decline in
TD's zinc and copper price assumptions. Our estimates have declined for 2022 and
2023 as a result.
Adjusted EBITDA for the second quarter was -$2.3mm, below our estimate of
$16.4mm, largely due to operational issues and lower production. This resulted in
lower revenue from free zinc, TCs, and zinc premiums.
Q2/22 zinc production of 57k tonnes was below our estimate of 67.3k tonnes.
2022 guidance has been reduced to 225k-240k tonnes from its previous April
2022 guidance of 255k-265k tonnes. This reflects labour challenges, a further
deterioration in cellhouse performance and an overrun on planned cellhouse
downtime in June. Management is evaluating potential investments to remedy
these ongoing cellhouse and equipment issues.
2022/2023 Contractual Agreement: Noranda and Glencore have entered into
an agreement for TCs and zinc premium for the period of May 1, 2022 to April
30, 2023. TCs will be set by a blend of 60% fixed rate and 40% variable market
rate. Zinc premiums are set at a fixed rate for the period. Detailed terms were not
disclosed. The impact of this agreement is expected to be visible in Q3/22, after
all inventory purchased before May 1, 2022 has been processed.
Spot TCs remain elevated: Spot TCs declined slightly to $235/t in June after
peaking at $260/t in April (based on Wood MacKenzie). This is up significantly
from $85/t in December. The TCs largely relate to smelter curtailments in Europe
due to high electricity prices, a situation that we believe could continue, given the
ongoing war in Ukraine.
TD Investment Conclusion
We are maintaining our BUY recommendation and reducing our target price
to C$2.00 from C$2.50, reflecting the operational issues and the recent
commodity price decline (primarily zinc and copper). Our valuation is based on
a 3.5x EV/EBITDA multiple on our 2023 estimates.