RE:RE:RE:RE:Why is this stock tankingRenewal of the SPA at market terms would remove a lot of uncertainty, and no doubt push the SP in that direction. Do you think 50 cents div would be sustainable in that scenario? I think it could hit $5 SP with a smaller div. If a 50 cent div is sustainable at market terms, I could well imagine the SP heading north of $5.
Not only do I think it is sustainable......a case could be made to increase the distribution.
Comparing the EBITDA under the SPA with the EBITDA that would be obtained under market terms is a bit complicated. Under the SPA the fund pays for 96% of Zn contained in the concentrate at the LME price This is in $US. The fund receives a processing fee (treatment charge or TC) of $0.405 ($Can) for this payable Zn. NIF actually recovers 97.3% of the Zn in concentrate so they have1.3% more metal to sell than they paid for. This metal gain is about 3500 tonnes which they sell for about US$7 million.
Market terms are very different. Everything is done in $US. Under market terms, the smelter pays for 85% of the Zn contained in the concentrate at the LME price. The smelter receives a TC for every tonne of concentrate processed. Under market terms the TC is currently about US$220 per tonne of concentrate (about US$0.20 per pound of Zn). Over the last 15 years the TC has been reduced from about $280 per tonne to $200. The TC is what is negotiated between the miner and smelter to determine the market terms. When there is a shortage of concentrate the TC is reduced, pushing more revenue to the miner. When there is excess concentrate the TC increases and more revenue is pushed to the smelter. NIF still recovers 97.3% so they have a 12.3% metal gain (~33000 tones worth $67 million). Spot terms are done exactly the same way. The only difference is a much lower TC under spot terms.
By doing a bunch of math and converting the $Can processing fee to $US, one can calculate what the EBITDA would have been if the concentrate had been purchased at spot or market terms instead of the SPA terms. They do this every quarterly report.
For 2014 (and previous years) the EBITDA under market terms would have been $18 million (~$5 million per quarter) less than it was under the SPA. In Q1 of 2015 the EBITDA would have been $1 million
more under market terms. In Q2 it would have been $6.5 million
more under market terms. What happened....simple.....In 2014 the FX was US$1 =$1.10 Canadian. Since the start of the 2015 the the FX rate has moved to $1.31 Canadian per US$.
I Know that it sounds crazy, but Glencore made $6.5 million extra profit in Q2 by supplying under the SPA than they would have made under market terms.
Obviously we can't count on such a favourable rate forever but I don't believe that we will see the Canadian $ approach par anytime soon. As long as it stays in the $1.20 - $1.30 range, the market terms will be equivalent or better for NIF than the SPA terms.
In addition, the long term debt which consumes $15 million per year will be reduced to zero at the end of 2016. The current dividend is $18 million which will be 80% covered by the reduced debt payment after December 2016. Unless something happens like a fire or collapse of the world economy, NIF is posed to keep generating cash by the bucket full.
If things stay about the same until next year, I think we just might see a renewal rather than a buy out. HOW CRAZY WOULD IT BE IF GLENCORE OFFERS TO RENEW THE SPA AT THE CURRRENT TERMS AND NIF SAYS NO, WE WANT MARKET TERMS......
The current dividend is 17%, general wisdom says that 17% is not sustainable, but every way I look at it, I am convinced that $0.50 per year is sustainable. If the market believes/realizes that 50 cents is sustainable they will recognize the value and the dividend rate will fall to about 10%. If the distribution remains at $0.50 the the SP will rise to $5.
BB