TD Weighs in...12 month target price drops from $4.25 to $3.75...
Noranda Income Fund (NIF.UN-T) C$2.90
Dividend-cut Materializes; Negotiations with Glencore Advancing
Event Noranda Income Fund reported Q1 results.
Impact: MIXED Dividend cut by 40% in preparation for transition to market terms: The monthly distribution has been cut to $0.025 per unit from $0.04167 previously. This represents a yield of ~10% at the current share price. Although the plant continues to generate significant excess operating cash flow (it generated $0.24/share before working capital changes in Q1), management is cutting the dividend to manage cash, and presumably build up a cash buffer in advance of the transition to market terms in May 2017. This is not a complete surprise as we did expect a lower dividend post expiration of the SPA, but the timing of the cut is earlier than we expected.
However, for the first time, we see evidence that negotiations with Glencore appear to be advancing: Although a full extension of the contract has not been settled, Glencore has agreed to supply feed for all of 2017 while negotiations continue, which gives the fund better certainty as they negotiate terms. The final payability terms have not been settled for this period, but management did indicate that the terms will be based on market terms, as expected. We believe that there is a high likelihood that the contract will be extended further at market terms given the strategic significance to Glencore of having control of the zinc value chain.
Adjusted EBITDA of $1.2mm was well below our estimate of $28.5mm, reflecting weaker-than-expected by-product revenues and zinc premiums, consistent with the weak commodity markets towards the end of 2015 and in the early part of 2016. However, despite the earnings miss, the plant continued to operate well, with zinc production of 67.6k tonnes in line with our estimate. Moreover, the reduction in inventory levels drove a reduction in the net debt balance to $26mm from $91mm as of Q4/15.
TD Investment Conclusion We remain of the view that there is significant value in this asset. Glencore remains in the driver’s seat, as manager of the fund, operator of the plant, and counterparty to the agreement. However, we believe that ultimately value will be realized in excess of the current unit price, and that the fund will easily generate enough cash flow to support the current distribution. We are maintaining our BUY rating, but lowering our target price to $3.75 from $4.25, reflecting our revised estimates using the new spot and term TCs.