Noranda Income Fund Unit T.NIF.UN

Yes the numbers are out......Now take a deep breath......

[Bigbird999]

In my opinion, the quarterly results described as "dismal" by some are not really that bad.  Some of it is accounting smoke and mirrors, some of it is caused by pricing volatility described below, some of it is a result of the need for the independant board to be ultra conservative, and some of it is just plain baffelgab nurtured by Glencore looking to gain an advantage from the FUD surrounding this stock.  Take as look at the EBITDA on page 14 of the MDA.  For NIF the EBITDA is almost directly equal to the cash flow.  The EBITDA for the "dismal" Q2 was $6 million.  Year to date it is $35 million.  Out of this EBITDA they paid off $7.5  million in long term debt and distributed approx $8 million to the priority unit holders (me and you).  EBITDA for the last half of the year should easily exceed the first half.  More than enough to pay off the remaining $15 million in debt and pay out the current distribution of $6 million.

I was a bit surprised that the financial results showed a loss, but as I posted, a couple of days ago, the inventory valuation can impact the financials when the price of zinc fluctuates as it has over the last year.  In any given quarter, the US$  LME zinc price determines what NIF pays for feed and the US$ LME price plus 7 -10 cents per lb (USD $150 - $200 per tonne) determines the sales revenue.   The inventory is valued at Cost so the raw materials and the materials in process are valued at the average cost of acquisition converted to $CAD for the quarter.  (They reference this in the MDA).  The reports are financial statements in $CAD.  Inventory is not reported as tonnage but if you do enough data mining and know what to look for you can find the approximate tonnages in inventory.  The value of the  finished goods inventory is also valued at a cost equal to the cost of the feed plus the operating cost  to turn concentrate into zinc metal (CAD $48 million for 69286 tonnes = CAD$693 = US$533).

Over the past year the Average quarterly US$/T LME has fluctuated wildly 2015 Q3 $1800  2015 Q4 $1700 2016 Q1 $1500  2016 Q2 $2000.   Since the low of $1450 in Jan/Feb the price has increased by 50% to >$2200.  In the financials the inventory includes $60 million of finished goods.  Remember this is at cost.  These goods were produced from material purchased at much lower LME than today's price and will be sold at today's LME price plus a premium.  Boone also references this in one of the reports saying it will have a positive impact in future sales revenue.

What we do know is that the finished goods inventory increased by ~2000 tonnes in Q2 (69000 produced 67000 sold.  If this 2000 tonnes were to be sold today we would see a bump in sales revenue of about US$2400 = CAD$3200 per tonne = ~CAD$7 million. 

The market seems to be reading the results as NOT TOO GLOOMY.  Previously, a quarterly report like we saw yesterday would have resulted in a SP drop of 25% - 50%.  This time it dropped about 20 cents to where it has been since the last quarterly result in May when it dropped from $3.50 to $2.50.

By Nov 3 Glencore will have to shoot or get off the pot.  They must issue notice of termination, renew the agreement or make an offer for 100%.  Could be a wild ride until then but there is huge upside potential and virtually no downside from the current SP

BB