RE:New treatment charges should begin to impact revenue in Q3 The Q4 results tomorrow will likely shed very little light on the TC of the new agreement. I believe is will be $100 plus and that appears to be backed up by the mating season discussions at the IZA meetings this week. Speculation will abound as the longs and shorts make their bets. NIF says they will not disclose terms until they are in effect, so as it stands now, speculation about future profitability will likely continue until May 1.
They do not report inventory tonnages, but they do report the inventory value for concnetrate, WIP and ingot metal. This value is at cost so this means it is the net cost of metal in concentrate (including the TC of 41 cents CAD per lb), WIP and finished metal are valued at the cost of metal in con plus the cost of conversion of 38 cents CAD per lb.
At the end of Q3 the values were total $182 million made up of
- con inventory $85 million
- WIP $16 million
- finished metal $72 million
I can't do an exact calculation but I can get pretty close by using the average LME price for Zn over Q3 when they received the concentrate Production is about 22500 tonnes per month (270 Ktpa)
- con inventory $85 million = 70000 t Zn (135000 t con)= ~12 weeks production
- WIP $16 million = ~7500 t Zn = ~1.5 weeks of production
- finished metal $72 million = ~36000 t Zn = ~8 weeks of production
- Total $182 million = 114,000 t zn = 23 weeks production
Buried in the notes and MDA they do report the change in tonnage inventory. Con down by 23000 t and metal down by 900 to at the end of Q3 vs Q4 -15 inventory. It is important to note that concentrate goes into inventory when NIF takes ownership. Ownership of domestic cons transfer to NIF when recieved by train or truck at the plant. Ownership of imported cons can transfer as early as date of shipment when it is loaded onto a boat or as late as when it is received at port (Trois Rivieres, Montral or Valleyfield). Timing of the shipments and ownership change can cause huge (40 - 50000 t Zn = 80000 - 100000 t con =1 - 2 months) swings in the concentrate inventory. They reported that the inventory decreased by 24000 t Zn in the 9 month up to Q3 but the value of the inventory went up by 11 million from 171 to $182 million because of the huge increase in LME over the 9 months. Remember the inventory value is based on cost, not the sale price.
Based on this and my knowledge of Zn plant operations I can say that the inventory will fluctuate from
- Zn in con 70,000 - 120000 t Zn = 12 -20 weeks
- WIP constant at 7500 t = 1.5 weeks
- finished metal 30000 - 50000 t Zn = 8 -12 weeks
If the Q4 inventory tonnage remains the same as Q3 (at 114000 t Zn), the value of the inventory will increase by $45 million to ~$230 million due to the effect of an average US$300 increase of the LME over Q4. Depending on the timing of concentrates receipts this could easily increase another 50 - 75 million.
This coulped with the sales vs production tonnages could have a huge effect on both the Q4 EBITDA and the LOIC draw required to finance thie inventory.
You have raised the same point that I was previously concerned about.. What are they doing with the concentrate shipments for the first 5 months of 2017? They should be paying for these and taking possession of these 5 months supply of concentrate (~200000 t con) whether they are on strike or not, because the net cost is $100 - $200 per tonne con (depending on the new TC) less than the post May terms. As you point out,, the benefit ($20 - $40 million) of the cheaper feed will spill into Q2 and Q3 of 2017 and affect the results. My concern is that the fund might declare force measure and let Glencore off the hopok for the cheap cons. Somebody should ask about this tomorrow.
BB