TD lowers target price to $2.50 Event
Noranda Income Fund reported Q4/17 results.
Impact: SLIGHTLY NEGATIVE
Q4 results were effectively in-line, as we had assumed the operations would
still be affected by the strike. As a reminder, the strike ended in late November
with the Fund and its unionized employees reaching a new collective agreement.
Operations at the plant have resumed to normal capacity as of the end of January
2018.
We have incorporated the Q4 results into our model, updated our estimates, and
also rolled out our 2019 estimates.
Adjusted EBITDA was -$3.0mm, slightly below our estimate of -$1.5mm,
reflecting higher-than-expected production costs, which was likely due to the
ramp-up time required to restore the plant to full operating capacity.
Zinc production of 46,004 tonnes was above our estimate of 35,987 tonnes.
Sales were 45,748 tonnes, effectively in line with production. The zinc premium
of $0.06/lb was slightly below our estimate of $0.07/lb.
Balance sheet: Net debt increased to $107mm (cash of $1.8mm and debt of
$108.7mm) from $93mm at the end of Q3/17, reflecting drawings from the RCF net
of repayments totalling $16mm in Q4/17 due to a build in inventory. Net working
capital is currently $74mm or $1.48 per unit.
The ABL facility, which had a previous maturity date of March 15, 2018 has
been extended by a month to April 13, 2018. The Fund is working on meeting
the conditions that would result in a subsequent maturity extension to July 20,
2020. As at YE 2017, excess availability on the facility was $21.5mm.
TD Investment Conclusion
We are maintaining our BUY rating but lowering our target price to C$2.50 from
C$2.75 previously . We remain of the view that there is significant value in this asset
and upside in the share price, which continues to trade below net working capital.
Despite the near-term weakness in zinc treatment charges, continued strength in
the underlying price of zinc will benefit the fund and potentially lead to improved
treatment charges in future years as additional zinc supply comes online.