Noranda Income Fund Unit T.NIF.UN

RE:RE:ZINC TC and ZINC Price

[Bigbird9999]

The only thing that will make NIF profitable is a reasonable TC.  An increase in the Zn price is just gravy.  The benchmark TC is designed to approximate the cost to convert Zn in concentrate to Zn metal.  It is negotiated annually beween the miners and smelters, based on availability of concentrate, smelter capacity and a guaranteed long term source of feed for the smelter (sale of concentrate for the miner).  From 2010 to 2015 the average world benchmark TC ranged from $190 to $275.  Prior to 2010 it was >$250.   In 2007 before the last crash, TC briefly hit $600.   At the current LME Zn price ($1.20/lb) and a benchmark TC of $140, NIF is profitable and would generate ~$25 million in earnings for distribution after capital, interest and pond reserve requirements.  At the long term (last 10 years) >$200 TC, NIF is hugely profitable and would generat cash for distribution of ~$90 million USD ($1.20 CAD per share).  The problem is that the TC that was negotiated is only $85 which results in a shortage of revenue of about $10 million after covering the capital, interest and pond liability requirements.  In addition the benchmark TC includes revenue sharing terms that increases the TC if the Zn price increases.  In simple terms the cash available for distribution increases by ~6 Million USD for every $10 increase in the TC.

The spot TC is a whole different animal.  Is is negotiated daily based on availability of concentrate and individual smelter needs. It is much more volastile and much lower than the annual benchmark TC.  No smelter runs on 100% spot.  Typically they procur 80 - 90% of their feed at benchmark terms to guarantee that they will have feed to maintain close to full production.  The smelter procurs the remaining 10 - 20% of their feed on a spot basis.  In essence the smelter is gambling that there will be concentrate available on the spot marketwhen he needs it.  And the miner who is selling spot concentrate is gambling that there will be a smelter who needs/wantsit when the miner produces it.  The board keeps quoting the spot TC as if it were the bench mark and in essence saying we are lucky to get anything more that spot.

The above basis suggest that a "reasonable" TC for NIF to have negotiated would be 85% at $140 and 15% at $50 =~$130.  At TC = $130 NIF would generate cash for distribution of ~$15 million = 30 cents US per share.

The problem is that Glencore is not reasonable.   The independent board had the opportunity to "force" Glencore into a buyout or a "resonable" TC by refusing the "unreasonable" $85 TC and voting to shut down NIF.  The optimum time to do that was when the union struck, but they did do it then.  I do not know whether it is even possible to do it now because they have signed a 5 year deal with Glencore.  I do know it was possible before they signed the deal in 2017.  I know it was considered as an option but for some reason they did not do it.

Meanwhile, as showme says, "It is a mess".  The only way out of the mess is a higher, "reasonable" TC.  In the absence of an independent board acting in the best interests of the 37 million units public I do not know how we can get there from here.  But it begs the question, "Has the independent board performed its fiduciary duties to the public unit holders?" It would take someone with a major (>10%???) share holding and deep pockets to go against Glencore, sue (or oust) the independent directors and ultimately return the true value of NIF to the public unitholders.  The deck is stacked against us and Glencore is known to skate over the line with respet to disclosures, fairness and legalities.

Meanwhile, we can pray for a higher TC, or force a higher TC or get an independent  board that holds the public unit holders interest first and negotiates a higher TC or....???????  I am still long on NIF but I admit it is getting more and more difficult to see a way out of this mess.

@Zincdink,  One last point, is that the hedging program is protective only and applied on 100% of production which is hedged at the LME price when the concentrate is purchased.  If the Zn price increases or decreases from the time they buy the feed untill they metal is sold (3 - 4 months), the sales revenue changes up or down.  The sales revenue change (up or down) as a result of changing Zn price is 100% offsets by a gain (or loss) on the hedge.  The numbers can be huge but are net zero.

BB