Noranda Income Fund Unit T.NIF.UN

RE:RE:RE:Noranda Outlook

[ljp0101]

Probably wouldn't get involved again; CEZ is a decent smelter with some long term structural advantages and I though there was good optionality in the stock around the top of the cycle medium term and China smelting cost structure moving up long term. NIF is easily worth >5/share with control and my basis is ~20% of that so I thought it was decent value. My mistake was underestimating the Glencore fox-running-the-henhouse situation and the fecklessness and/or cluelessness of the independent directors, who simply lack commodity common sense (basic that hedge your entire conversion margin or nothing but don't half hedge, especially with a shark trading house).

 

This is the time we should be spewing cashflow, and we'll do ok yet if operations aren't fumbled. But all the wrong hedging decisions have been made - should have staying on spot TCRCs and physical premium shouldn't have been hedged - so here we are with the most fantastic market situation and poor adjusted EBITDA with a potential working capital / hedging collateral mess.

The liquidation cost is relavent inasmuch as Glencore uses it to justify making decisions with poor economics as better than the alternative of a zero to the IDs. The expansion that was just done was a marginal risk adjusted project at the time for NIF and probably will end up negative NPV given how much it screwed up operations but it ends up quite good for Glencore because they can source a wider range of concentrates and pocket the transportation differentials whereas they were more constrained and would have had to ship further before.