TDW adopts realistic outlook... Wonder what took so long. NIF featured in today's Action Notes. This time I copy/pasted the textual content, omitting financials which I don't understand anyway:
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Noranda Income Fund
(NIF.UN-T) C$0.38 [at time of copy/paste]
Cellhouse Issues Limit Current Upside; Financing Becomes a Risk
Event
We are updating our estimates following last week's update on operations and cellhouse conditions, as well as discussions with management.
Impact: NEGATIVE
We have updated our model to reflect the cellhouse repair downtime planned in Q4/22, and reduced throughput expectations for 2023. It has become clear that despite the best market conditions in years for a North American zinc refinery (closure of European smelters due to the energy crisis, and surging TCs and zinc premiums), NIF will not be able to capitalize as we had expected. Furthermore, the eventual need for a full cellhouse and crane replacement (approximately ~$100mm) adds financing risk for NIF shareholders (NIF relies on Glencore to finance inventories and does not have any excess capital). Given the increased uncertainty of Noranda's ongoing operations, as well as additional financing risk for a larger overhaul, we have increased Noranda's risk rating to SPECULATIVE from High. Although Noranda stated that it does not intend to provide guidance for the foreseeable future, we expect the company to provide some form of an outlook for 2023 with the Q3/22 results in early November.
Noranda intends to shut down the cellhouse for at least 4-6 weeks from the end of October. The conditions of the cellhouse have continued to deteriorate and the company has decided to proactively repair the cells. The repairs will stabilize near-term operations, but will not address the underlying issues affecting operations.
Replacement of all cells in the cellhouse likely required to fully restore normal operations. The company believes that this upgrade would require an extended time frame for long lead-time items, with a time frame of 2024, and would require a shutdown of approximately seven weeks. The cost is estimated at ~US $100mm. This did come as a surprise; this plant has been operating relatively reliably and consistently for decades.
TD Investment Conclusion
We are reducing our recommendation to HOLD from Buy and reducing our target price to C$0.50 from C$2.00, reflecting our reduced estimates and increased risk levels.
Our valuation is based on a 3.5x EV/EBITDA multiple on our 2023 estimates.