Noranda Income Fund Unit NNDIF

Leverage to zinc prices

[Bwrbhk]

Here are some interesting numbers for Noranda.  In the 1st hald of 2021 the price of zinc averaged $1.28/lb. and Noranda broke even after taxes.  Had the current zinc price ($1.71/lb.) been in effect during the first half of 2021 and everything else stayed the same, Noranda would have earned about $13 million pre-tax.  On an annualized basis, this would be $26 million pre-tax or $19 million after tax.  This is equivalent to US $0.38/share or CDN $0.47/share.  This is not a forecast, but it gives one an idea what Noranda's earnings power is at current zinc prices, current (depressed) treatment charges, current byproduct revenue and current costs.  Noranda produces approximately 70 million lbs. of free zinc each year.  Thus a 10 cent change in the price of zinc impacts revenue and pre-tax earnings by about $7 million annualy.
The other major variable impacting Noranda's earnings are treatment charges.  As many Noranda shareholders are painfully aware, current spot TC's are depressed, having declined from over $300 per tonne in early 2020 to the current level of $90 to 100 per tonne.  The decline in TC's was caused by cutbacks in zinc concentrate production due to COVID.  Prior to the recent cutbacks in zinc refinery production in Europe and China, industry observers were expecting spot TC's to slowly recover as mine production recovered to pre-COVID levels.  With the recent cutbacks in zinc metal production at refineries in Europe and China the recovery in TC's should accelerate.  Every $10 per tonne increase in TC's impacts Noranda's pre-tax earnings by about $5 million.  Noranda do not disclose what they receive for TC's, but it is estimated that during the first half of 2021 it was around $100 per tonne.  All figures in US $'s unless otherwise noted.

[Eric1212]

  Imagine a 500 $ TC or 1 000 $ TC for a few quarters or years. If 10 $ of TC giving 5 M USD of earnings. Rougly, 500 $ could result 5 $ of earnings per share and 1 000 TC, 10 $ per share. 10 $ per share is what, 30 $ up to 200 $ a share on the market !? I didn't check the 10 $ for 5 M USD information but if it's true, we could have a really good 2022 year !

[Bwrbhk]

The leverage numbers are easy to check, just multiply the tones of concentrate treated each year by $10.  Noranda treats a little over 500,000 tones of concentrate each year.  $500 TC's is totally unrealistic as it would result in the closure of most of the world's zinc mines,

[Scotch12]

When the annually negotiated TC's were 300 in 2020 my recollection is the deal, they signed was half at that price and the other half at spot.   We have not had an announcement this year what the TC deal is and my understanding is they never reached one.  There is a fall back or default position if they can't reach an agreement. I suspect that it is the 50/50 formula. 

[Bwrbhk]

I believe the fall back position is related to spot TC's which are currently around $80 to $90 per tonne.  It appears that they received about $100 per tonne in the 1st half of 2021.

[ljp0101]

Anyone know how they handle transportation cost netbacks? Don't know the exact numbers but would guess you can argue +/- 50 per tonne of concentrate price adjustment depending. Benchmark and spot are both CFR North Asia.

[Bwrbhk]

The concentrate producer pays for the shipping.

[Scotch12]

Noranda is at least partially  responsible for shipping the finished l product to the customers.  It shows up on the balance sheet as selling costs and is not a trivial amount. I got this straight from managment when I inquired about what made up selling costs, and why was it so high given there appears to be only the one customer.

[ljp0101]

It doesn't matter who pays for the shipping, just how it gets reflected in the economics. Spot TCRC is CFR China. If I had concentrate in Canada, I'd need to either pay to ship it to China or accept a lower price from a trader that pays for shipping. Real world concentrate flow are more complicated though and arbing these flows is one way traders make money. Consider CEZ's position

[Scotch12]

  I think the math of how much they are getting is complicated.  I remember the TD analyst being exasperated by management in a CC.  It was well into 2020 and management indicated that some of the zinc was still being processed at the previous year’s TC, as that is when they ordered or received the zinc (I can't recall which).  If the default position is spot, why did they

[ZincDink]

Fun fact, in the domestic market, Chinese smelters are paid 4150 per MT TC which is the equivalent of 645 USD. This suggests that the smelter receives 1300 USD per tone of zinc produced. Yet they pay foreign less than $ 100 to smelt their concentrate. So, China mines can produce with a 650 USD per MT concentrate. why can't the rest of the world pay at least $ 500? The huge difference in

[ljp0101]

Difference in import and domestic China TCRCs is at least in part because of VAT. You should gross up the concentrate import price for VAT to compare. Could also be some differences in how the price is quoted but I'm sure there's no significant arb.