Noranda Income Fund Unit NNDIF

TDW adopts realistic outlook...

[JasonBilly]

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:

. . . . . . .

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.

 

[Bwrbhk]

The TD analyst has never been right on his Noranda recommendation.  

[ZincDink]

The only thing right in that analysis was this has been the best market conditions in years and NIF is going to be missing out on a lot of it. Amazing how sentiment has changed on this. Remember the strike in 2017 which resulted in only 180 ktonnes for the year? Was still 1.25. Guess the need for cell imporovements is destroying what little faith was left. Can't wait to learn how a 250 M

[Eric1212]

Actually, it's 25 M$ + debts.     BUT, does it's really worth 25 M$ + debts !? That is the question... Most probably, the value is somewhere arround 700 M$ with equipments.   The real estate alone is worth 33 941 500 $ according to the city.

[JCW]

Thanks Eric, your perspective and knowledge are very much apprciated!!  Difficult to imagine what options might exist.......

[Bwrbhk]

All of the debt and current liabilities are more than covered with the current assets.  The shares are trading at less than the net-net working capital (working capital less all liabilities) per share.

[ljp0101]

Problem with the net-net line of thought is the starting point on a going concern basis. Company has said environmental liability is larger than balance sheet mark if they close and implied liquidiation value is nil. I don't endorse this view but that's Glencore's argument and can be used to justify any shenanigans. Wonder if they'll be able to access Canada's cheap green

[Bwrbhk]

If they spend $100 million to replace the cell house, it will be the lowest cost zinc refinery in the western world and probably lower cost than many Chinese refineries.  The major uncertainty is how do they raise the $100 million?  Loan from the Quebec government, a rights issue backstopped by Glencore, etc.

[BSdetector2016]

How about an equity issue? $100M/$0.35 = 285M new shares. This isn't investable, at least as an income instrument. Glencore will do what it does best and mop up the interest that it doesn't own and fund it themselves, probably with a little help from the Quebec government distributing Alberta oil money.