Noranda Income Fund

Welcome to the Noranda Income Fund Fourth Quarter and Fiscal 2021 Financial Results Conference Call-In Webcast. At this time, all participants are in a listen-only mode. Following management's presentation, there will be a question-and-answer session, open to financial analysts and investors only. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, February 25th at 8.30 a.m. Eastern Time. I will now turn the conference over to Paul Arnarsson, CEO of Canadian Electronics Think Limited, Noranda Income Funds Manager. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us. Also joining me this morning is our CFO, Sylvain Laret. Before we start, I'd like to draw your attention to slide three of the presentation regarding forward-looking information. During the course of today's presentation, we will be making a number of forward-looking statements that are based on certain assumptions and subject to a number of risk factors outlined on this slide. As a result, the Rand income fund cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Please note that all dollar amounts in this presentation are in U.S. dollars, unless otherwise indicated. Turning to slide four, 2021 was a challenging year for the fund in the context of the ongoing pandemic, unfavorable dynamics in the global zinc concentrate markets, as well as inflationary and supply chain pressures impacting businesses globally. We nonetheless stayed focused on achieving our production targets and moving forward with our strategic expansion projects while mitigating the challenges we face. For the quarter, loss before income taxes came in at $42.8 million compared to a loss of $13.7 million in the comparable period. After removing the unrealized derivative loss of $31.4 million and $6 million respectively and other adjustments, Adjusted EBITDA was nil compared to a negative $0.9 million in the same quarter last year. For the year, loss before income taxes was $39.1 million compared to a loss of $26.7 million in the prior year. After removing the unrealized derivative loss of $30.5 and $6.9 million, respectively, and other adjustments, adjusted EBITDA was $13.5 million compared to $17.4 million last year. This past December 17th, the trustees approved a special cash distribution of $0.02 per unit based on the fund's 2021 unconsolidated taxable income calculated in accordance with our trust indenture. Our financial results reflect a tight global concentrate market, which negatively impacted one of our key revenue sources, treatment charges, which were significantly lower in 2021 compared to historical averages. Higher zinc, copper, and sulfuric acid prices only partially offset the lower treatment charges. Our fourth quarter results were also impacted by the high unrealized derivative instrument losses, which were driven by a larger zinc hedge book and sharp zinc price increases late in the quarter. These unrealized losses resulted from zinc forward sales that are entered into as part of our inventory management program that is designed to protect the price of zinc purchased until it is sold. Fluctuations in zinc prices can create timing differences between the gains or losses on derivative instruments versus its eventual realization when the corresponding zinc is sold. Increased input costs and the strengthening of the Canadian dollar compared to the US dollar have added to the pressure on profits. In this context, and as we closely monitor zinc concentrate market dynamics impacting our revenues in 2022, the team is working diligently to maintain production cadence and complete our strategic projects. both of which face challenges late in the year. We met the mid-range of our 2021 production target of between 260,000 and 270,000 tons of zinc metal. However, our operating efficiency was negatively impacted in Q4 due to unplanned maintenance events. As you well know, our operations are very complex, and this complexity has only increased in the context of the ongoing pandemic. Unfortunately, we encountered some production issues, which resulted in lost tonnage. Turning to slide five, let's take a look at our strategic projects. In alignment with our long-term strategy to decrease production costs and increase profitability, the fund has been in the process of installing additional belt filters and related equipment to increase filtration capacity. We are also adding two additional cooling towers in the cell house to improve cooling capacity in the summer months. The cost of the expansion projects was originally estimated at about $32 million, but following some setbacks late in the year, and the unfavorable exchange rate, the total cost is now estimated at around $38 million. The cost increases were primarily incurred in the fourth quarter and were due to materials and labor availability challenges, which also caused the delay in the overall project timeline. Commissioning is now targeted for the second quarter of 2022, after which we will ramp up our production capacity. Despite the project delays, we are maintaining our increased production target for 2022 of between 270,000 and 280,000 tons. Assuming no further delays in project completion and taking into account some cold weather related impacts in the corridor underway, our forecasted volume is now at the mid-range of this target, down from the upper end that was anticipated during our budgeting process. The following step, and not before 2023, sorry, not before 2023, is the further ramp up of production up to between 280,000 and 290,000 times annually. Given the complexity of our smelting operations, production capacity increases are a gradual process. I will now turn it over to Sylvain to review our financial and operating results in more detail.

Thank you, Paul, and good morning, everyone. Let's start with our key performance drivers in Q4 on slide seven. Zinc concentrate and secondary feed process was slightly lower than in the same period in 2020. Zinc grade and zinc recovery were slightly lower compared to the same period last year. The lower zinc grade is explained by lower local mine deliveries during the quarter. Average LME zinc price was at $1.53 a pound, so significantly higher than in the same period last year. Byproduct revenue increased as a result of higher sulfuric acid and copper prices. Finally, the average exchange rate was at 79 cents, reflecting a stronger Canadian dollar, which had a significant impact on our production costs. Turning now to slide 8, in Q4, zinc metal production and sales decreased year-over-year by about 3,000 tons. This is in large part due to lower zinc rate and unplanned maintenance in the quarter. Lower sulfuric acid cells volume is a combination of lower volume of concentrate process, lower sulfur content in the concentrate, and a higher level of internal consumption. Unit production costs were $602 per tonne compared to $481 per tonne in the same period in 2020. The increase is mainly due to lower production, higher input costs, and a stronger Canadian dollar. For the year, production and sales were at mid-range of our annual target, whereas sulfuric acid sales volume for the year were lower compared to 2020. Turning now to slide 10, Note that the adjusted EBITDA method of calculation has changed to meet new non-GAAP measure rules. The main change is replacing inventory margin impact with unrealized gain or loss. This has introduced some volatility to this metric. Based on the new calculation and after removing the unrealized derivative loss of $31.4 and $0.6 million, respectively, and other adjustments, adjusted EBITDA in Q4 was nil, compared to a negative $0.9 million in Q4 of 2020. After removing the unrealized loss of $30.5 and $6.9 million, respectively, and other adjustments, adjusted EBITDA for the year was $13.5 million, compared to $17.4 million in 2020. Overall, our earnings in Q4 were positively impacted by commodity price increase, but as more than offset by lower treatment charges, lower premiums, foreign exchange impact, and higher production costs. In Q4, CAPEX was $13.9 million. $6.8 million was related to our strategic projects. The balance is sustaining CAPEX necessary for the maintenance of our operations. For the full year, capital spending was $47 million. $22.5 million was for the strategic projects. These projects mainly account for the year-over-year increase. Going forward, our sustaining capex is expected to creep higher due to required ongoing maintenance and periodic equipment upgrades in order to meet higher standards and factoring in inflation. Turning now to slide 12, excluding changes in working capital, interest, tax payments, and distributions, cash flow from operation was negative $0.1 million in Q4. This is compared to a negative $1.1 million for the same period last year. Cash flow in Q4 of 2021 was mainly impacted by lower treatment charges partly offset by higher commodity prices. Cash flow for the year remains relatively in line with prior year at $13.9 million compared to $14.8 million in 2020. Looking now at our EBL as at December 31st, 2021, it was at $165.5 million, including net worth credit, leaving an excess availability of $14.5 million. Our senior secured metal liability stood at $44.6 million. Working capital was $156.2 million at year end, compared to $214.3 million at the end of 2020. Paul, back to you. Thank you, Sylvain.