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spk00: 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.
spk03: 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.
spk02: 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.
spk03: Looking ahead at 2022 and consistent with late 2021, our sector continues to be impacted by global supply chain pressures, rising energy prices in Europe, metal production curtailments and power availability issues in China and Europe. In Europe, zinc smelters have limited production due to high power costs and in some cases have been put into care and maintenance. Chinese zinc production has been affected by power availability related to coal supply and carbon emission controls. While zinc and copper prices increased sharply in late 2021, treatment charges have stayed suppressed. Industry experts are forecasting somewhat higher treatment charges in 2021 on the basis that their supply and demand analysis projects a conscious rate surplus in 2022. But much uncertainty remains as to how and when this might materialize. Refined zinc premiums are also being impacted. In 2022, HUD-BAE will close its flint-fond smelter and there's concern that zinc metal previously imported into North America from Europe will no longer be available in the same volume due to the tightness in that market. Finally, the transportation industry is also experiencing labor shortages and cost increases. With these contributing factors, CRU reported that the premium for zinc in North America has doubled since the end of 2020. In their market outlooks, many analysts are of the opinion that the zinc metal market is transitioning from a surplus in 2021 to a deficit in 2022. Closer to home on the supply chain front, we are seeing input cost increases and we've had some inventory impacts. As you know, we must balance large offshore higher impurity concentrate inventories with lower impurity local concentrate deliveries. The availability and mix of both of these concentrate sources is essential to our operations. Unfortunately, we've experienced a notable decrease in local mine deliveries due to production interruptions at those sites. This has required us to dip into contingency stock to mix feed qualities to maximize the processing facility's production. This is something we will continue to monitor closely, and we are working on ensuring we have the right contingency plan in place where possible. In this continued challenging context, we are closely monitoring zinc market dynamics, our inventory levels, and our feed mix, and we are working on maintaining our current production cadence after facing some operational efficiencies late last year and early this year. We are also moving ahead with the completion of our strategic projects over the next quarter so that we can have more stable operations, ramp up production in the second half of the year. I'd like to reiterate my thanks to our management team and our employees across the plant for working safely and with dedication in what have been challenging circumstances. The pandemic is not yet behind us. We are all committed to commissioning these strategic projects, which we are confident will put us in a solid position when market dynamics start to improve. That concludes our formal remarks. Operator, back to you for the Q&A.
spk00: At this time, if you would like to ask a question, please press star 1 on your telephone. Again, that's star 1 to ask a question. Please hold for your first question. Your first question comes from Daniel McConvey with Rossport Investments.
spk04: Daniel McConvey Hello. Good morning, everyone. Thanks for the presentation. I'm a little rusty, but with the strategic expansion being finished this year and the shortage of energy around the world, I guess, number one, from your standpoint, remind us what the how the expansion is going to help your economics. And second, even though spot prices are low now, maybe just give us an update on that based on with the Hutt Bay refinery faulting, how that might impact you. And just if there is a shutdown of more refineries in Europe because of gas prices, how that could help your situation on spot and renewing your contract.
spk03: Yeah, so it's, I mean, to the first question, Daniel, and thanks for those questions and for joining today. For the economics, you know, the plant here is a largely fixed cost, has a very high fixed cost structure. We enjoy relatively low electricity costs, and therefore, as we get additional tonnage, the incremental profit on that is fairly beneficial to us. So Every additional ton, there's a high level of payback. So generally what we can do is just take our electricity costs and that's our major variable cost. There's not a lot of additional fixed costs that are added to the addition of those tons. So depending on all of the other metrics of zinc price and treatment charges, et cetera, you'll look for an uptake. I mean, you've got to look at what your projections are on those revenue drivers add those tons and add the electricity costs, and you can see that there's a fairly high-level uptake on those costs. So we're looking at getting another 10,000 tons this year and another 10,000 tons on top of that next year if the ramp-up works as it should and everything else rolls forward as planned. So there's a pretty good additional profit driver for us on those projects. It's not a huge game changer necessarily, but it does allow us to be in a more defensive position as we see the local stocks reducing. So instead of having a reduced production profile, the expansion projects actually allow us to increase our production profile, which is very beneficial. It's only adding maximum 20,000 tons if everything goes well to our $260,000, $270,000, 270 ton run rate. We're looking at about a 10%, 20% additional, 10%, 15% additional production. So it's certainly not doubling the capacity of the plant, but it does help, again, from a defensive position and allows us to forward an additional profitability. With respect to what's happening in Flintlawn and in Europe, certainly having less... Zinc in the North American market is beneficial from a premium point of view. It's not necessarily free money. As we've noted, and as everyone knows, there's a lot of pressure on the supply chain market at the current time, so there is additional complexity for us to organize both our concentrate coming in and the zinc going out, as well as all of our other products. So there is additional costs that are being incurred on a logistics front. So the additional premiums that come through aren't necessarily free money. But as we've said, there's a little bit of zinc that currently gets imported from Europe into the North American market. And with the shutdowns and pressures in Europe, that's certainly going to change. And as well with flint bond coming off, that will also change. From a zinc concentrate point of view and treatment charges, one would expect that if there's less smelter capacity in Europe and here in Canada, that there may be some impact on positive impact on treatment charges. But there are other smelting operations around the world that are increasing capacity. So it's really a supply-demand issue. And, you know, all the reading, you know, certainly we're not experts on that here. I can only, you know, sort of recount what I've read from Woodmax, CRU, and other sources that the analysts seem to be positive on the increases in the treatment charge front. But they are tempering. Their increases, at least for 2021, are somewhat tempered. And they're always sort of making other qualitative or qualification comments that anything could happen. As we're seeing with Russia entering the Ukraine, that additional uncertainty as to what's going to be happening in Europe and around the world. And there are other impacts as well that could potentially impact the treatment charge situation. So the treatment charge area for us is a key driver, and it's important for our overall profitability that that number increases. So we're looking forward to seeing some improvement in that front. But as I've mentioned, the analysts are all pointing to a lot of uncertainty, and they're not sticking their heads out too far when they are looking at increases in the treatment charges. I hope that gives you some clarity.
spk04: That's helpful. Thank you. I just might add, given all that, what's your level of optimism for 2022? Pardon me? Your offer. What is your level of optimism for 22 performance with all those factors combined?
spk03: I think that we are generally an optimistic bunch here, and we're certainly focused on achieving from a production point of view what we say we're going to do, maximizing our production and reducing our costs. In this environment, we've done a pretty good job over the last couple of years. But as we get through the pandemic here, there's certainly strains from all fronts. On the supply chain, operations, et cetera, we saw some unplanned maintenance events late last year and some continued blips in January and February with cold weather. So we're remaining optimistic from an operations and cost point of view and also on the treatment charge front. But again, there's a lot of complexities both here internally and also in the global economy that could have some negative impact on us here. The only thing we can do here is try to do the best we can on our operations and cost front, try to reduce any negative impacts and optimize any opportunities that we have, like the two expansion projects, and make them work as best as possible. And that's all we can do from our front, and the rest is in the market's hands.
spk04: Great. Thank you very much.
spk03: Thank you, Daniel.
spk00: Again, if you wish to ask a question, please press star, then the number 1 on your telephone keypad. Again, that's star, then the number 1 to ask a question. Your next question comes from Ben Franklin with River Styx Capital.
spk01: Hey, Paul. I just have a question about the moving parts with the doubling of the premiums and trying to understand where that leaves Naranda. I think in the last couple of information forums, it was a sensitivity of about 6 million in pre-tax cash for every penny. And I don't think you still disclose what the premiums were, but I think they're in the sort of six to 10 cent range historically, but they were fixed at one point with Glencore. So how do I take all of that information and see what that's going to look like for the future? and what that means for Naranda.
spk03: Thanks, Ben, for that. Yeah, I think you can back into those numbers if you look at the MD&A tables. There's the price of zinc. There's two zinc prices there, one realized in the other market, I think it's called. Sylvain is helping me out here. there's realizing price and your average LME is in price. If you look at the difference between the two, you'll have the effective premium that we've realized. So I think you can, uh, look at, uh, yeah, you're right. We have a fixed, uh, deal with, with Glencore gets revised, uh, twice during the year. So I think you can take a stab at, uh, the difference, what you see in the MDNA there and use the CRU, uh, cause the deal with Glencore does follow market. So, uh, So you can take that information, apply the factor that we gave you on CRU and anything else you can find in the market and apply those metrics to the back end calculation data to the MDNA.
spk01: Excellent, excellent. So the sensitivity hasn't really changed on that. There's nothing else, no other moving parts that we could think of. I think you mentioned some increased costs that it's not completely flow through like we would expect, but it sounds pretty positive.
spk03: Yeah, I think there's a bit of – there's going to be some positive impact there on the bottom line. You've got to take a little bit of a thicker pencil to the logistics side of things. I think that we're looking at inflation of 2%, 3% this year. I think that our logistics costs are going to sort of outstrip that a little bit, not excessively, but somewhat. So I think you can add some buffer in your model for that.
spk01: Okay, thank you.
spk00: Again, if you wish to ask a question, please press star, then the number 1 on your telephone keypad. Again, that's star, then the number 1 to ask a question. At this time, there are no further questions. Thank you for participating. You may disconnect at this time.
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