Noranda Income Fund

Welcome to Naranda Income Fund 3rd Quarter 2022 Financial Results Conference Call-In Webcast. At this time, all participants are in a list 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 the zero for operator assistance at any time. I would like to remind everyone that the conference call is being recorded today, November 15, 2022, at 8.30 a.m. Eastern Time. I would now like to turn the conference over to Paul Anderson, CEO of Canadian Electrolytic Zinc Limited, Noranda Income Funds Manager. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for joining us. Also on the call this morning is our CFO, Sylvain Lorette. Before we start, I would 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, Miranda 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. Excuse me. The third quarter of 2022 was challenging for us both from a financial and operational perspective. While market conditions were favorable with strong zinc prices and treatment charges, our financial results continued to be hampered by lower zinc production and sales as a result of production issues. For the third quarter, we incurred a loss before taxes of $16.9 million, including an unrealized derivative financial instrument loss of $33.4 million and an impairment of non-financial assets of $30 million, which was a result of lower production and increased cell house capital expenditures. We also continue to deal with previously discussed labor shortages and our efforts to recruit and fill vacancies, while more challenging than the past, have continued. Hiring has improved, and we have less and less open positions. Once hired, recruits will receive the necessary training and coaching as we look to build operator experience. Finally, as you know, we commenced the major cell repair and cell house maintenance shutdown in late October, which is currently underway. Let's take a moment on this major development related to our cell house operations, turning to slide five. Our top priority is improving operating conditions of our cell house. As announced on October the 19th, 2022, given the accelerated deterioration of the cell house operating conditions, we made the difficult decision to temporarily shut down operations to proceed with a proactive cell repair program. This decision was not made lightly. We have been trying to repair the new cells without having to shut down the facility, but the cadence of repairs was not sufficient. As such, we determined that a shutdown was necessary to properly repair the previously identified damaged cells. In addition, during the shutdown, we are undertaking a cell-by-cell integrity assessment to determine if further repairs are warranted. It is also important that we undertake these repairs before the cold winter month, complicate the maintenance even further. We are entering the third week of the shutdown, expended the last four to six weeks. However, additional time may be required if additional cells need to be repaired or other issues are discovered during the cell inspection process. At this time, the team is making progress and we can report that in total, 65 cells have been cleaned and closed. Of those, 37 have been repaired. We have about 26 cells left to repair. However, this number may increase as more cells are cleaned and inspected. We have 204 cells in the cell house in total, and we had initially estimated to repair between 60 and 80 cells. While this shutdown is being undertaken to stabilize near-term cell house operating conditions, the repairs will still not fully address the underlying issues impacting operating conditions. We expect that a replacement of all cells in the cell house will be necessary to stabilize and improve operating conditions for the long term, as well as the previously planned crane replacements. As previously disclosed, a full cell and crane replacement is currently estimated to cost approximately 100 million U.S. dollars, and would not be started before 2024, depending on supply chain constraints and successfully obtaining financing. We will provide an update to investors as the plan for long-term cell house revitalization and financing advances. Because of the cell house maintenance shutdown and uncertainty regarding its duration as previously disclosed, we do not expect to meet our most recent annual production and sales guidance for 2022. of between 225,000 and 240,000 tons of zinc. In addition, we do not intend to provide annual production and sales guidance for the foreseeable future. In the past, production and sales were stable and much more predictable, but with the processing facilities production capacity remaining constrained and due to continued risks in terms of operating stability, aging infrastructure, and other such factors, production is now much more difficult to predict and will remain so until the underlying production issues are fully addressed. While we will not be providing detailed production guidance for 2023, and although we are optimistic as we look forward, we remain cautious about predicting a return to production volumes as seen in 2020 and 2021. Production volumes will be subject to the impact of the tight labor market, repairs and maintenance strategies, and the uncertainty of operating aging infrastructure, among other factors. I'll now turn it over to Sylvain to review our financial and operating results in more detail.

Thank you, Paul, and good morning, everyone. We will begin our key performance drivers in Q3 on slide 7. Zinc concentrate and secondary feed process was lower than in the same period in 2021 as a result of lower production levels. Commodity prices have mostly remained high in the first nine months of the year, as reflected in higher average LME zinc price. However, the zinc price was volatile and trending lower in the third quarter. The concentrated inventory is protected against zinc price decreases through the inventory management program. Byproduct revenues increased as a result of higher sulfuric acid netbacks offset by lower volumes. Finally, the average exchange rate was lower at 77 cents. Turning now to slide 8, as Paul mentioned, we continued to experience operational challenges in Q3, resulting in a significant decrease in zinc metal production in cells. Lower sulfuric acid cell volumes is also mainly related to lower volumes of the concentrate process. Turning now to slide 9, Loss before income taxes were $16.9 million for the third quarter of 2022, including an unrealized derivative financial instrument loss of $33.4 million and an impairment of non-financial assets of $30 million. This is compared to earning before income taxes of $5.9 million, including an unrealized derivative financial instrument loss of $0.1 million in the same period in 2021. The unrealized financial instrument loss was driven by a large edge book and fluctuations in zinc prices in the quarter. On the impairment charge, we conclude that an impairment existed relating to our generating unit. As Paul mentioned, this is due to sell-out operating conditions. First, the extensive repair program needed to stabilize near-term operations Second, lower production. And third, increased sell-out capital expenditure. Turning now to slide 10, after removing the unrealized derivative financial instrument impacts, the impairment charge, and the other adjustments, adjusted EBITDA in Q3 was $40.4 million compared to $7.8 million in Q3 of 2021. Higher adjusted EBITDA compared to the same period last year mainly reflects the support provided by positive market conditions, despite our lower production levels and resulting higher costs. In Q3, CAPEX was $8.5 million. This includes strategic expansion projects of $1.7 million aimed at increasing production capacity and profitability. The balance is sustaining capex necessary for maintaining our operations. Turning now to cash flow on slide 12, excluding changes in working capital, interest, and tax payments, cash flow from operation was $41 million in Q3 compared to cash flow of $8 million for the same period last year. Realized derivative financial instrument gains were a strong cash flow driver in the quarter as zinc prices decreased. Cash flow in Q3 of 2022 was also impacted by higher commodity prices and treatment charges, partly upset by lower volumes. Looking now to our ABL, as at September 30th, 2022, it was at $175.2 million, including letters of credit, leaving an excess availability of $4.8 million. Our senior secured metal liabilities stood at $32.9 million. Working capital increased to $234.2 million, up from $155.5 million as of December 31st, 2021. Paul, back to you.