Noranda Income Fund: Solid Q3 Results Suggest Troubles Behind Them

Noranda Income Fund reported 2019 Q3 results today. The stock jumped 35% (as of this writing), on the news that they have stabilized operations.

Last quarter, the company had issues with their treatment facilities that resulted in reduced production, higher operating costs, and Capex investments. Their strong Q3 performance suggests these issues are behind them.

Operational Review

The fund increased production and sales of Zinc metal 6% quarter over quarter. However, the fund achieved substantially higher revenues and EBITDA on the back of higher volumes and higher treatment charges.

Net revenues increased 300% quarter over quarter to USD 75.8 million. While that seems impressive, that’s only a 6% increase year over year. The significant quarterly increase stemmed from troubles during 2019 H1.

EBITDA increased 276% quarter over quarter to USD 23.3 million. Again, the substantial increase coming from challenges earlier in the year.

While it’s clear the company is in a much stronger position after this quarter, the possibility for distribution in 2019 isn’t as clear.

Expectations for Q4 and Beyond

During the conference call, management was asked how they were thinking about a distribution for 2019. In 2018 they distributed $0.06 per share. Management was frustratingly unclear, citing they don’t have a crystal ball and listing a series of factors that might inhibit a substantial distribution, including approval from debtors.

The signs for a 2019 distribution are admittedly mixed looking forward.

While this time last year, the company had generated $55.6 million of free cash flow. As of this year, the company has generated $10.7 million.

However, treatment charges have been high and are expected to maintain these levels, possibly even increasing. This would bode well for Noranda’s free cash flow.

The company is still working through a concentrate shipment from China that has less favourable terms than its concentrate supply from Glencore. Until this is processed, Noranda will not reap the full benefits of the Glencore deal.

Further, the company has an ABL facility of $111 million outstanding, due in July of 2020. While we believe it’s very likely they will largely roll this over, management didn’t provide any guidance on how much might need to be paid down before then.

Overall, we believe the operational results for Q4 will be similar to Q3. At this time, it’s not clear what distribution might come during Q4. However, the fund is obligated to pay out and free cash flow to unitholders.

At the very least, we believe that strong fundamentals of favourable forecasted treatment charges and stabilized operations will result in substantial free cash flow in 2020. If or when Noranda signals to the market that they are re-instating a regular distribution, the stock price will increase accordingly.

It’s up to investors to decide whether this will happen. Once the distribution is announced, there will be a step-change in the stock price and the opportunity for substantial gains will be gone.