Author Topic: NIF-UN.TO - Noranda Income Fund  (Read 3273 times)

samwise

  • Jr. Member
  • **
  • Posts: 80
NIF-UN.TO - Noranda Income Fund
« on: January 10, 2019, 06:13:14 PM »
A Canadian net net. Working capital is zinc ore and metal. PPE is a zinc smelter, biggest supplier on North American east coast. No or low commodity price risk to working capital since they seem to either hedge or sell forward. I can't verify this exactly but their WC hasn't moved much with zinc prices.

Zinc smelting charges are at multi year lows, and could improve leading to decent earnings and yield. Or Glencore might decide to buy them out.

Overall a boring investment with not much news. Reading about Glencore cornering zinc mines and rationalizing capacity, which lead to high zinc prices and low smelter charges was the most exciting thing about this investment. Besides the strike last year of course. Stories of hardships faced by east coast industries during the strike seem to indicate that the smelter is also valuable.

Glencore could do a take under, but the last attempt a few years ago was successfully opposed by shareholders, and the same funds are invested now. In fact one person asked "why don't we shut it down since that's worth more" in the annual meeting a year or two ago.

Price has run up last few days on no news. I was hoping to start a discussion because I noticed some people have mentioned it in the "what are you buying" thread.
« Last Edit: April 17, 2019, 06:27:09 PM by Parsad »


Lakesider

  • Full Member
  • ***
  • Posts: 175
Re: NIF-U.TO
« Reply #1 on: January 10, 2019, 06:17:24 PM »
The write up on VIC is excellent but a little dated.

https://www.valueinvestorsclub.com/idea/NORANDA_INCOME_FUND/7195876673

I have been in this for a while and added recently, seems that global treatment charges have increased and I'm expecting have a much better year. I think the special dividend is good sign that management are getting less cautious.


samwise

  • Jr. Member
  • **
  • Posts: 80
Re: NIF-U.TO
« Reply #2 on: January 11, 2019, 07:38:46 PM »
Yes I heard that TC rates might be moving up.

But I actually sold some shares I had bought a few months ago at 1.20 . It isn't a good business and it won't take much for shares to drift back down to 1.20 again. Of course it could double tomorrow and I'd miss some of the upside, but so far I haven't had a good experience in holding onto bad businesses after run ups.

Lakesider

  • Full Member
  • ***
  • Posts: 175
Re: NIF-U.TO
« Reply #3 on: March 11, 2019, 12:58:34 PM »
Great pop upwards from December, nearly doubled.

Not releasing the terms of the new rate agreement is very frustrating as a unit holder. I suspect its due to terms being unfairly negotiated in flavor of glencore. The half fixed half floating agreement is going to be tough to work out. 

samwise

  • Jr. Member
  • **
  • Posts: 80
Re: NIF-U.TO
« Reply #4 on: March 11, 2019, 07:05:32 PM »
Great pop upwards from December, nearly doubled.

Not releasing the terms of the new rate agreement is very frustrating as a unit holder. I suspect its due to terms being unfairly negotiated in flavor of glencore. The half fixed half floating agreement is going to be tough to work out.

Yes it's all hush hush with Glencore. However it's extremely cheap at<4xFCF and<3xEBITDA, but not a net-net anymore.

Here is how I get my estimates. A TC between 200-240 should produce  EBITDA between 80-110, using slide 18 from their 2015q4 presentation. If I adjust for the sensitivity shown on slide 22 of the 2016Q4 presentation, we could easily get another 20 million in EBITDA as both the zinc price and CAD rate are more favourable. If I conservatively deduct 30-40 million for capex and interest charges, and some estimates for tax:20-25, then I get to FCF of 25-50 million. At the high end, this is 2x FCF. And I don't even know how to estimate the benefits of their new lower electricity rates and the renegotiated labour contracts after the last strike. Both these items are 1/3 of cost each, so savings can be substantial.

The unit holders are actually in a strong position here given market conditions and ownership of units.

1. Many hedge funds have used the low prices last year to build substantial positions. So that Glencore can't just do a take under or perpetually negotiate bad deals. We might get a proxy fight this year.
2. The market for zinc smelters is tight because of two secular drivers:
a) new zinc mines incentivized by last couple of years' high zinc prices. I.e. Demand will remain high.
b) new environmental regulations in China have closed many smelters. I.e. Supply will remain constrained, or at least be at higher cost than before.
3. The smelter charges (TC) are just back to average for historical benchmark pricing. But the spot market has usually been lower, and Glencore is probably hoping it drops during the year, hence the 50% benchmark and 50% spot price based contract. We need a stronger voice in those contract negotiations, which the hedge funds can provide if they win a proxy fight. There is no reason we shouldn't be 90% at benchmark, with only 10% capacity at spot.

If unitholders negotiate a fair contract and TC rates remain close to averages, then there is no reason an unlevered business trades at 2-4x FCF. Given zinc market conditions and strong unit holders representation by hedge funds like polar, I think the chances of a rerating higher, or an offer from Glencore are both good.

Lakesider

  • Full Member
  • ***
  • Posts: 175
Re: NIF-U.TO
« Reply #5 on: April 14, 2019, 03:30:11 PM »
I'm kicking myself for not buying more. I loved this idea, not sure how much of this is hindsight bias though!

samwise

  • Jr. Member
  • **
  • Posts: 80
Re: NIF-U.TO
« Reply #6 on: April 14, 2019, 07:53:08 PM »
I'm kicking myself for not buying more. I loved this idea, not sure how much of this is hindsight bias though!

Do you have a sell target?

I've been trimming along the way at 1.5 & 2.1. With hindsight that seems a mistake, but so did not selling at 1.5 last time it popped up there when the strike ended. So I wouldn't kick myself too much.

Still cheap on cash flow if TC rates remain stable. But no asset protection now. Perhaps a regular dividend will be required now ( they are still an income fund). And the dividend could attract buyers. But I haven't figured out what the right price is.

No proxy contest. I guess the hedge funds are happy as long as Glencore behaves.

Lakesider

  • Full Member
  • ***
  • Posts: 175
Re: NIF-U.TO
« Reply #7 on: April 14, 2019, 08:23:18 PM »
I've decided to wait and see, but in my head my figure is about $3.20 but its hard to tell what this will be paying out in 6months because of the format of new TC agreement. Its been deliberately kept quiet, as I suspect the deal is skewed to favour GC so there could be a nasty shock to the downside.

If they are getting TC are close to market TCs then it could be spitting out .50 FCF per unit. I wouldn't give this a high multiple though.

Lakesider

  • Full Member
  • ***
  • Posts: 175
Re: NIF-U.TO
« Reply #8 on: April 17, 2019, 02:00:09 PM »

From TD
We are maintaining our BUY recommendation and increasing our target price
to C$4.00 from C$2.25 previously. Our target price is based on a 4.5x EV/EBITDA
multiple on a 50%/50% blend of our 2019E and 2020E estimates.



samwise

  • Jr. Member
  • **
  • Posts: 80
Re: NIF-UN.TO - Noranda Income Fund
« Reply #9 on: May 22, 2019, 07:45:55 PM »
Company confirmed $1 Fcf on the conference call. So we are at 3x FCF.
Company seems to prefer paying back ABL before reinstating dividends.
Either case, the future hinges on Chinese smelters ramping back up ( or not) despite environmental restrictions.

https://seekingalpha.com/article/4257130-noranda-income-fund-nndif-ceo-liana-centomo-q1-2019-results-earnings-call-transcript?part=single

Couldn't find news on zinc, but the Chinese seem pretty serious about the environment, having just shut down one of their biggest aluminum smelters.

https://www.kitco.com/news/2019-05-15/China-alumina-prices-spike-on-Shanxi-shutdowns.html