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.
