EVENT: NORANDA INCOME FUND - Q1 RESULTS CONFERENCE CALL & WEBCAST

Transcription

1 1 EVENT: NORANDA INCOME FUND - Q1 RESULTS CONFERENCE CALL & WEBCAST TIME: 08H30 E.T. REFERENCE: CNW GROUP - TORONTO LENGTH: APPROXIMATELY 16 MINUTES DATE: APRIL 28, 2006 OPERATOR: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Noranda Income Fund Q1 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press * 0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Friday, April 28, 2006, at 8:30 a.m. Eastern. I will now turn the conference over to Mr. Michael Boone, Vice- President and Chief Financial Officer. Please go ahead. MICHAEL BOONE (Vice President and Chief Financial Officer, Noranda Income Fund's Manager): Thank you, and good morning, everyone. I am Michael Boone, Chief Financial Officer of the Noranda Income Fund's Manager. Thank you for joining us today for our first quarter conference call. During the course of the call, we will be making some forwardlooking statements that are based on certain assumptions, and are subject to a number of risk factors. The forward-looking text appears on Slide No. 2. On the call today are analysts and investors. I would like to welcome those joining us via our website that are in a listen-only mode. There are slides to go along with the presentation. You can access these slides by going to the home page of our website at and clicking on "Investor Centre," then "Conference calls." The presentation is also posted as a PDF file that can be printed. After the presentation, we'll be open for questions and answers. Joining me today is Mario Chapados, President and Chief Executive Officer of Noranda Income Fund's Manager. I'd like to turn the call over to Mario.

2 2 MARIO CHAPADOS (President and Chief Executive Officer, Noranda Income Fund s Manager): Thank you, Mike, and good morning, everyone. Turning to Slide 3 on earnings, we ve had a slow start to the year. Yesterday, we reported first quarter net earnings of $4.3 million, compared to $6.5 million of the same period in Zinc metal production, at 61,700 tonnes was 8 percent below production in the first quarter of Sales totalled 62,600 tonnes, or 1 percent below the first quarter of Production was negatively affected by the breakdown of one of the electrolytic circulation pipes in the refinery. Repairs have been made, and production is back to normal. As a reminder, the Fund calculates unit cash costs under the following methodology: production costs, before any impact of changes in inventory, plus our SG&A, divided by the tonnes of zinc produced. With lower production in the first quarter, our unit costs increased. The first quarter cash costs were $761 a tonne, compared to $650 a tonne for the same quarter a year ago. The $2.8 million increase resulted from higher natural gas and oil prices, and higher reagent prices. We also had higher supply and contractor costs related to repairs. With respect to electricity, Hydro Québec announced a 5.3 percent increase effective April 1, During the fourth quarter of 2005, the market for zinc tightened, supported by the closure of refinery capacity in the United States, strong demand, and low inventories. All these factors positively impacted the negotiated annual zinc premiums for As a result, average contracted zinc premiums for the first quarter of 2006 rose to US$0.068 a pound from US$0.058 a pound a year ago. In 2006, almost all of the Fund's zinc metal sales are on an annual contract basis. In the first quarter of 2006, the zinc market continued to tighten as a result of continued strong demand for zinc. Byproduct revenues in the first quarter of 2006 remained strong. Copper supply disruptions since the beginning of the year have continued to keep the market tight. With inventories very tight, copper prices in the first quarter of 2006 rose to US$2.24 compared to US$1.48 a pound in the first quarter of Sulphuric acid netbacks also remained strong during the quarter. For the quarter, by-product revenues totalled $8.5 million, up from $4.7 million in the same period a year ago.

3 3 I will now ask Mike to review our financial performance for the first quarter of Then I will come back to you with our outlook for I am confident about our prospects for the year, despite the slow startup. Michael MICHAEL BOONE: Thanks, Mario. As Mario mentioned, we've had a slow start to the year. However, we do expect to have stronger financial results for the remainder of 2006, if we achieve our production and sales targets. On Slide 8, first quarter 2006 net revenues were $61 million. This compares to $59 million for the first quarter of The $2 million variance was due to higher premiums, byproduct revenues and processing fees, partially offset by lower volumes of zinc metal sales, and a stronger Canadian dollar. Production costs were higher, at $40 million, compared to $37 million for the first quarter of last year, due to higher energy, supply, and contractor costs. EBITDA for the quarter was $16 million, compared to $18 million in the first quarter of Net earnings for the quarter were $4.3 million, as compared to $6.5 million for the first quarter of The $2.2 million decrease was due to lower volumes of zinc metal production in sales, and higher operating costs, offset by higher premiums and by-product revenues. The increase in net earnings resulted in cash generated from operations of $13 million, compared to $15 million in the first quarter of last year. Our notional operating reserve now stands at $6.8 million; $2.1 million lower than December The notional operating reserve is fulfilling its purpose of covering fluctuations in operations, and allowing us to provide for stable monthly cash distribution to unitholders. Comparing the net earnings in the first quarter of 2006 to that of 2005, the negative $2.2 million variance can be explained as follows: positive price variance of $5.1 million, due to higher premiums, process fees, and copper prices; negative exchange variance of $0.7 million due to an average exchange rate of 1.55 versus lower production and sales accounted for a negative variance of $3.7 million, and costs were higher by $2.8 million from a year ago. Operating working capital increased by $24 million in 2005, and it rose by a further $6 million in the first quarter of The increase is

4 4 directly related to the rise in the zinc price. It has risen sharply in the past year, from US$0.54 in December of 2004 to US$0.83 in December It was US$1.44 yesterday. The Fund is contemplating increasing its revolving facility to address its working capital requirements. That concludes my comments, and I'll turn the call back over to Mario. MARIO CHAPADOS: Slide 14. In spite of lower production in the first quarter, we remain optimistic for Production and sales for 2006 has been revised to 273,000 tonnes from 275,000 tonnes. This is the same level as last year. The processing fee will be $0.365 a pound. The premiums are expected to beat the US$0.06 we achieved in 2005, around US$0.069 a pound for the year. And our capital spending has been revised to $21.5 million, which I will tell you more about in one minute. Looking beyond 2006, our strategy, revenue enhancements, cost reductions, and disciplined approach to capital spending all support our primary objective of stable cash distributions. Late in 2005, we performed a strategic planning exercise where we identified a number of value creation projects and initiatives. We believe they will have a very positive impact on the Fund in the future. Revenue enhancement will come from a number of revenuegenerating projects that we have identified. They include increasing zinc production, optimizing the mix of zinc concentrate that will allow us to fill our copper capacity; increasing recoveries; and maximizing the premium from value-added products. We are always looking for sustainable cost reductions. Clear targets were identified for productivity improvements, energy consumption, and supply costs, using our Six Sigma program to help achieve our goals. We will continue our disciplined approach to our capital spending. CEZinc is a modern facility. During the period, $12-15 million was spent as sustaining capital. Capital spending for 2006 has been revised to $21.5 million. Of this amount, $7 million will be invested in 2006 to generate a potential cash flow of $4-6 million on an annual basis, starting in Work has commenced, and we expect it will be finished by the end of That concludes my remarks. Michael MICHAEL BOONE: Operator, would you give the polling instructions before we open for questions and answers?

5 5 OPERATOR: Thank you. One moment, please. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press the * followed by the 1 on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be polled in the order they are received. Please ensure you lift the handset, if you're using a speakerphone, before pressing any keys. One moment, please, for your first question. Your first question comes from Walter Spracklin from RBC Capital Markets. Please go ahead. WALTER SPRACKLIN: Thanks very much. Good morning, gentlemen. MICHAEL BOONE: Good morning, Walter. WALTER SPRACKLIN: Regarding the revenue enhancement projects that you have - you mentioned that they would be completed in 2006, so if we're to look into 2007, you don't see any carry-over of these projects? And you've run at a much higher rate than the $14.5 million in maintenance costs. Going to 2007, are you expecting Capex to drop down to $14.5 million? MARIO CHAPADOS: No. The $21.5 million will be spent in 2006, and at the end of 2006, we'll revise again our budget, in terms of capital investment related to our portfolio of projects, and that will be decided at the end of this year with the Board. WALTER SPRACKLIN: So, really, these are projects that you do engage in, on an ongoing basis, to support the overall production of your facility? MARIO CHAPADOS: The money we are asking for, from $15 million to $21.5 million, that's real and new projects. And in fact, we ve already started these projects, and we are very confident they will all be finished already by the end of WALTER SPRACKLIN: Okay. My next question is with respect to your raw material costs, and maybe, Michael, you can answer this one. I came in a lot lower than you came in, on the raw material side, and it's pretty much formula-driven. I'm just wondering what's going on there. Was the capture ratio low? Or was this related to the production glitch? MICHAEL BOONE: This is on the raw material purchase cost line? WALTER SPRACKLIN: Exactly. MICHAEL BOONE: Okay. It is mostly driven by the price. We are seeing some of the raw materials that we purchased in 2005 come in and settle at higher prices in 2006, so that would bump up that line for the first quarter.

6 6 WALTER SPRACKLIN: Okay. So volatility with the zinc pricing will make that formula a little less predictable -- is that what you're saying? MICHAEL BOONE: Yes. When there is volatility, it will become a little bit less predictable because of that effect. WALTER SPRACKLIN: Okay. Understood. And the capture ratio in the quarter? MICHAEL BOONE: Speaking to the zinc recovery? WALTER SPRACKLIN: Yes MARIO CHAPADOS: The zinc recovery for the quarter was higher. It was, in fact, 96.1 percent. WALTER SPRACKLIN: 96.1%? MARIO CHAPADOS: Yes. And we are targeting 97 percent. In fact, one of the projects will be to increase the recovery during the year, and this project will be terminated at the end of June. WALTER SPRACKLIN: Okay, great. Thanks very much for your answers, guys. MICHAEL BOONE: Thanks, Walter. MARIO CHAPADOS: Thank you. OPERATOR: Your next question comes from Ian Howat from National Bank Financial. Please go ahead. IAN HOWAT: Yes, just wanted to follow up on the costs going forward. I sort of understand it was sort of high, on a per-tonne basis in the quarter, because of lower production. But actual costs were higher than last year anyway, even with lower production. Can you give some clarity on what we can expect, going forward, for the next 2 or 3 quarters? MARIO CHAPADOS: Part of the reason why the cost was higher in this quarter, compared to the first quarter in 2005, is related to the energy price increase, especially in natural gas and oil, as well as the reagents. The price of metal is going up, but at the same time, the reagent price is going up too. There was also the cost to repair the breakdown. Contractors and supplies were in the order of $700,000-$800,000. IAN HOWAT: Okay. The new power rates increase -- how much does that add per tonne? MARIO CHAPADOS: On a unit basis for the 9 months from the 1st of April to the end of 2006, there will be an increase of $800,000. IAN HOWAT: For the whole year? MARIO CHAPADOS: For nine months IAN HOWAT: Okay. Thanks very much. MARIO CHAPADOS: Thank you. MICHAEL BOONE: Thanks, Ian.

7 7 OPERATOR: Ladies and gentlemen, if there are any additional questions at this time, please press the * followed by the 1. As a reminder, if you're using a speakerphone, please lift the handset before pressing the keys. Gentlemen, there are no further questions at this time. Please continue. MICHAEL BOONE: Thank you. I'd like to remind everyone that the recording will be available from 6:30 p.m. tonight to midnight on May 5th, by dialing or , with the reservation number being In addition, it will be available on our website. Thank you for joining us this morning, and we'll talk to you on July 31st for our second quarter results. OPERATOR: Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines. ****