Noranda files income fund preliminary prospectus
Noranda Inc NRD
Shares issued 238,384,744 Mar 14 close $17.35
Thu 14 Mar 2002 News Release
Mr. Dale Coffin reports
NORANDA FILES PRELIMINARY PROSPECTUS FOR NORANDA INCOME FUND
Noranda has filed a preliminary prospectus with the securities and
regulatory authorities in each of the provinces of Canada for an initial
public offering of priority units of the Noranda income fund. The fund has
been created to acquire from Noranda, the CEZinc zinc processing facility
located in Valleyfield, Que., and ancillary assets (the Valleyfield
processing facility).
The offering of priority units is being made by Noranda. Proceeds from the
offering and the draw down of credit facilities provided to the fund by a
syndicate of Canadian chartered banks and other lenders, will be paid to
Noranda as partial consideration for the acquisition of the Valleyfield
processing facility.
Following the offering, and if the overallotment option on a portion of
Noranda's units is not exercised, Noranda will continue to own a
49-per-cent interest in the fund. Over 50 per cent of Noranda's interest in
the fund representing 25 per cent of the outstanding equity of the fund
will be held as ordinary units, which will be subordinated in respect of
cash distributions to the priority units for a period of 15 years.
Noranda will enter into a 15-year supply and processing agreement to sell
to the Valleyfield processing facility up to 550,000 tonnes of zinc
concentrate annually, an amount expected to support 100 per cent of its
annual production at planned rates for that period. The Valleyfield
processing facility will pay Noranda for the concentrate based on the
London metal exchange (LME) price for "payable zinc metal" contained in the
concentrate less a treatment charge or processing fee, initially set at
35.2 cents per pound of payable zinc metal. The processing fee will be
adjusted annually to reflect changes in certain costs. Noranda will also
provide management services to the Valleyfield processing facility and the
fund and will act as the facility's exclusive sales agent for all products.
The Valleyfield processing facility is the second largest zinc processing
facility in North America and the largest zinc processing facility located
in eastern North America, where the majority of its customers are located.
It produces refined zinc metal and various byproducts from zinc
concentrates purchased from mining operations, and sells refined zinc
products.
Commentary
"Today's low interest rate environment has created a high level of demand
for alternative income generating investments," said Aaron Regent,
Noranda's executive vice-president and chief financial officer. "By
creating the Noranda Income Fund we are able to offer a high-quality income
fund with many of the desired characteristics investors are looking for --
stable and predictable cash flow generation capability, high-quality
long-life assets and strong management and sponsorship," Mr. Regent added.
"Further, by subordinating 25 per cent of Noranda's ownership to the
interests of other investors, there is a clear alignment of ownership
interests."
"For Noranda, we are able to raise a sizable amount of capital from one of
our metal processing assets while continuing to operate and manage the
business. The proceeds received by Noranda from the offering will enhance
Noranda's financial flexibility and will be available to reduce corporate
debt or to make further investments in the mining sector," said Mr. Regent.
The Valleyfield processing facility's current president and chief executive
officer, Lucy Rosato, stated that: "Having recently completed a substantial
modernization program, we do not anticipate a need for major capital
investments over the next 15 years. We have also achieved record annual
production levels during each of the last five years and we are confident
that through continued process and productivity improvements, we can
realize further production increases."
Profile of Valleyfield processing facility
The Valleyfield processing facility has been in operation since 1963 and
has been continually expanded and improved since that time. Noranda has
invested over $200-million in the facility in the past five years,
increasing production by approximately 18 per cent to 265,525 tonnes in
2001. Production is expected to further increase to 270,000 tonnes in the
period from April 1, 2002, to March 31, 2003, and to 280,000 tonnes
annually thereafter.
The Valleyfield facility is favourably located along major transportation
networks, which connect it to the principal zinc markets in the United
States and Canada. It has achieved ISO 9002 certification over its entire
production process and LME certification for its special high-grade zinc
slabs.
Noranda estimates that in 2001, the Valleyfield processing facility
supplied approximately 15 per cent of total zinc metal demand in the U.S.
and approximately 35 per cent of demand in Canada. The U.S. is one of the
largest zinc consumers in the world and is a net importer of approximately
75 per cent of its consumed zinc metal. The Valleyfield processing facility
is well located to service the majority of zinc consumers in the U.S., who
are located in the northeastern and midwestern industrial centres. Due to
its favourable location, long-standing relationships with customers and its
reputation for quality, the Valleyfield processing facility is the dominant
supplier in these regions.
This offering is being arranged by a group of underwriters and is being
co-led by CIBC World Markets Inc. and Scotia Capital Inc. and also includes
RBC Dominion Securities, TD Securities Inc., BMO Nesbitt Burns Inc.,
National Bank Financial Inc. and Trilon Securities Corporation. Copies of
the preliminary prospectus are available from CIBC World Markets Inc. and
Scotia Capital Inc.
Background information Noranda income fund's main features
Long-term supply and processing agreement
Noranda will enter into a 15-year supply and processing agreement to sell
to the Valleyfield processing facility up to 550,000 tonnes of zinc
concentrate annually, an amount expected to support 100 per cent of its
annual production at planned rates for that period. The Valleyfield
processing facility will pay Noranda for concentrate based on the LME price
for "payable zinc metal" contained in the concentrate less a treatment
charge or processing fee, initially set at 35.2 cents per pound of payable
zinc metal. The processing fee will be adjusted annually to reflect changes
in certain costs.
Due to the terms of the processing facility's sales contracts, the hedging
of zinc price exposure is generally not required as concentrate pricing
terms are based on the LME zinc price two months after delivery, a period
which approximately equals the time required to process concentrates into
refined metal and sell the refined metal to the final customer.
As a result of the processing fee and minimal exposure to changes in the
LME zinc price, the projected net revenues are expected to be relatively
stable.
Projected revenues
The processing fee is expected to be the principle source of distributable
cash of the fund for the next 15 years. Revenues from the processing fee
will constitute approximately 80 per cent of the Valleyfield processing
facility's projected net revenue (net of raw material purchase costs but
excluding transportation and distribution costs) for the next 12 months and
will be at comparable levels for the remainder of the 15-year term of the
supply and processing agreement.
Additional net revenues are expected to be derived from zinc product
premiums and, to a lesser extent, from sales of byproducts and metal
recovery gains. These revenues have been generally stable for the past five
years. The nature of the Valleyfield processing facility's products and its
delivery cost advantage allow it to realize a premium over quoted special
high-grade zinc.
Cash distributions
Distributable cash to the fund's unitholders is expected to be $50-million
per year after providing for capital expenditures and interest expense.
Credit facilities in place
The fund has received commitments from a syndicate of Canadian chartered
banks in respect of a $150-million secured term loan and a $55-million
secured revolving operating line of credit. On closing, $175-million is
expected to be drawn on the credit facilities and paid to Noranda as
partial consideration for the acquisition of the Valleyfield processing
facility.
Continuing management
Pursuant to various management agreements, Noranda will continue to operate
and manage the Valleyfield processing facility and will also provide
management, marketing and other administrative services to the fund.
Noranda ownership and subordination
Following the offering, Noranda will continue to own a 49-per-cent interest
in the fund. Over 50 per cent of Noranda's interest in the fund,
representing 25 per cent of the outstanding equity of the fund, will be
held as ordinary units, which will be subordinated in respect of cash
distributions to the priority units for a period of 15 years.
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