DBRS Confirms Noranda Operating Trust Rating at BB (high), Stable Trend

DBRS has today confirmed the BB (high) rating with a Stable trend on the Senior Secured Notes of Noranda Operating Trust (the Trust). The Trust remains a well-established and profitable processor of zinc concentrates strategically located to serve North American zinc metal markets, but is highly dependent on a zinc concentrate supply and processing agreement (Supply and Processing Agreement) with Glencore Canada Corporation (Glencore Canada) that ends its initial term in May 2017. Post-May 2017, the economic viability of the Trust’s zinc processing facility (CEZinc) is uncertain as it will need to replace (or continue) the Glencore Canada concentrate supply in a market that is currently in oversupply with low zinc processing charges.

The Trust’s CEZinc facility has been operating well since the resolution of issues related to the storage of excess sulphuric acid. Combined with a refinancing of its debt in 2011, a reduced level of distributions and large contributions from working capital reductions, the Trust’s debt has been reduced sharply and its credit metrics are now very strong.

The Trust’s near-term financial picture can be expected to strengthen as term debt is reduced by $15.0 million per year and zinc processing operations proceed normally under the auspices of the Supply and Processing Agreement. That said, despite labour stability provided by a three-year contract signed in 2011, lower production due to higher expected maintenance in H2 2013 is expected to reduce some of H1 2013 gains. In addition, near-term, operational complexity can be expected to increase as traditional sources of zinc concentrate transition to new sources, each with its own processing characteristics.

DRBS considers the CEZinc to be an important part of Glencore Canada’s current zinc mine operations; as such, we consider Glencore Canada has a strong vested interest in its ongoing operation. DBRS expects it likely that Glencore Canada could and would provide financial assistance if the Trust had difficulties in meeting its financial obligations during the term of the Supply and Processing Agreement. Nonetheless, the Trust’s earnings and cash flow are fully dependent on the terms of its Supply and Processing Agreement with Glencore Canada and continuing near-capacity operation.

Even though the Supply and Processing Agreement is subject to automatic renewal for five year terms at the end of its initial term on May 2, 2017, Glencore Canada has the right with appropriate advance written notice to indicate it does not wish to renew the agreement. In that case, the Trust would have to seek alternate sources of concentrate to process after May 2017 or potentially could seek to revise the terms of the existing agreement with Glencore Canada. In these cases, if current market conditions are a guide, DBRS expects the Trust can expect significantly lower earnings and profitability post-May 2017, or even a possible shutdown of operations due to competitive pressures.

Accordingly, DBRS discontinued the Issuer Rating of the Trust (an exception to our normal rating practice), due to the uncertainty regarding the Trust’s viability post-2017. As well, DBRS has not established a Recovery rating for the Senior Secured notes as their repayment remains intricately tied to assumptions regarding the successful operation under the Supply and Processing Agreement, which extends beyond the notes maturity in December 2016.

In the first half of 2013, the Trust has continued to restrict distributions to provide funds to maintain the operational capability of CEZinc and build resources to accommodate any transition / remediation / closure costs that may be incurred post-May 2017. DBRS views this as prudent action given the profitability of the CEZinc facility post-May 2017 remains in doubt.

Notes:
All figures are in Canadian dollars unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Mining Industry and Rating Companies in the Industrial Products Industry, which can be found on our website under Methodologies.