The Arrangement Agreement was unanimously approved by the
This transaction has several benefits for the Fund’s priority unitholders including:
- Immediate and attractive premium for the Fund’s priority unitholders;
- All-cash transaction not subject to a financing condition; and
- Removal of future dilution, commodity and execution risk.
“Noranda Income Fund was established in 2002 as an income trust to distribute cash flow from the zinc processing facility in
Independent Committee Review and Board Recommendations
The Independent Committee took into consideration several factors when approving the Arrangement Agreement including:
- Compelling Value to Priority Unitholders: The
C$1.42 per unit purchase price represents a 45% premium on the closing price on the TSX onJanuary 6, 2023 , the last trading day prior to announcement, and a 62% premium on the 20-day volume weighted average price per priority unit on the TSX for the period ending onJanuary 6, 2023 . Considering associated risks and with challenges still on the horizon for the Fund, the Independent Committee concluded that the consideration represents a compelling value for priority unitholders compared to the status quo. - Certainty of Value and Immediate Liquidity: The Transaction allows unitholders to realize an attractive price for their units through an all-cash offer, thereby providing certainty of value and immediate liquidity.
- Inability to Generate Distributable Cash: The Fund has not been able to generate distributable cash to proceed with monthly distributions for unitholders since 2017 and with long-term capital expenditures needed in the cellhouse it is unlikely the Fund would be able to recommence such distributions in the foreseeable future.
- Business Subject to Significant Volatility: The Fund is, by its nature as a single-asset zinc smelter, subject to significant volatility. Following the initial 15-year favourable supply and processing agreement put in place at the Fund’s inception in 2002, the ability to generate revenue and cash flow is subject to market volatility in treatment charges and zinc prices. The Fund also faces significant working capital requirements and fluctuations thereof. These challenges are exacerbated by the rising cost environment.
- Capex Requirements: The operations of the Fund necessitate meaningful capital expenditure (“capex”) requirements to maintain zinc smelting operations, which is reflective of the heavy industrial nature of the Fund’s business. These capex requirements are necessary to ensure the maintenance, stability, safety and efficiency of its operations. This past year, production was negatively impacted primarily by instability in cellhouse operating conditions and the related six-week shutdown of the cellhouse to conduct maintenance and repairs: in 2022, zinc metal production decreased by 33% to 198,182 tonnes, compared to 264,046 tonnes in 2021, and zinc metal sales decreased by 33% to 198,666 tonnes, compared to 263,612 tonnes in 2021. While the Fund believes the cellhouse repairs will contribute to stabilizing near-term cellhouse operating conditions, the cost of a full cell and crane replacement in the cellhouse, required to fully address underlying operational issues, is estimated to be approximately
US$100 million . Obtaining financing for this will present a challenge for the Fund. - Negotiations Led by Independent Committee: The Arrangement Agreement is the result of extensive arm’s-length negotiations between the Independent Committee and Glencore, with the oversight and participation of the Independent Committee’s external financial and legal advisors, as well as the Fund’s external legal advisor.
- Independent Valuation and Fairness Opinion: Accuracy
Canada provided an independent valuation to the Independent Committee, which determined that, as atDecember 31, 2022 , based upon and subject to the assumptions, limitations and qualifications contained therein, the fair market value of the priority units ranged fromC$1.24 toC$1.94 per unit. AccuracyCanada also provided the Independent Committee a fairness opinion to the effect that, as atJanuary 8, 2023 , the consideration to be received by the priority unitholders under the Transaction is fair, from a financial point of view, to such holders, subject to the limitations, qualifications, assumptions and other matters set forth therein. - Additional Fairness Opinion:
Paradigm Capital , acting as financial advisor to the Independent Committee and the Fund, provided an opinion to the effect that, as atJanuary 8, 2023 , the consideration to be received by the priority unitholders under the Transaction is fair, from a financial point of view, to such holders, subject to the respective limitations, qualifications, assumptions, and other matters set forth in such opinion. - Minimal Conditionality: The Transaction is not subject to any due diligence condition or financing condition and the Independent Committee and the Board believe that there are limited closing conditions that are outside of the control of the Fund and, as such, there is a reasonable likelihood of completion.
- Transaction Structure: The Transaction is structured as a court approved plan of arrangement, which provides procedural benefits to unitholders such as dissent rights and which also allows for structural flexibility which may be desirable given the Fund’s complex corporate structure.
- Required Unitholder and Court Approvals: The Transaction will become effective only if, at a special meeting of unitholders called to consider the Transaction, it is approved by (i) 66 2/3% of the votes cast by the holders of the Fund’s priority units and special fund units voting as a single class, and (ii) a simple majority of the votes cast by holders of the Fund’s priority units and special fund units after excluding votes from certain unitholders, including Glencore, and, after considering the procedural and substantive fairness of the Transaction, by the
Ontario Superior Court of Justice (Commercial List). - Benefits to Other Stakeholders: The Independent Committee believes that the Transaction – and integrating the zinc smelter operations into Glencore – is in the best interest of the processing facility, its employees and the local community, given that the Fund already has so many important relationships with Glencore, including Glencore being the owner of the zinc smelter’s manager, which is also the employer of the facility’s employees.
The past few years have been difficult for the resource industry, with supply chain disruptions and labour shortages presenting challenges to the sector globally. Following recently announced production issues, the Fund made necessary investments and proceeded to a temporary shutdown of the zinc smelter to make immediate repairs in the cellhouse. While that proved to be the right decision with the cellhouse now reopened, challenges are still on the horizon. The Fund does not intend to provide annual production and sales guidance for the foreseeable future, as the zinc smelter’s production capacity will remain constrained until the underlying issues impacting cellhouse operating conditions are fully addressed.
It is the view of the Independent Committee that the Transaction offers the best value realizable for unitholders and comes at a strategic time. The Fund is grateful to the zinc smelter’s employees for their hard work and dedication to the Fund, including during the recent shutdown.
Background to the Transaction
The Transaction is the result of a concerted review by the Independent Committee of the alternatives available to the Fund, begun informally in
Given the suspension of monthly distributions in
In
In
During the course of the strategic review, the zinc smelter’s cellhouse was experiencing accelerated deterioration, resulting in pressing capex needs. By
In
Through the strategic review, the Independent Committee completed an in-depth analysis of the Fund’s status quo, long-term prospects and lack of viable alternatives. The Independent Committee believes that the Transaction presents the best opportunity to deliver value to unitholders and that it is fair to unitholders and in the best interests of Fund and the unitholders.
Transaction Summary
The Transaction will be implemented by way of a court-approved plan of arrangement under the Business Corporations Act (
Further details regarding the terms of the Transaction are set out in the Arrangement Agreement, a copy of which will be made available on SEDAR at www.sedar.com.
The Meeting
The Meeting is expected to be held on or about
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Forward-Looking Information
Certain information in this press release, including statements regarding the Arrangement Agreement, the proposed Transaction, the Meeting, receipt of Fund unitholder, court and required regulatory approvals for the Transaction and the cost of and financing of a full cell and crane replacement, are forward-looking information. In some cases, but not necessarily in all cases, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "targets", "expects" or "does not expect", "is expected", "an opportunity exists", "is positioned", "estimates", "intends", "assumes", "anticipates" or "does not anticipate" or "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might", "will" or "will be taken", "occur" or "be achieved". Statements containing forward-looking information are not historical facts but instead represent management's expectations, estimates and projections regarding future events.
Forward-looking information is necessarily based on a number of opinions, assumptions and estimates that, while considered reasonable as of the date of this press release, are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including but not limited to the factors described in greater detail in the "Risk Factors" section of the Fund’s Annual Information Form dated
About the
Advisors and Counsel
For more information: | Vice President, Special Situations 647-265-4522 asidnell@kingsdaleadvisors.com |
Source:
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