July 20, 2009 / 11:13 AM / 8 years ago

UPDATE 3-Noranda Income Fund suspends distribution, units fall

* Not paying distribution until economy improves

* Profitability, cash flow hurt by weaker demand

* Units fall more than 26 pct

(adds TD Newcrest comments, updates stock movement)

By Chakradhar Adusumilli

BANGALORE, July 20 (Reuters) - Noranda Income Fund NIF_u.TO, which owns a zinc-processing plant in Quebec, suspended its monthly cash distribution as sluggish demand and weak market conditions took a toll on its profitability and cash flow, sending its units down more than 26 percent.

“The suspension of the distribution is clearly negative, however given the lack of visibility with the sulphuric acid situation, and the fund’s net debt position of C$193 million, we view this as a prudent move,” TD Newcrest analyst Steven Green said in a research note to clients.

The analyst said if the fund continues at operating levels of 80 percent for the remainder of 2009 and if it is unable to reduce current debt levels, it may trip leverage ratio covenant in the fourth quarter.

The analyst, who cut his price target on the company’s stock to C$2.25 from C$2.50 but maintained a “hold” rating, said Noranda would save about C$1.5 million per month from the suspension of distribution.

The company, which owns the CEZinc processing facility in Salaberry-de-Valleyfield, said the suspension would impact both the ordinary and priority unitholders.

“It is disappointing news that they are not continuing with the distribution for the short term,” analyst Terence Ortslan of TSO & Associates told Reuters.

Sluggish demand and falling metal prices have forced many zinc producers to curtail operations, axe jobs and cut production forecast.

“It is not a question of pricing any more, but it is a question of volumes,” Ortslan said, adding that the undisposed volume is hurting the company’s cash flow.

Since March 2009, the fund has operated the production of sulphuric acid and zinc at 80 percent of 2008 levels due to the weak demand, the company said in a statement.

The Fund’s profitability and cash flow have been negatively impacted by operating at less than full capacity and by weak market conditions, Noranda added.

The fund, which was created to buy Xstrata Canada Corp’s CEZinc processing facility in Salaberry-de-Valleyfield, said it would stop paying monthly cash distribution until there is an overall improvement in the economic outlook.

“They (company) have proven to make lot of money in the past and there is no reason why its not going to happen again,” Ortslan added.

The company’s units, which have fallen more than 35 percent so far this year, were trading down 68 Canadian cents at C$1.94 on the Toronto Stock Exchange. (Editing by Ratul Ray Chaudhuri, Pradeep Kurup)

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