Description

Noranda Income Fund (Noranda) was created over 20 years ago with a zinc smelter in the outskirts of Montreal. Had an agreement in place with Xstrata (now Glencore), who controlled 25% of the equity. Xstrata would manage the smelter, provide the zinc concentrate and also market the zinc. The company has been written up on VIC three times. All three reports provide an excellent overview of the company and its intrinsic value. This write up however focuses on a shareholder vote happening in six days that could create an asymmetric situation with a big upside and a very limited downside.

Since 2017 Noranda has been underperforming, management claims the business needs huge capex investments (USD 100M) and proposes that unitholders accept a take under from Glencore (USD 38M) at CAD 1.42 per share. This offer is going to be voted on February 28. 2/3 of the register need to vote for it.

Activist investors Riverstyx Capital Management and LM Asset Fund, who control 22% of the units claim this is a blatant robbery, and have requisitioned a special meeting of unitholders to reconstitute the board of trustees.  The meeting is scheduled to be held on March 28. They also point out that the board of trustees, and the CEO for that matter, are directly or indirectly controlled by Glencore.

Noranda is one of the largest zinc smelters in North America, has access to cheap hydro power, and supply and trading contracts with one of the largest players in the industry -Glencore- . So the fact that it is not making money in a context where most zinc smelters are doing very well beggars’ belief. By way of example, Boliden’s Kokkola (293 ktonnes) and Odda (80 ktonnes) made SEK 1200M and 600M EBIT, respectively, in 2022. In his 2019 write-up LA2NYC was also pointing to Aurubis AG (XTRA:NDA), which is also doing very well.

Noranda has 866 acres of valuable real estate. In his 2017 write-up Fenkell estimated that acres in the area could go for CAD500k (CAD 433M in total). I would just refer you to the google maps screen shots further down, which illustrate the size of Noranda’s land plot and show a very decent neighborhood nearby. I would also add that real estate prices in Montreal have skyrocketed over the last few years.

Options:

1. Take under at CAD 1.42 is successful (1.4% downside - SMALL LOSS)
2. Take under is not successful
   1. Glencore increases the offer - WIN
   2. Glencore does not increase the offer
      1. Activists do not take control of the board of trustees (highly unlikely if the take-under fails in my opinion, who would prefer the current status quo?) - BIG LOSS
      2. Activists take control of the board of trustees => the asset is put for sale or liquidated - WIN

Catalyst

Votes on Feb 28 and March 28