Canexus expects second straight year of record financial, operational performance in 2012 with cash operating profit to increase to between US$140M and US$145M on factors including higher chlor-alkali plant production, sales volumes
December 16, 2011
– Canexus Corporation (TSX:CUS) ("Canexus" or the "Corporation") today announced its financial, operations and market outlook for 2012.
"Canexus is well positioned to achieve a second consecutive year of record financial and operational performance in 2012, realizing the full benefits of the investments made in growth projects completed over the past 18 months, the most significant of which was the technology conversion project (TCP) at our North Vancouver chlor-alkali facility, as well as benefiting from stable market conditions," said Gary Kubera, President and CEO.
"We expect 2012 cash operating profit to increase to between $140 million and $145 million, resulting in distributable cash of $80 million to $85 million, for a payout ratio of 75% to 80%. This is a significant improvement over the record cash operating profit anticipated for 2011 of $120 million to $122 million. We remain committed to drive future growth while delivering sustainable returns to our shareholders," Mr. Kubera added.
The improvement in our outlook for 2012 (over 2011 expected results) reflects:
Higher chlor-alkali plant production and sales volumes (3%), higher realized netbacks (6% - led by hydrochloric acid price improvements) and lower cash production costs as we realize the remaining benefits of TCP through final expected manpower reductions and elimination of natural gas consumption
Higher realized netbacks (5%) in our North American Sodium Chlorate business unit on similar sales volumes
Solid performance from our North American Terminal Operations (NATO) business at Bruderheim, which is projected to achieve "critical mass" base transload business levels in 2012.
"Since our initial public offering in 2005, Canexus has built a solid track record of growth through project implementation. While we realize the benefits of past investments, we continue to pursue our next phase of visible growth projects," said Mr. Kubera.
"I am pleased to announce that today the Board of Directors of Canexus Corporation approved the first of two expected phases of hydrochloric acid expansion at our North Vancouver chlor-alkali facility in support of growing demand from the oil and gas industry for use in multi-stage hydraulic fracturing of horizontal wells. This first phase of expansion is expected to increase our hydrochloric acid practical capacity by 111,000 wet metric tonnes (WMT) to 260,000 WMT at an approximate cost of $25.0 million (including infrastructure to facilitate future growth) and is expected to add an incremental $13 million to cash operating profit (average annual impact over project life) following start-up in Q1 2013. This acid expansion and related infrastructure investment, paves the way for continued growth and further chlorine derivatization. A similar second phase of expansion is currently being developed and will be considered for approval in early 2012," Mr. Kubera added.
Global pulp markets have shown some weakness in the second half of 2011 which we expect will continue into early 2012 before stabilizing by mid-year. Mid-term forecasts continue to predict growing global demand for pulp led by China. Capacity growth, which was postponed in South America during the 2008/09 recession, will continue to be constrained in the short term with no new capacity expected before late 2012. This is a favorable mid-term dynamic for North American pulp producers. The North American sodium chlorate industry continues to operate at near 95% operating rates that are expected to continue for 2012, with our sodium chlorate plants expected to operate at capacity. The project to upgrade the power line capacity at our low-cost Brandon plant is expected to be completed in the second half of 2012, setting the stage for potential additional de-bottleneck expansion opportunities at this facility in the future.
North American chlor-alkali industry fundamentals are being affected by slower global economic growth with reduced demand for chlorine products which in turn has constrained caustic soda supply. Caustic soda pricing has strengthened rapidly in 2011 and we expect this strength to carry into mid-2012 before easing. Chlorine derivative exports from the U.S. Gulf Coast continue to be advantaged by low natural gas prices, resulting in reasonable industry operating rates (about 85%) which are expected to continue. Moderate natural gas prices in North America favorably position North American chlorine chain petrochemicals for export to Asia in comparison to naphtha-based production in Asia for the near to mid term. Hydrochloric acid demand has grown quickly in Western Canada as a result of new drilling and fracturing technologies and higher oil prices. At the same time, supply has been constrained due to lower by-product acid production that accounts for roughly two-thirds of North American supply. The result has been rapid escalation of acid prices which we expect to persist through 2012. Metric electrochemical unit (MECU) netback prices are expected to remain strong in the mid term with continued price escalation for hydrochloric acid mitigated somewhat by caustic soda prices softening modestly as 2012 progresses with demand easing due to the economic slowdown. We expect to operate our North Vancouver chlor-alkali facility at 95% of practical capacity and will continue to benefit from the hydrochloric acid expansion completed in 2010.
In South America, demand for Brazilian pulp has been strong over the past year and is expected to remain so in 2012, consistent with growing global demand for pulp. As a result, our sodium chlorate plant is expected to operate at capacity through 2012. We also expect to operate our chlor-alkali plant at capacity, having the flexibility to derivatize up to 100% of our chlorine production to hydrochloric acid. Cash operating profit is expected to grow modestly from 2011, the consistency of which benefits from our fixed margin contract with our major customer.
Canexus continues to expand its capabilities at its NATO unit. The significant hydrochloric acid expansion announced today is facilitated by this strategic asset which allows for the movement of large quantities of this and other products required by the oil and gas industry in Western Canada.
The $6.5 million project announced in November to substantially increase diluted bitumen and conventional heavy oil truck-to-railcar transloading, in response to terminal service demand, is on track to be available in early 2012. We continue to pursue pipeline access agreements that could transition this site into a unit train loading terminal. Our two 800,000 barrel salt caverns will also support the potential large scale development of the site to service the oilsands region.
Additional 2012 Annual Operating Plan Assumptions
The following additional points summarize the underlying assumptions for the Canexus 2012 annual operating plan:
Canadian dollar expected to average US$1.01. We currently have foreign exchange option protection on US$5 million per month from January 1, 2012 through September 30, 2012 at rates varying from US$0.95 to US$0.98
Estimated incremental funding costs of our defined benefit pension plan will be $4.0 million, and TCP remaining severance payments of $0.8 million and $0.5 million will be made in 2012 and 2013 respectively
At September 30, 2011, Canexus had $370 million of major tax pools to shelter taxable income in Canada
Our capital expenditure program in 2012 is expected to include:
$21.6 million to be spent on maintenance capital (including $5.9 million on our electrolytic cell recoating programs at Brandon and in Brazil)
$31.9 million on expansion/growth projects (Brandon power line upgrade - $4.2 million; North Vancouver acid growth - $21.0 million, and NATO diluted bitumen and heavy oil transloading and acid blending - $6.7 million)
$4.3 million on high-return continuous improvement projects
Our 2012 annual operating plan and capital expenditure program will be financed from cash on hand, excess distributable cash, DRIP proceeds and our committed credit facilities. We expect our leverage (Debt-to-EBITDA ratio) to fall to approximately 2.0 by the end of 2012 (3.0 for Debt plus convertible debentures-to-EBITDA ratio).
This news release refers to EBITDA, cash operating profit, payout ratio and distributable cash to assist in measuring the Corporation's financial performance. Readers are cautioned that these measures are non-GAAP measures and should not be construed as alternatives to net income or loss or other comparable measures determined in accordance with GAAP as an indicator of the Corporation's performance or as a measure of the Corporation's liquidity and cash flow. The Corporation's method of calculating non-GAAP measures may differ from the methods used by other issuers and accordingly, the Corporation's non-GAAP measures are unlikely to be comparable to similarly titled measures used by other issuers.
This news release contains forward-looking statements and information relating to expected future events relating to Canexus and its subsidiaries, including with respect to sodium chlorate industry operating rates and their impact on pricing for sodium chlorate, the timing and impact of completion of power line capacity upgrades at Brandon, MECU netbacks, the timing, cost and impact of a hydrochloric acid expansion at Canexus' North Vancouver chlor-alkali plant, demand from Canexus' major Brazilian customer and operating capacities at South American plants, demand from the oil and gas industry for hydrochloric acid and terminal capacity at Bruderheim and the timing of completion of a facility expansion in relation thereto, fundamentals and demand in the global pulp market and pulp capacity growth in relation thereto, caustic soda supply and demand and the impact on prices, facility utilization and operating rates in relation to demand expectations, expectations in relation to chlorine prices, expectations with respect to the relative value of the Canadian dollar, expectations in relation to Canexus' defined benefit pension plan and TCP severance payments, expectations regarding Canexus' 2012 capital expenditures and leverage and expectations of Canexus' operating profit, distributable cash and payout ratios for 2011 and 2012. The use of the words "expects", "anticipates", "continue", "estimates", "projects", "should", "believe", "plans", "intends", "may", "will" or similar expressions are intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements for a variety of reasons, including market and general economic conditions, future costs, treatment under governmental regulatory, tax and environmental regimes and the other risks and uncertainties detailed under "Risk Factors" in the Fund's Annual Information Form filed on the Fund's SEDAR profile at www.sedar.com. Management believes the expectations reflected in these forward-looking statements are currently reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. Due to the potential impact of these factors, Canexus disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Financial outlook information contained in this press release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Such financial outlook information should not be used for purposes other than those for which it is disclosed herein.
Canexus produces sodium chlorate and chlor-alkali products largely for the pulp and paper and water treatment industries. Our four plants in Canada and two at one site in Brazil are reliable, low-cost, strategically-located facilities that capitalize on competitive electricity costs and transportation infrastructure to minimize production and delivery costs. Canexus also provides fee-for-service hydrocarbon transloading services to the oil and gas industry from its terminal at Bruderheim, Alberta. Canexus targets opportunities to maximize shareholder returns and delivers high-quality products to its customers. Canexus' common shares (CUS) and debentures (Series I - CUS.DB; Series III - CUS.DB.A; Series IV - CUS.DB.B) trade on the Toronto Stock Exchange. More information about Canexus is available at www.canexus.ca.