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Press release from Marketwire

Canexus Corporation Announces Third Quarter Results

Cash Operating Profit Increases 100% over Prior Year Driven by Strong Chlor-Alkali Performance

Thursday, November 03, 2011

Canexus Corporation Announces Third Quarter Results17:08 EDT Thursday, November 03, 2011CALGARY, ALBERTA--(Marketwire - Nov. 3, 2011) - Canexus Corporation (TSX:CUS) (the "Corporation" or "Canexus") today announced its financial results for the third quarter ended September 30, 2011. Unless otherwise noted, the Corporation is reporting the 100% results of Canexus Limited Partnership ("Canexus LP"). Highlights:Canexus LP recorded cash operating profit for the third quarter of $37.0 million, an increase of 100% over Q3 2010 and within our guidance for the quarter of $35.0 - $40.0 million. Distributable cash available to Canexus Corporation was $23.7 million ($0.20 per share) resulting in a payout ratio of 67%. Our guidance for Q4 cash operating profit of $30.0 - $35.0 million is unchanged. Canexus set both a production record and cash operating profit record at the North Vancouver chlor-alkali facility in the quarter. Production was 53,500 metric electrochemical units ("MECU") or 214,000 MECU on an annualized basis. Cash operating profit was $16.5 million (after allocation of general and administrative expense), up from $9.7 million in Q2 2011. We are currently evaluating the expansion of our hydrochloric acid capacity that could see us add approximately 280,000 wet metric tonnes ("WMT") in 2013. Today, the Board of Directors of Canexus Corporation approved a $6.5 million project (to be available in early 2012) to substantially increase diluted bitumen and conventional heavy oil truck-to-railcar transloading at our North American Terminal Operations ("NATO") site at Bruderheim, to respond to terminal service demand that could transition into a unit train loading terminal. The previously announced $5.5 million project to expand our hydrochloric acid terminal capacity is slated for completion in December. The Board declared the regular quarterly dividend of $0.1368 per common share payable January 16, 2012 to shareholders of record on December 31, 2011. As of September 30, 2011, total borrowings under committed credit facilities were $288.0 million with remaining available undrawn capacity of approximately $147.0 million. Cash on hand at September 30, 2011 was $4.0 million."Our results for the third quarter were in line with expectations and begin to demonstrate the earnings potential of the Corporation, led by the strong performance of our chlor-alkali facility at North Vancouver," said Gary Kubera, President and CEO. "These results continue to reflect the benefits of the strategic investments we have made in our business and our commitment to driving future growth while delivering sustainable returns to our shareholders."Distributable Cash Distributable cash available to Canexus Corporation was $23.7 million ($0.20 per share) for the quarter resulting in a payout ratio of 67%.Three Months Ended September 30Nine Months Ended September 30CAD thousands2011201020112010Cash Operating Profit37,00018,50387,92549,805Interest Expense(5,975)(5,089)(17,819)(8,528)Realized Currency Translation Gains31221,9623,29224,912Maintenance Capital Expenditures(4,328)(2,185)(11,810)(9,073)Provision for Current Income Taxes(1,003)(602)(3,315)(4,204)TCP Severance Costs Paid-(1,377)(2,133)(1,953)Other(306)(1,770)(411)3,365Distributable Cash of Canexus LP25,70029,44255,72954,324Cash General and Administrative Expense of the Corporation(619)(74)(1,242)(333)DTU Settlement on Conversion(1,505)-(1,505)-Other149-718-Distributable Cash23,72529,36853,70053,991Distributable Cash Per Share$0.20Below is a reconciliation of net cash generated from operating activities to Distributable Cash of the Corporation for the three months ended September 30, 2011.Three Months EndedCAD thousandsSeptember 30, 2011Net Cash Generated from Operating Activities32,472Change in Non-Cash Operating Working Capital(2,524)Non-Cash Change in Income Tax Payable and Interest Payable(807)Interest Income220Maintenance Capital Expenditures(4,328)Realized Foreign Currency Translation Losses on Cash(552)Amortization of the Purchase Cost of Foreign Exchange Options(278)Expenditures on Decommissioning Liabilities(5)Operating Non-Cash Items(473)Distributable Cash23,725Segmented Information for the Three Month Periods Ended September 30, 2011 and 2010Canexus has a total of six manufacturing plants – four in Canada and two at one site in Brazil – organized into three business units. Canexus also provides fee-for-service hydrocarbon transloading at its terminal in Alberta. NATO results are included in the North America Chlor-alkali results. Below is our third quarter performance by segment.CAD thousands, except as notedNorth AmericaThree Months Ended September 30, 2011Sodium ChlorateChlor-alkaliSouth AmericaOtherTotalSales Revenue54,61057,37527,293-139,278Cost of Sales32,34828,54021,043(58)81,873Distribution, Selling and Marketing6,72914,77735970222,567General and Administrative (1)2,5613,2451,1511,0317,988Operating Profit (Loss)12,97210,8134,740(1,675)26,850Add:Depreciation and Amortization included in Cost of Sales3,0435,6951,335-10,073Depreciation and Amortization included in General and Administrative--11231242Share-based Compensation(19)(28)(16)(102)(165)Cash Operating Profit (Loss)15,99616,4806,070(1,546)37,000Cash Operating Profit Percentage29%29%22%27%CAD thousands, except as notedNorth AmericaThree Months Ended September 30, 2010Sodium ChlorateChlor-alkaliSouth AmericaOtherTotalSales Revenue56,12436,51026,406-119,040Cost of Sales34,17927,56320,7204682,508Distribution, Selling and Marketing6,95210,66033731118,260General and Administrative (1)2,2322,7329861,9607,910Operating Profit (Loss)12,761(4,445)4,363(2,317)10,362Add:Depreciation and Amortization included in Cost of Sales3,4853,490607-7,582Depreciation and Amortization included in General and Administrative---422422Share-based Compensation1424990137Cash Operating Profit (Loss)16,260(931)4,979(1,805)18,503Cash Operating Profit (Loss) Percentage29%(3%)19%16%Note:General and administrative expenses are for functional areas such as human resources, finance, information technology and legal and are allocated to the operating segments based on production volumes.Highlights for each business unit are as follows:North America Sodium Chlorate:Q3 2011 versus Q3 2010: Third quarter sales revenue for this segment compared to the same period in 2010 decreased 3% to $54.6 million from $56.1 million. Sales volumes decreased 7% or 6,900 metric tonnes ("MT") over Q3 2010. Realized netback prices (net of freight), despite being negatively affected by the stronger Canadian dollar relative to the US dollar (Q3/11 – US$1.03; Q3/10 - US$0.96), increased 4% over Q3 2010. Our cash operating profit percentage of 29% was consistent year over year as higher realized netback prices and slightly higher production volumes were offset by higher fixed costs, slightly higher electricity and salt costs and higher general and administrative expense allocated to this segment. Q3 2011 versus Q2 2011: Third quarter sales revenue for this segment compared to the second quarter increased slightly to $54.6 million from $54.4 million. Sales volumes and realized netback prices were consistent between periods. Our cash operating profit percentage increased from 28% to 29% as a result of higher production volumes and lower electricity and salt costs for the three months ended September 30, 2011. Our plants continue to run at capacity. With some supply disruption at a competitor's plant expected to continue into the fourth quarter, industry operating rates are expected to remain in the mid-90's. The power line capacity upgrade to our Brandon plant is on track for completion in the second half of 2012 and will set the stage for further possible expansion opportunities.North America Chlor-alkali:Q3 2011 versus Q3 2010: Third quarter sales revenue for this segment compared to the same period in 2010 increased 57% to $57.4 million from $36.5 million, due to higher sales volumes of all products (hydrochloric acid 123%; chlorine 30%; and caustic soda 25%), and 19% higher MECU realized netback prices led by caustic soda. Higher sales volumes were due to the startup and ramp up of the technology conversion project ("TCP") in Q3 2010. Cash operating profit (loss) increased from a loss of $0.9 million for the three months ended September 30, 2010 to a record profit of $16.5 million for the same period in 2011 as a result of 52% higher production volumes with our plant running at planned levels in Q3 2011. Cash operating profit benefited from higher sales volumes, higher MECU realized netback prices and lower fixed costs, partially offset by higher electricity and salt costs. Q3 2011 versus Q2 2011: Sales revenue for this business increased 13% in Q3 2011 to $57.4 million from $50.7 million in Q2 2011. The increase in sales revenue was due to 19% higher MECU realized netback prices led by caustic soda and higher hydrochloric acid (18%) and caustic soda (3%) sales volumes, partially offset by lower chlorine sales volumes (9%). Cash operating profit percentage increased from 19% for the three months ended June 30, 2011 to 29% as a result of higher MECU realized netback prices and slightly higher production volumes, partially offset by slightly higher electricity costs. We expect our plant to run at about 90% of practical capacity in Q4 reflecting the seasonality of chlorine demand for water treatment and lower forecast economic growth in North America. MECU realized netback prices are expected to remain robust, with caustic soda prices moderating slightly due to contract timing and offset by significant price increases announced for hydrochloric acid in Q4 ($70/WMT or approximately $200/MT on a chlorine equivalent basis) as contracts allow. The demand for hydrochloric acid in the oil and gas industry for fracturing is expected to continue to be very strong creating further pricing momentum moving into 2012.South America:Q3 2011 versus Q3 2010: Third quarter sales revenue for this segment compared to the same period in 2010 increased 3% to $27.3 million from $26.4 million primarily due to higher chlorine equivalent sales volumes as a result of 7% higher chlor-alkali production volumes. Hydrochloric acid sales volumes and realized netback prices both increased by about 19%, partially offset by lower chlorine sales volumes (11%) and lower realized netback prices (8%). Sodium chlorate sales volumes were about 5% lower. Higher electricity costs in Q3 2011 also added to sales revenue due to the nature of our fixed US dollar margin contract with our major customer. Our cash operating profit increased from $5 million for the three months ended September 30, 2010 to $6.1 million as a result of higher chlor-alkali production and sales volumes, and lower fixed costs. Q3 2011 versus Q2 2011: Third quarter sales revenue for this segment increased 7% to $27.3 million from $25.4 million in the second quarter of 2011. Our cash operating profit increased from $5.6 million for the three months ended June 30, 2011 to $6.1 million due to increases in sodium chlorate sales volumes of 7% and higher hydrochloric acid sales volumes and realized netback prices (both increased about 5%), partially offset by higher fixed costs resulting from planned maintenance at both of our plants in the quarter. Our plants are expected to continue to operate at or near capacity in the fourth quarter. Market FundamentalsNorth America Sodium Chlorate: The third quarter of 2011 saw global pulp markets retract from the strong performance recorded in the first half of the year. Market pulp prices have declined modestly from peak levels in July 2011, eroding some of the price increases recorded earlier in the year by pulp producers. Year to date September 2011, global pulp shipments were up by over 5% from the same period in 2010. Following four consecutive months of increases, producer inventories at the end of September fell by 3 days to stand at 38 days. Producer inventories for both softwood (32 days) and hardwood (44 days) pulp are above historical averages (29 days for softwood and 37 days for hardwood), adding pressure to current price levels. However, most pulp producers are expecting modest demand recovery in the fourth quarter.Despite the softening of pulp prices, current levels continue to support healthy operating rates from North American bleached pulp mills and strong demand for sodium chlorate. Likewise, sodium chlorate exports from North America continued their growth trend, with year to date August 2011 volumes slightly higher than the same period in 2010. The supply of sodium chlorate has been in a tight-to-balanced position for the full year, supporting price increases. Barring any strong reversal in the pulp industry or the global economy, the chlorate market supply-demand balance should remain at current levels, and could see stronger fundamentals later in 2012 as some of the projected pulp mill re-starts increase overall demand for sodium chlorate.North America Chlor-alkali: The North America chlor-alkali industry operated at an estimated 83% of capacity in the third quarter of 2011, compared with 88% in the prior quarter and 91% in the third quarter of 2010. The reduction in industry capacity utilization is a direct result of decreased chlorine derivative exports to China from US Gulf Coast producers. Domestic chlorine demand remains weak and the outlook for the fourth quarter is poor when considering the seasonal downturn in construction materials and water treatment. Industry capacity utilization is expected to be at or below 80% in the fourth quarter of 2011.North American hydrochloric acid supply declined significantly consistent with the reduction in chlorine derivative production which generates by-product hydrochloric acid supply – principally the isocyanates and fluorochemicals manufacturers. Chlorine burner supply has increased to capacity levels but not sufficient to offset the loss of by-product supply. On the demand side, there has been an increase for hydrochloric acid in the oil and gas well stimulation segment, resulting in a market that is undersupplied.North American caustic soda production declined in the third quarter of 2011 consistent with lower chlorine operating rates. Import supply availability declined due to lower chlorine demand and weak PVC economics in Asia. Domestic demand remained strong with continued high demand from the pulp and paper sector. Domestic caustic soda supply is expected to decrease further in the fourth quarter of 2011 with the expected lower chlorine operating rates. Import availability will be influenced by PVC margins and chlorine demand in other segments.North America MECU prices increased during the third quarter of 2011 due to caustic soda price improvement. Additional caustic soda and hydrochloric acid price increases are expected in the fourth quarter, while chlorine prices are expected to erode. Overall, MECU values are forecast to remain stable in the fourth quarter.South America: Brazilian pulp exports in September 2011 were weaker than in August 2011. Lower exports in September indicates higher producer inventories at this time which, together with recent concerns on global economic activity, may trigger price reductions in the short term. Year to date September 2011, exports were 3% higher, indicating flat activity.Canexus' major sodium chlorate customer is on track to meet 2011 pulp production targets. Canexus' other pulp customers are also on track to meet their production objectives for the year. Accordingly, Canexus Brazil's sodium chlorate plant is projected to operate at maximum rates for the duration of 2011. During January to August 2011 the Brazilian chlorine capacity utilization rate was 82% (7% lower than the same period in the prior year). The decreased production rate was the result of demand reduction associated with a power outage and planned outages at several chlor-alkali facilities throughout the year. These disruptions were associated with captive chlorine consumers that are not part of the market segments into which Canexus Brazil sells. In contrast to the Brazilian market as a whole, Canexus Brazil's chlor-alkali capacity utilization was 94% during the nine months ended September 30, 2011.Financial Updates Long-term Debt and Finance Income (Expense): We borrow in US dollars, which creates unrealized currency translation gains as the Canadian dollar strengthens. A substantial portion of our revenues are denominated in or referenced to the US dollar. During the third quarter of 2011, we recorded an unrealized currency translation loss of $21.5 million as a result of the significant weakening of the Canadian dollar at the end of the quarter (Q3/10 - $10.7 million unrealized loss), and realized $0.9 million of foreign currency gains on repayments of US dollar denominated loans in the quarter (Q3/10 - $20.5 million of realized gains on temporary repayments of US dollar denominated loans to minimize borrowing costs). These amounts are included in finance income (expense). Interest expense in the quarter was $6.0 million (Q3/10 - $5.1 million) and is included in finance income (expense). Interest capitalized on major projects was $0.2 million in Q3 2011 ($1.5 million in Q3 2010). We stopped capitalizing interest associated with TCP capital expenditures on August 1, 2010. In Q3 2010 we also expensed $2.8 million of convertible debenture transaction costs.Other Income (Expense):In the third quarter, mark-to-market fair value losses of $0.6 million (Q3/10 - $Nil) and realized gains of $0.1 million (Q3/10 - $0.2 million) were recorded on foreign exchange option contracts. In the third quarter of 2011, we recorded mark-to-market fair value gains of $0.2 million (Q3/10 – losses of $0.4 million) on interest rate swaps and realized losses of $0.4 million (Q3/10 - $0.4 million). Other income also includes $0.6 million of realized currency translation losses on working capital in Q3 2011 (gains of $1.5 million – Q3 2010) and $0.7 million of sales taxes in Q3 2010 recorded on the hydrogen settlement in Brazil that occurred in the second quarter of 2010. In the third quarter we recorded mark-to-market fair value losses on a cross currency swap of $1.9 million as a result of the significant weakening of the Canadian dollar at the end of the quarter. In Q3 2011 we entered into a cross currency swap to effect the payment of interest on the Series IV Convertible Debentures issued on June 30, 2011 in US dollars.Capital Expenditures: Capital expenditures for the three months ended September 30, 2011 were $10.4 million, of which $4.3 million was spent on maintenance projects and the balance on continuous improvement and expansion projects. Provision for Income Taxes: Provision for income taxes is higher in the third quarter of 2011, as compared to the same period in 2010, due to changes in foreign exchange rates in foreign subsidiaries. As of September 30, 2011, Canexus LP has approximately $370 million of future tax deductions resulting from capital expenditures which can be used to shelter future taxable income. DTU Settlement: The conversion to a Corporation on July 8, 2011 triggered the settlement of the Director's Trust Unit Compensation Plan ("DTU"). Following payment on July 21, 2011, each of the Directors has reinvested the after-tax proceeds received in shares of Canexus Corporation.Operating Results for the Periods Ended September 30, 2011 and 2010Three Months Ended September 30Nine Months Ended September 302011201020112010Revenues139,278119,040395,788337,079Cost of Sales (1)81,87382,508251,200233,346Gross Profit57,40536,532144,588103,733Distribution, Selling and Marketing22,56718,26065,73555,125General and Administrative (2)7,9887,91023,02421,943Operating Profit26,85010,36255,82926,665Finance Income (Expense)(27,622)731(32,829)(10,627)Income (Loss) before Other Income (Expense) and Income Taxes(772)11,09323,00016,038Other Income (Expense)(2,642)249(2,006)4,701Income (Loss) before Income Taxes(3,414)11,34220,99420,739Provision for (Recovery of) Income TaxesCurrent1,0036023,3154,204Deferred969(2,055)2,3479831,972(1,453)5,6625,187Net Income (Loss)(5,386)12,79515,33215,552Notes:Depreciation and amortization included for the three and nine months ended September 30, 2011 - $10.1 million and $31.6 million respectively; depreciation and amortization included for the three and nine months ended September 30, 2010 of $7.6 million and $21.5 million respectively. Depreciation and amortization included for the three and nine months ended September 30, 2011 - $0.2 million and $0.7 million respectively; depreciation and amortization included for the three and nine months ended September 30, 2010 of $0.4 million and $1.3 million respectively.Financial Statements, Conference Call and Webcast Financial Statements and Management's Discussion and Analysis will be posted on the Canexus web site at www.canexus.ca and filed on SEDAR when available. Management will host a conference call at 10 a.m. ET on November 4, 2011, to discuss the results. A Q3 2011 presentation will be available on our website to facilitate the conference call. Please call 416-644-3414 or 1-800-814-4859. The conference call will also be accessible via webcast at www.canexus.ca. A replay of the conference call will be available until midnight November 11, 2011. To access the replay, call 416-640-1917 or 1-877-289-8525, followed by passcode 4478356#.Non-IFRS Measures Cash operating profit, cash operating profit percentage, payout ratio, distributable cash and gross profit are non-IFRS financial measures, but management believes they are useful in measuring the Corporation's performance. Readers are cautioned that these measures should not be construed as alternatives to net income or loss or other comparable measures determined in accordance with IFRS 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-IFRS measures may differ from the methods used by other issuers and accordingly, the Corporation's non-IFRS measures are unlikely to be comparable to similarly titled measures used by other issuers. Readers should consult the Corporation's Q3 MD&A filed on SEDAR for a complete explanation of how the Corporation calculates each such non-IFRS measure. Forward-Looking Statements 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 of completion of power line capacity upgrades at Brandon, MECU netbacks, the timing 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 and expectations in relation to chlorine prices. 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.About Canexus 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.FOR FURTHER INFORMATION PLEASE CONTACT: Gary KuberaCanexus CorporationPresident and CEO(403) 571-7300ORRichard McLellanCanexus CorporationCFO(403) 571-7300www.canexus.ca