News Centre

FOR: NORANDA INCOME FUND

Noranda Income Fund Reports First Quarter 2006 Net Earnings of $4.3 Million

Apr 27, 2006 - 12:44 ET

VALLEYFIELD, QUEBEC--(Marketwire - April 27, 2006) -

Attention Business/Financial Editors:

The Noranda Income Fund (the "Fund") reported net earnings of $4.3 million for the first quarter of 2006, compared to $6.5 million for the first quarter a year ago. The $2.2 million decrease was due to lower volumes of zinc metal production and sales and higher operating costs, offset by higher premiums and byproduct revenues.

"While the first quarter of 2006 was impacted by reduced production as a result of unforeseen plant maintenance, the realized premiums for zinc and byproduct revenues have continued to strengthen. The production issue is behind us, and given the current price environment, we should recover from the impact of the reduced first quarter production during the balance of 2006, because of higher byproduct revenues and metal premiums," said Mario Chapados, President and Chief Executive Officer of the Noranda Income Fund's Manager.

The outlook for 2006 and the estimate for production, premiums and byproduct revenues are subject to various risks and uncertainties. The assumptions can be found in the "Forward-Looking Statements" below.

Financial Results

This analysis of the financial position and results of operations of the Fund should be read in conjunction with the unaudited interim consolidated financial statements of the Fund for the three months ended March 31, 2006 and with the audited consolidated financial statements of the Fund and the notes thereto for the period ended December 31, 2005. All dollar amounts are shown in Canadian dollars unless otherwise specified.

The analysis has been prepared as of April 27, 2006. Additional information relating to the Fund, including the Fund's annual information form is available on SEDAR at www.sedar.com.



Q1/2006 Highlights
------------------

First Quarter
2006 2005
---- ----
Zinc metal production (tonnes) 61,684 66,851
Zinc metal sales (tonnes) 62,606 62,984
Realized average
metal premiums (US$ per pound) 0.068 0.058
Byproduct revenues ($ millions) $8.5 $4.7
Average US/Canadian exchange rate 1.155 1.227

 


- Realized premiums were higher - 6.8 cents US per pound in Q1/06 vs. 5.8 cents in the same quarter of 2005.

- Benefited from 81% increase in byproduct revenues - $8.5 million in Q1/06 compared to $4.7 million in Q1/05 as copper prices continue to climb. Current copper prices are $3.20 per pound vs. the average price in Q1/06 of $2.24 per pound.

- Advanced projects aimed at improving productivity and increasing revenues.

- All the monthly cash distributions were paid at the forecasted levels.

RESULTS OF OPERATIONS

Consolidated Net Earnings (Three months 2006 compared to three months 2005)

Revenues less raw material purchase costs ("Net Revenues") in the first quarter of 2006 were $60.8 million compared to $59.4 million in the same period of 2005. The $1.4 million variance was due to higher premiums, byproduct revenues and processing fees, partially offset by lower volumes of zinc metal sales and a stronger Canadian dollar. Each $C0.01 appreciation in the average Canadian/US exchange rate negatively impacts the Fund's annual net earnings by approximately $0.5 million.

Over 74% of Fund's Net Revenue in the first quarter of 2006 was realized from the processing fee on zinc concentrates. The Fund retains only a small exposure to the fluctuations in the price of zinc under the terms of the Supply and Processing Agreement with Falconbridge Limited (Falconbridge). Another portion of the Fund's Net Revenue is derived from premiums realized on the sale of zinc metal and various value-added zinc products. These premiums have been steadily rising due to the increased tight supply of zinc metal in the North American market. The Fund also benefits from the sale of byproducts, such as copper, cadmium and sulphuric acid that are processed and extracted from the zinc concentrate.

The production decrease in the first quarter of 2006 has caused an increase of in-process inventory, which should result in higher metal production in the remainder of 2006. Total production of zinc metal for 2006 is forecast at 273,000 tonnes - the same level as what was achieved in 2005.

Production costs in the first quarter were $39.6 million compared to $36.8 million in the first quarter of 2005. The $2.8 million increase resulted from higher energy, supply and contractor costs.

Selling, general and administration costs for the first quarter of 2006 were $4.8 million, unchanged from the first quarter of 2005. Amortization and reclamation was $7.2 million in the first quarter of 2006, compared to $6.7 million in the first quarter of 2005.

In the first quarter of 2006, net interest expense was $2.9 million, compared to $2.6 million in the same quarter a year ago due to higher levels of debt that has resulted from the increase in the zinc price and the corresponding increase in working capital during 2006.

PRODUCTION

Zinc metal production in the first quarter of 2006 of 61,684 tonnes was 8% lower than the 66,851 tonnes produced in the first quarter of 2005. During the first quarter, production was negatively affected by the breakdown of one of the electrolyte circulation pipes in the refinery. Repairs have been made and production is back to normal.

For the first quarter of 2006, sales totalled 62,606 tonnes, 1% lower than the 62,984 tonnes sold in the first quarter of 2005. Zinc sales matched production during the quarter. Sales for 2006 have also been revised downwards to 273,000 as a result of the lowered production target.

The following target for sales is subject to various risks and uncertainties. The assumptions for them can be found in the "Forward-Looking Statements" below.

PREMIUMS AND BYPRODUCTS

During the fourth quarter of 2005, the market for zinc tightened, supported by the closure of refining capacity in the United States, strong demand and low inventories. All of these factors positively impacted the negotiated annual zinc premiums for 2006. As a result, average contracted zinc premiums rose to 6.8 cents US per pound, from 5.8 cents US per pound a year ago. In 2006, almost all of the Fund's zinc metal sales are on an annual contract basis. In the first quarter of 2006 the zinc market has continued to tighten as a result of continued strong demand for zinc.

Byproduct revenues in the first quarter of 2006 remained strong. Copper supply disruptions since the beginning of the year has continued to keep the fundamentals strong. With inventories tight, copper prices in the first quarter of 2006 rose to US$2.24 per pound, compared to US$1.48 per pound in the first quarter of 2005. Sulphuric acid netbacks also remained strong during the quarter. For the quarter, byproduct revenues totalled $8.5 million, up from $4.7 million in the same period a year ago.

CAPITAL EXPENDITURES

The Fund has identified a number of capital projects that are aimed at improving productivity and increasing revenues over the next few years. As a result, the forecast capital expenditure for 2006 have been increased from $18 million to $21.5 million of which $7 million represents investments in revenue generating projects and $14.5 million represents sustaining capital required to maintain the plant's current capacity.

The focus of the revenue enhancing capital expenditures is to increase zinc concentrate throughput towards the maximum available concentrate supply under the terms of the Supply and Processing Agreement with Falconbridge. The Fund currently processes approximately 535,000 tonnes, which are 15,000 tonnes below the Supply and Processing Agreement's maximum level. Closing the gap to 550,000 tonnes will increase processing fees, and revenue from zinc premiums and byproducts. In 2006, $7 million of capital expenditures will be allocated toward de-bottlenecking the plant to increase this capacity, with a potential to generate an additional $4 to $6 million in incremental cash flow starting in 2007.

The Fund's target for capital spending and cash flow is subject to various risks and the assumptions can be found below in the "Forward-Looking Statements" below.

Cash Flows, Liquidity and Capital Resources

Cash realized from operations, before changes in non-cash working capital for the first quarter of 2006 was $13.2 million compared to $15.1 million in the first quarter of 2005. During the quarter, non-cash working capital increased by $5.6 million, mostly due to higher zinc prices. Zinc prices do not have an impact on the Fund's net earnings, but they do impact the value of in-process and finished product inventories. In the first quarter of 2006, the average LME zinc price increased by 38% to $1.02 per pound from $0.74 per pound in the fourth quarter of 2005 and currently stands at $1.55 per pound.

Capital expenditures in the first quarter were $3.2 million compared to $1.9 million in the first quarter of 2005.

Distributions paid to unitholders in the first quarter were $12.8 million, unchanged from the same period in 2005.

The Fund has a $65 million secured Revolving Facility maturing on May 3, 2007. It is used for general corporate purposes, including financing working capital. It is the Fund's intention to extend the Revolving Facility to May 3, 2008 during 2006.

Fluctuations in working capital balances as a result of operations are generally funded by or used to repay the Revolving Facility. During the quarter, $120.7 million of debt was issued and $112.7 million was repaid related to the fluctuations in working capital. If zinc prices continue at the current high levels, the Fund may seek additional financing to finance the higher working capital levels.

At March 31, 2006, the Fund's total debt was $188.4 million.

Distribution Policy, Distributable Cash(1) and Operating Reserve

The Fund makes monthly distributions to its Unitholders based on the monthly Distributable Cash declarations. The Fund's goal is to provide stable monthly distributions and will seek to increase distributions through sustainable improvements, such as operating efficiencies and revenue enhancing opportunities.

In the first quarter of 2006, Cash Generated (Distributable Cash before changes in operating reserves) was $10.7 million and distributable cash to unitholders was $12.8 million: $9.6 million paid to Priority Unitholders and $3.2 million paid to Ordinary Unitholders.

In order to meet the Fund's goal to provide a stable monthly distribution the Fund utilizes a notional operating reserve. In a period during which Cash Generated is greater than the distribution declared, the operating reserve will increase. In a period during which Cash Generated is less than the distribution declared, the operating reserve will decrease. The operating reserve provides flexibility so that the Fund can maintain a stable, monthly distribution, while adhering to the Fund's trust indentures and debt covenants.

During the first quarter of 2006, the operating reserve decreased to $6.8 million from $8.9 million at the end of December 2005.

The schedule below sets out the history of the Fund's cash distributions for the past six months:



----------------------------------------------------------------------

RECORD DATE PAYMENT DATE DISTRIBUTION PER UNIT

----------------------------------------------------------------------

April 30, 2006 May 25, 2006 8.5 cents

March 31, 2006 April 25, 2006 8.5 cents

February 28, 2006 March 27, 2006 8.5 cents

January 31, 2006 February 27, 2006 8.5 cents

December 31, 2005 January 25, 2006 8.5 cents

November 30, 2005 December 28, 2005 8.5 cents

----------------------------------------------------------------------

 


(1) Distributable Cash is not a measure defined by generally accepted accounting principles and is dependant upon the definition as contained in the trust indentures establishing the Fund. Distributable Cash under the Fund's indenture is based on 100% of the net earnings adjusted to account for non-cash transactions such as amortization, reclamation and minority interest, reduced by additions to capital assets, site restoration expenditures, reasonable reserves and repayment of long-term debt. Fluctuations in working capital balances as a result of operations are generally funded by or used to repay the Revolving Facility.

Cash Generated is defined as Distributable Cash before changes in operating reserves. Distributable Cash as calculated by the Fund may not be comparable to similar measures presented by other issuers. The Distributable Cash for the period is as follows:



Three months Three months
ending ending
($ thousands) March 31, 2006 March 31, 2005
--------------------------------------------------------------------

Net earnings $4,334 $6,511
Add:
Amortization, and reclamation 7,165 6,707
Minority interest in earnings 1,445 2,170
Loss from sale of assets 163 14
Proceeds from sales of assets - 1
Decrease in capital and site
restoration reserve 781 -

Less:
Additions to property, plant and
equipment (3,199) (1,909)
Site restoration expenditures (9) -
Increase in capital and site
restoration reserve - (597)
--------------------------
Cash Generated during the period 10,680 12,897
--------------------------
(Increase) decrease in operating
reserve 2,070 (147)
--------------------------
Distributable Cash for the period $12,750 $12,750
--------------------------

 


OUTLOOK

The Fund's goal for 2006 is to continue to provide stable monthly distributions of 8.5 cents per unit per month.



The 2006 targets for the key drivers of the Fund are:
Production: 273,000 tonnes
Sales: 273,000 tonnes
Processing fee: 36.5 cents per pound
Premium: 6.9 cents US/pound
Capital expenditures: $21.5 million

 


Forward-Looking Statements

This news release contains Forward-Looking Statements concerning the Noranda Income Fund's ("Fund") objectives and 2006 general business outlook, zinc metal production and sales targets, estimated processing fee, zinc premium target, capital expenditures forecast and cash flow projections. Forward-Looking Statements can be identified by the use of words, such as "are expected", "is forecast", approximately or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. Forward-Looking Statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, or performance to be materially different from any future results or performance expressed or implied by the Forward- Looking Statements.

Examples of such risks, uncertainties and other factors include, but are not limited to the following: (1) the Fund's ability to operate at normal production levels; (2) the dependence upon the continuing supply of zinc concentrates (terms of the Supply and Processing Agreement); (3) the demand for zinc metal, sulphuric acid, and copper cake; (4) changes to the supply and demand for specific zinc metal products and the impact on the Fund's realized premiums; (5) the ability of the Fund to continue to service customers in the same geographic region; (6) the sensitivity of the Fund's net revenues to reductions in realized zinc metal prices including premiums, copper prices, sulphuric acid prices; the strengthening of the Canadian dollar vis-à-vis the US dollar; and increasing transportation and distribution costs (7) the sensitivity of the Fund's production costs to increases in electricity rates, other energy costs, labour costs and operating supplies used in its operations; (8) changes in capital expenditure requirements; (9) the negotiation of collective agreement with its unionized employees; (10) general business and economic conditions; (11) transportation disruptions; (12) the legislation governing air emissions, discharges into water, waste, hazardous materials and workers' health and safety as well as the impact of future legislation and regulations on expenses, capital expenditures, taxation and restrictions on the operation of the Processing Facility; (13) potential negative financial impact from regulatory investigations, claims, lawsuits and other proceedings; (14) loan default and (15) reliance on Falconbridge for the operation and maintenance of the Processing Facility. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied in the forward-looking statements contained herein.

These Forward-Looking Statements represent our views as of the date of this Report. The Fund anticipates that subsequent events and developments may cause the Fund's views to change. The Fund does not undertake to update any forward-looking statements, either written or oral, that may be made from time to time by or on behalf of the Fund subsequent to the date of this release.

Noranda Income Fund is an income trust whose units trade on the Toronto Stock Exchange under the symbol "NIF.UN". The Noranda Income Fund was created to acquire Falconbridge's CEZ processing facility and ancillary assets (the "CEZ processing facility") located in Salaberry-de-Valleyfield, Quebec. The CEZ processing facility is the second-largest zinc processing facility in North America and the largest zinc processing facility in eastern North America, where the majority of its customers are located. It produces refined zinc metal and various byproducts from zinc concentrates purchased from mining operations. The Processing Facility is operated and managed by Canadian Electrolytic Zinc Limited.



NORANDA INCOME FUND

CONSOLIDATED BALANCE SHEETS

(unaudited)

($ thousands)

March 31 Dec. 31
2006 2005
---------- --------
ASSETS

Current assets:
Cash and cash equivalents - 175
Accounts receivable
Trade 84,629 72,022
Falconbridge 14,288 13,120
Inventories 84,064 60,519
Prepaids and other assets 3,275 3,133
---------- ---------
186,256 48,969

Deferred financing fees 1,201 1,263

Property, plant and equipment 330,509 334,641
---------- ---------
517,966 484,873
---------- ---------

LIABILITIES AND EQUITY

Current liabilities:
Bank indebtedness 184 -
Accounts payable and accrued liabilities
Trade 14,993 16,155
Falconbridge 84,695 51,942
Distributions payable 4,250 4,250
---------- ---------
104,122 72,347

Future site restoration and reclamation 16,214 15,924

Long-term debt 188,400 180,400

Interests of Ordinary Unitholders 52,307 54,050

Unitholders' Interest:
Unitholders' equity 191,293 191,293
Deficit (34,370) (29,141)
---------- ---------
156,923 162,152
---------- ---------
517,966 484,873
---------- ---------


NORANDA INCOME FUND

CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited)

($ thousands)

Three months
ended March 31
--------------------
2006 2005
---------- ---------
Revenues
Sales 184,337 116,526
Transportation and distribution costs (3,581) (3,304)
---------- ---------
180,756 113,222
---------- ---------

Raw material purchase costs 119,916 53,787
---------- ---------
Revenues less raw material purchase costs 60,840 59,435
---------- ---------

Other expenses
Production 39,580 36,781
Selling, general and administration 4,781 4,779
Foreign exchange loss (gain) 646 (162)
Amortization and reclamation 7,165 6,707
---------- ---------
52,172 48,105
---------- ---------
Earnings before interest expense & minority
interest 8,668 11,330
---------- ---------
Interest expense, net 2,889 2,649
---------- ---------

Earnings before minority interest 5,779 8,681

Minority interest in earnings for Ordinary
Unitholders 1,445 2,170
---------- ---------

Net earnings 4,334 6,511
---------- ---------

Deficit beginning of period (29,141) (23,700)

Distributions to Priority Unitholders (9,563) (9,563)
---------- ---------

Deficit end of period (34,370) (26,752)
---------- ---------

Net earnings per Priority Unit (basic and diluted) $ 0.12 $ 0.17



NORANDA INCOME FUND

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

($ thousands)

Three months
ended March 31
--------------------
2006 2005
---------- ---------
Cash realized from (used for) operations:
Net earnings for the period 4,334 6,511
Items not affecting cash:
Amortization and reclamation 7,165 6,707
Minority interest 1,445 2,170
Mark-to-market (gain)/loss on derivative financial
instruments - (372)
Amortization of deferred financing fees 62 77
Loss from sale of assets 163 14
Site restoration expenditures (9) -
---------- ---------
13,160 15,107
---------- ---------
Net change in non cash working capital items (5,570) (21,515)
---------- ---------
7,590 (6,408)
---------- ---------

Cash realized from (used for) investment activities:
Purchases of property, plant and equipment (3,199) (1,909)
Proceeds from sale of property, plant and equipment - 1
---------- ---------
(3,199) (1,908)
---------- ---------

Cash realized from (used for) financing activities:

Distributions - Priority Unitholders (9,563) (9,563)
- Ordinary Unitholders (3,187) (3,187)
Long-term debt issued under the Revolving Facility 120,700 17,600
Long-term-debt repaid under the Revolving Facility (112,700) (6,500)
Increase in bank indebtedness 184 -

---------- ---------
(4,566) (1,650)
---------- ---------
Change in cash and cash equivalents
during the period (175) (9,966)

Cash and cash equivalents, beginning of period 175 11,000
---------- ---------
Cash and cash equivalents, end of period - 1,034
---------- ---------

 


NORANDA INCOME FUND

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2006

(UNAUDITED)

($ thousands except as otherwise indicated)

1. Nature and Description of the Noranda Income Fund

The Noranda Income Fund (the "Fund") was created in 2002, initially to acquire from Noranda Inc. ("Noranda"), indirectly through the Noranda Operating Trust (the "Operating Trust") and the Noranda Income Limited Partnership (the "Partnership"), the CEZinc processing facility (the "Processing Facility") in Salaberry-de-Valleyfield in Quebec. The Processing Facility produces refined zinc metal and various by-products from zinc concentrates.

As of June 30, 2005, Noranda changed its name to Falconbridge Limited ("Falconbridge") pursuant to a corporate amalgamation.

Significant Agreements

Pursuant to a 15 year Supply and Processing Agreement signed on May 3, 2002, between Falconbridge and the Partnership, Falconbridge is obligated to sell to the Processing Facility, except in certain circumstances, up to 550,000 tonnes of zinc concentrate annually at a concentrate price (based on the price of zinc metal on the London Metal Exchange ("LME") for "Payable zinc metal" contained in the concentrate less a processing fee initially set at $0.352 per pound of that "Payable zinc metal". As of January 1, 2004, the processing fee is the processing fee in the previous year adjusted annually (i) upward by 1% and (ii) upward or downward by 10% of the year-over-year percentage change in the average cost of electricity per megawatt hour for the Processing Facility. The processing fee for 2006 is $0.365 (2005 - $0.361) per pound. "Payable zinc metal" in respect of a quantity of concentrate will be equal to 96% of the assayed zinc metal content on that concentrate under the Supply and Processing Agreement.

Under the Supply and Processing Agreement, Falconbridge acts as the exclusive agent for the Partnership to arrange the sale of zinc metal and by-products and related hedging arrangements.

Under the terms of an administration agreement between the Fund and the management of Canadian Electrolytic Zinc Limited (the "Manager"), a wholly owned subsidiary of Falconbridge, and a management services agreement between the Operating Trust and the Manager, the Manager provides administrative services to the Fund and management services to the Operating Trust, respectively. Under the terms of an operating and management agreement between the Manager and the Partnership, the Manager operates and maintains the Processing Facility and provides management services to the Partnership.

Cash Distributions

The Fund determines distributable cash ("Distributable Cash") on a monthly basis for the unitholders of record of the Fund on the last business day of each calendar month and these distributions are to be paid on or about 25 days thereafter.

Cash distributions on Ordinary Units are subordinate to distributions on Priority Units until 2017 except upon the occurrence of certain events. Each Ordinary Unit is entitled to receive cash distributions on a monthly basis in an amount that is equal to the monthly cash distributions paid to each Priority Unit, provided each Priority Unit is first paid an amount that is equal to the monthly cash distribution of not less than $0.08333 per Priority Unit (the "Base Distribution") before any amount is paid to holders of Ordinary Units. If, notwithstanding the subordination of the Ordinary Units, Distributable Cash is not sufficient to make the Base Distributions on Priority Units in a month, the amount of the deficiency shall not accumulate and will not be paid to holders of Priority Units. If Distributable Cash, in a month is not sufficient to make a distribution on the Ordinary Units that is equal to the distribution on the Priority Units, the amount of the deficiency will accumulate and be paid to holders of the Ordinary Units from excess Distributable Cash in a subsequent month. Any accumulated Distributable Cash deficiency related to the Ordinary Units will not be accrued by the Fund until such time excess Distributable Cash is available. As at March 31, 2006, there was no accumulated Distributable Cash deficiency.

2. Accounting Policies

These unaudited interim consolidated financial statements have been prepared following the accounting policies as set out in the 2005 annual consolidated financial statements. The unaudited interim consolidated financial statements have been prepared using disclosure standards appropriate for interim financial statements and do not contain all the explanatory notes, descriptions of accounting policies or other disclosures required by Canadian generally accepted accounting principles for annual financial statements. Accordingly, these unaudited financial statements should be read in conjunction with the Fund's audited annual consolidated financial statements and the accompanying notes included in the 2005 Annual Report.

3. Derivative Instruments and Financial Risk

Commodity Hedges

The Fund purchases metal in zinc concentrate to be processed eventually into refined zinc metal for sale to customers. Due to the structure of the Fund's sales and purchase contracts, hedging of zinc price exposure other than that undertaken in response to customer requests for fixed pricing is generally not required to any material extent. As agent of the Fund, Falconbridge provides the hedging arrangements in the event that the structure of the Fund's sales and purchase contracts do not minimize exposure to changes in zinc prices.

Certain customers request a fixed sales price instead of the LME average price in the month of shipment. Falconbridge enters into futures contracts (fixed forward price hedges) on behalf of the Fund that will allow the Fund to receive the LME average price in the month of shipment while customers pay the agreed-upon fixed price. Falconbridge accomplishes this by settling the futures contracts during the month of shipment, which generally results in the realization of the LME average prices. In the event that the futures contracts have to be terminated early, due to the customer cancelling a fixed price order, Falconbridge has the right to charge the customer with the cost of settling the LME contract.

At March 31, 2006, Falconbridge had futures contracts (fixed forward price hedges) hedging approximately 32 million pounds of zinc (March 31, 2005 - 25 million pounds) related to the Fund. At March 31, 2006, the mark-to-market value of these positions, which had not been recorded in the consolidated statement of earnings was an unrealized gain of $10,611 (March 31, 2005 unrealized gain of $3,659). The ultimate gain or loss from the fixed forward price hedges will be realized over the next two years as the sales of zinc occur.

The Processing Facility's commodity hedging program includes inventory management hedges which hedge purchases and sales of zinc metal. These contracts have the option to settle physically, therefore, they do not fall within the definition of a derivative and the Processing Facility is not required to mark them to market. At March 31, 2006, the Processing Facility had bought forward approximately 29 million pounds of zinc (March 31, 2005 - sold forward 5 million pounds). At March 31, 2006, the mark to market value of these positions was an unrealized gain of $4,207 (March 31, 2005 unrealized loss of $80).

Currency Risk

The company maintains cash and cash equivalents, accounts receivable, and accounts payable in foreign currencies, and is therefore exposed to currency risk on these funds.

4. Distributable Cash

Distributable Cash is not a measure defined by generally accepted accounting principles and is dependant upon the definition as contained in the trust indentures establishing the Fund. Distributable Cash under the Fund's indenture is based on 100% of the net earnings adjusted to account for non-cash transactions such as amortization, reclamation and minority interest, reduced by additions to capital assets, site restoration expenditures, reasonable reserves and repayment of long-term debt. Fluctuations in working capital balances as a result of operations are generally funded by or used to repay the Revolving Facility.

Cash Generated is defined as Distributable Cash before changes in operating reserves. Distributable Cash as calculated by the Fund may not be comparable to similar measures presented by other issuers. The Distributable Cash for the period is as follows:



Three Three
months months
ending ending
March 31, March 31,
2006 2005
-----------------------------------------------------------------------

Net earnings $4,334 $6,511
Add:
Amortization, and reclamation 7,165 6,707
Minority interest in earnings 1,445 2,170
Loss from sale of assets 163 14
Proceeds from sales of assets - 1
Decrease in capital and site restoration 781 -
reserve

Less:
Additions to property, plant and equipment (3,199) (1,909)
Site restoration expenditures (9) -
Increase in capital and site restoration reserve - (597)
---------------------
Cash Generated during the period 10,680 12,897
---------------------
(Increase) decrease in operating reserve 2,070 (147)
---------------------
Distributable Cash for the period $12,750 $12,750
---------------------

Priority units issued 37,500,000 37,500,000
Ordinary units issued 12,500,000 12,500,000
Distributable Cash attributable to Priority Units $0.255 $0.255
Distributable Cash attributable to Ordinary Units $0.255 $0.255
-----------------------------------------------------------------------

 


In order to meet the Fund's goal to provide a stable monthly distribution the Fund utilizes an operating reserve. In a period during which Cash Generated is greater than the distribution declared, the operating reserve will increase. In a period during which Cash Generated is less than the distribution declared, the operating reserve will decrease. As of March 31, 2006 the operating reserve was $6,814 (March 31, 2005 - $4,238).

The Fund also utilizes a capital and site restoration reserve. As of March 31, 2006 the capital and site restoration reserve was $4,306 (March 31, 2005 - $3,712).

5. Related Party Transactions

As discussed in Note 1, the Fund has entered into significant agreements with related parties.

As a result of the Supply and Processing Agreement, during the three- month period ending March 31, 2006 Falconbridge has sold $139,264 of concentrate (2005 - $65,224) and provided $303 of sales agency services (2005 - $325). The sales agency services are provided on a cost recovery basis. As of March 31, 2006 the Partnership has a payable of $73,823 to Falconbridge (2005 - $27,841) related to the Supply and Processing Agreement. This amount is included in accounts payable and accrued liabilities.

As a result of the administration agreement between the Fund and the Manager, the management agreement between the Operating Trust and the Manager and an operating and management agreement between the Partnership and the Manager, Falconbridge has provided the following administration, management and operating services to the Fund:



-----------------------------------------------------------------------
Selling, general and administration
-----------------------------------------------------------------------
Three months ending March 31 2006 2005
-----------------------------------------------------------------------
Salary and benefits $1,734 $1,762
Support services 312 240
Research and technology costs 56 78
Operating and management agreement management fee 66 65
-----------------------------------------------------------------------

Total $2,168 $2,145

 


During the three month period ending March 31, 2006, the Fund's production expenses included $15,871 (2005 - $15,429) of salary and benefits provided by the Manager.

The administration, management and operating services are provided on a cost recovery basis and an annual management fee of $265 in 2006 (2005 - $260). The annual management fee is adjusted by 2% per annum at the beginning of each calendar year.

As of March 31, 2006 the Fund, Operating Trust and the Partnership had a payable of $10,257 (2005 - $15,894) related to the agreements. This amount was included in accounts payable and accrued liabilities.

In addition to the related party transactions above, the Partnership undertakes transactions with various other Falconbridge group companies and divisions at terms that reflect market rates. The following table summarizes the related party transactions for the period.



-----------------------------------------------------------------------
Period ended March 31 2006 2005
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Sales
Sales of zinc metal $3,575 $4,186
Sales of by-products 8,164 4,451

Expenses
Purchases of raw materials and operating supplies $1,379 $1,362

 


Included in the accounts receivable as at March 31, 2006 was $11,925 (2005 - $6,969) of amounts due from sales of zinc metal and by-products and all other receivables was $2,363 (2005 - $1,578). Included in accounts payable and accrued liabilities as at March 31, 2006 was $615 (2005 - $1,562) of amounts due to related parties, excluding amounts due under agreements identified above.

All amounts due to and from related parties are non-interest bearing and are due in the ordinary course of business. All transactions with Falconbridge and affiliated companies are carried out in the normal course of operations, and are recorded at an agreed upon exchange amount.

6. Economic Dependence

The Processing Facility is dependent on key customers. The loss of a significant customer may have a material adverse effect on the Fund's financial position and results of operations.

7. Comparative Amounts

Certain of the comparative figures have been reclassified to conform to the current year's presentation.



FOR FURTHER INFORMATION PLEASE CONTACT:

Noranda Income Fund
Michael Boone
Vice-President and Chief Financial Officer
(416) 982-7188
Email: michael.boone@falconbridge.com
Website: www.norandaincomefund.com


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