News Centre

FOR: NORANDA INCOME FUND

Noranda Income Fund Reports Fourth Quarter Earnings of $7.6 Million and 2008 Earnings of $27.7 Million. A February Distribution of 4.0 Cents Per Unit Was Declared for the Priority Unitholders

Feb 17, 2009 - 20:11 ET

VALLEYFIELD, QUEBEC--(Marketwire - Feb. 17, 2009) - The Noranda Income Fund (the "Fund")(TSX:NIF.UN) reported net earnings of $7.6 million for the fourth quarter of 2008, compared to $13.7 million in the same quarter a year ago. Cash realized from operations was $28.2 million for the fourth quarter of 2008, compared to $29.1 million in the fourth quarter of 2007. 

For the 2008 year, the Fund reported net earnings of $27.7 million compared to $27.4 million in 2007. The 2007 results included a one-time recognition of a $13.1 million future income tax expense. At December 31, 2008, the Fund's total debt was $196.6 million, down from $240.3 million at the end of December 2007. There is no debt refinancing until 2010. Cash realized from operations was $122.3 million in 2008, compared to $67.9 million in 2007.

"Market conditions have deteriorated rapidly since November 2008 for zinc and January 2009 for sulphuric acid. In response to this situation, the Fund has decided that it will not pay the February monthly distribution to the Ordinary Unitholder, and it has reduced the February monthly distribution to Priority Unitholders. The reduction in the distribution will allow the Fund to protect the balance sheet and maintain liquidity during this challenging period." said Mario Chapados, President and Chief Executive Officer of the Noranda Income Fund's Manager.

Current Economic Conditions

The outlook for 2009 is uncertain with the duration and depth of the global crisis difficult to predict. Lower overall industrial activity has led to a significant drop in the demand for zinc and sulphuric acid. 

Under these circumstances, the Fund finds it very difficult to provide a reliable 2009 forecast for its key drivers. Therefore, it will not provide guidance for 2009. This decision will be reassessed at the end of the first quarter.

February Cash Distribution

The Fund announced today its monthly cash distribution for February of $0.04 per Priority Unit, down from the $0.085 per unit that has been paid since February 2003. The distribution will be payable on March 25, 2009 to unitholders of record at the close of business on February 27, 2009.

The Fund reduced the monthly distribution to the Priority unitholders to $0.04 because the deteriorating economic conditions are negatively impacting customer demand for our products as well as zinc premiums, copper revenue and sulphuric acid netbacks. As a result of the reduction in the distribution below the Base Distribution amount of $0.08333, the subordination feature became effective and the Ordinary Units owned by Xstrata Canada, will not receive any distribution. 

Financial Results
This press release of the financial position and results of operations of the Fund should be read in conjunction with the unaudited consolidated interim financial statements of the Fund for the three and twelve months ended December 31, 2008 and with the audited consolidated financial statements of the Fund and the notes thereto for the period ended December 31, 2007.

This press release is based on various assumptions (see "Forward-looking Information" below.) All dollar amounts are shown in Canadian dollars unless otherwise specified.

The press release has been prepared as of February 17, 2009. Additional information relating to the Fund, including the Fund's annual information form is available on SEDAR at www.sedar.com.

2008 Highlights

- All of the monthly distributions were paid at the 8.5 cents per unit level. 

- The Fund's consolidated net earnings were $27.7 million compared to $27.4 million in 2007.

- Long-term debt was reduced to $196.6 million from $240.3 million at the end of December 2007 as lower zinc prices reduced the Fund's working capital requirements.

- Byproduct revenues rose to $46.7 million from $30.5 million due to significantly higher sulphuric acid revenues.

- Zinc metal production of 264,231 tonnes was 1% higher than the 2007 level of 262,133 tonnes.

- Sales of zinc metal totalled 258,665 tonnes, 9,864 tonnes or 4% higher than the 2007 sales level.

- Recoveries were higher at 97.4% compared to 96.3% in 2007.

- Mr. Roger Garon retired from the Fund's Board of Trustees. 

- Mr. John C. Eby was appointed as an independent Trustee.

RESULTS OF OPERATIONS

Consolidated Net Earnings (Fourth quarter 2008 compared to fourth quarter 2007)

The Fund reported net earnings of $7.6 million for the fourth quarter of 2008, compared to $13.7 million in the same quarter a year ago. The $6.1 million decrease was mainly due to lower zinc metal sales, premiums, copper revenues, and commodity hedging and financial instruments losses partially offset by higher sulphuric acid revenues and zinc metal production, lower amortization and interest expense and a weaker Canadian dollar.

Revenues less raw material purchase costs ("Net Revenues") in the fourth quarter of 2008 were $77.6 million, compared to $72.7 million in the same quarter of 2007. The $4.9 million increase was due to higher sulphuric acid revenues and a weaker Canadian dollar partially offset by lower premiums, sales and recoveries. 



Production Cost Breakdown
($ millions) Fourth Quarter Increase/
2008 2007 (Decrease)
------ ------ ----------
Production costs 45.9 43.1 $2.8
Change in inventory (7.2) (0.1) $(7.1)
------ ------ ----------
38.7 43.0 $(4.3)

 


Production costs in the fourth quarter of 2008 were $38.7 million, $4.3 million lower than the $43.0 million recorded in the fourth quarter of 2007. Higher contractor and supply costs resulted in a $2.8 million increase. This was offset by the impact of inventory increasing in the fourth quarter of 2008 ($7.1 million).

Selling, general and administration costs in the fourth quarter of 2008 were $3.7 million, compared to $4.6 million in the same quarter of 2007. The higher costs in 2007 were in part due to the transaction costs relating to amending the Credit Facility.

The foreign exchange loss for fourth quarter of 2008 was $12.6 million, compared to a gain of $0.8 million in the fourth quarter of 2007. The foreign exchange loss was a result of a weakening Canadian dollar on the Fund's net monetary liability. The foreign exchange loss was largely offset by an increase in the value of in-process and finished inventory. The increase in the value of inventory is realized in Net Revenues as the metal is sold to customers (thereby increasing the Net Revenue recorded by the Fund). The Fund maintains cash and cash equivalents, accounts receivable and accounts payable and long-term debt in US dollars.

In the fourth quarter of 2008, the commodity financial instrument loss was $1.7 million and the commodity hedging loss was $0.3 million. In the fourth quarter of 2007, the commodity financial instrument gain was $2.6 million and the commodity hedging gain was $0.8 million. During the period, the change in the market value of the Fund's derivative financial instruments resulted in these gains and losses.

In the fourth quarter of 2008, amortization of property, plant and equipment was $7.2 million compared to $8.2 million in the fourth quarter of 2007. The decrease was due to lower sales volumes in the fourth quarter of 2008 versus the fourth quarter of 2007.

Reclamation for the three month period ending December 31, 2008 was $0.4 million, compared to $0.3 million in the fourth quarter of 2007. 

In the fourth quarter of 2008, net interest expense was $2.9 million compared to $4.5 million in the fourth quarter of 2007. The decrease in the interest expense was due to lower average amount of long-term debt outstanding during the quarter ended December 31, 2008 compared to the quarter ended December 31, 2007, as well as lower variable interest rates.

Minority interest in earnings of subsidiaries in the fourth quarter of 2008 was $2.5 million, down from $4.1 million in the fourth quarter of 2007 due to the Fund's lower earnings before income tax.

Consolidated Net Earnings (Twelve months 2008 compared to twelve months of 2007)

Net earnings for the year ended December 31, 2008 totalled $27.7 million, compared with net earnings of $27.4 million for 2007. The $0.3 million increase was mainly due to higher sulphuric acid revenues and zinc recoveries, and lower interest expense partially offset by lower premiums, copper revenues, higher amortization and reclamation expenses, the impact of prior month pricing and the recognition of a $13.1 million future income tax expense which was recorded in 2007 and resulted from the enactment of new tax laws including Bill C- 52.

Net Revenues in 2008 were $297.6 million, compared to $262.8 million in 2007. The $34.8 million increase was due to higher sulphuric acid revenues, recoveries, processing fees and zinc sales volumes, partially offset by lower premiums, the impact of prior month pricing and the impact of a declining Canadian dollar.

The Fund makes a portion of its sales based on the average price from the previous month (month prior pricing). In a market in which zinc prices are rising, a portion of the Fund's revenues will lag behind the higher zinc prices; while in a market in which zinc prices are falling, a portion of the Fund's revenues will benefit from higher zinc prices from the month prior. In 2008, month prior pricing had a positive impact of approximately $2.2 million on the Fund's Net Revenues, as the average monthly zinc price decreased to US$0.50 per pound in December 2008 from US$1.07 per pound in December 2007. In 2007, month prior pricing had a positive impact of $8.8 million on the Fund's Net Revenues, as the average monthly zinc price decreased to US$1.07 per pound in December 2007 from US$2.00 per pound in December 2006.

Production costs in 2008 were $175.7 million, $17.2 million higher than the $158.5 million recorded in 2007. Higher energy, supply and labour costs resulted in an $11.3 million increase. The remainder of the increase ($5.9 million) was a result of inventory increasing more in 2007 than in 2008.



Production Cost Breakdown
($ millions) 2008 2007 Increase
Production costs 177.9 166.6 11.3
Change in inventory (2.2) (8.1) 5.9
------ ------ ---------
175.7 158.5 17.2

 


Selling, general and administration costs in 2008 were $18.0 million, compared to $19.6 million in 2007. The higher costs in 2007 were in part due to the transaction costs associated with the Credit Facility amendment.

The foreign exchange loss in 2008 was $17.8 million, compared to a gain of $18.5 million in 2007. The $36.3 million variance was a result of the impact of the Canadian dollar on the Fund's net US dollar monetary liability. In 2008, the Canadian dollar weakened resulting in a foreign exchange loss. While in 2007, the Canadian dollar strengthened resulting in a foreign exchange gain. The foreign exchange loss in 2008 was largely offset by an increase in the value of in-process and finished inventory. The increase in the value of inventory is realized in Net Revenues as the metal is sold to customers (thereby increasing the Net Revenue recorded by the Fund). The Fund maintains cash and cash equivalents, accounts receivable and accounts payable and long-term debt in US dollars. 

In 2008, the commodity financial instrument loss was $1.6 million and the commodity hedging gain was $0.1 million. During the year, the change in the market value of the Fund's financial instruments resulted in these amounts being recorded.

In 2008, amortization was $32.8 million, $2.5 million higher than the $30.3 million incurred in 2007. The increase in amortization was in part due to the increase in sales during 2008. 

In 2008, reclamation was $1.2 million, $4.0 million higher than the $2.9 million recovery recorded in 2007. In 2007, the reclamation expense was a recovery due to a reduction in the expected future reclamation spending, which resulted in a reduction in the present value of future site restoration and reclamation liabilities.

In 2008, net interest expense was $13.7 million compared to $22.3 million in 2007. The decrease in interest expense was due to a lower average amount of long-term debt outstanding, as well as lower variable interest rates.

Income tax expense in 2008 was nil. On June 22, 2007, the Federal Government substantively enacted its tax legislation relating to the taxation of existing income and royalty trusts, at effective rates similar to Canadian corporations, commencing in 2011. Prior to June 22, 2007, the Fund estimated the future income tax on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes at a nil effective tax rate.

Minority interest in earnings of subsidiaries in 2008 was $9.2 million, down from $13.5 million in 2007 due to the Fund's lower earnings before minority interest and income taxes.



KEY PERFORMANCE DRIVERS
----------------------------------------------------------------------------
The following table provides a summary of the key performance drivers for
the fourth quarter and years 2008 and 2007:
----------------------------------------------------------------------------
Fourth Quarter Year-to-date
2008 2007 2008 2007
----------------------------------------------------------------------------
Zinc metal production (tonnes) 69,140 66,697 264,231 262,133
Zinc metal sales (tonnes) 57,202 67,540 258,665 248,801
Zinc concentrate processed
(tonnes) 128,671 134,407 508,008 513,717
Zinc recovery (%) 95.8 96.9 97.4 96.3
Processing fee (cents/pound) 37.5 37.0 37.5 37.0
Zinc metal premiums (US$/pound) 0.041 0.097 0.057 0.112
Byproduct revenues ($ millions) 10.6 5.5 46.7 30.5
Copper in copper cake production
(tonnes) 1,073 698 3,448 3,014
Copper in copper cake sales
(tonnes) 935 811 3,531 3,176
Sulphuric acid production
(tonnes) 107,024 111,640 422,905 426,520
Sulphuric acid sales (tonnes) 107,303 106,989 426,112 426,149
Average LME zinc price (US$/pound) 0.54 1.19 0.85 1.47
Average LME copper price (US$/pound) 1.77 3.26 3.16 3.23
Sulphuric acid netback (US$/tonne) 76 22 60 20
Average US/Cdn. exchange rate 1.21 0.98 1.067 1.074
----------------------------------------------------------------------------

 


PRODUCTION

In the fourth quarter of 2008, zinc metal production was 69,140 tonnes, compared to 66,697 tonnes in the same quarter of 2007. Production was positively impacted by a higher concentrate zinc grade in the fourth quarter of 2008 compared to the same quarter a year ago. In addition, the 2,000 tonnes of in-process inventory from the third quarter was converted into zinc metal. Zinc recoveries were lower in the fourth quarter of 2008 at 95.8%, compared to 96.9% in the same quarter a year ago.

Production in 2008 was 264,231 tonnes compared to 262,133 tonnes in 2007. Production was higher than 2007 due to a higher concentrate zinc grade and higher recoveries.

The Fund has made a decision regarding the liners protecting the concrete walls in the electrolysis cell house. Through work done in the fourth quarter of 2008, management believe that a gradual replacement of these liners over a period of 2 to 3 years can be done without interrupting production. The estimated cost is $18 million. Liner replacement in the cellhouse is expected to begin in the second half of this year.

SALES

As a result of the financial crisis, the demand for zinc from all end use markets contracted in the fourth quarter of 2008 and the trend has continued into 2009. Zinc metal is used in a wide range of industries. Its major use, which accounts for 50% of total zinc metal consumption in North America, is in the production of galvanized steel which is then sold to customers such as the automobile and construction industries. The Fund has seen a 40% drop in orders from the steel companies in the last two months as they rebalance their inventories and adjust to the current demand. The stimulus packages from the US and Canadian governments should be a positive influence on the demand for zinc. However, they are not expected to impact demand until the latter part of 2009. While zinc production cuts have been made in North America, as well as globally, the zinc metal market is in significant oversupply as evidenced by the 196,000 tonnes rise in LME stocks since the end of September 2008.

Weak end-use demand, destocking and prolonged holiday shutdowns negatively impacted fourth quarter zinc metal sales. They totalled 57,202 tonnes, compared to 67,540 tonnes in the fourth quarter of 2007.

Sales in 2008 were 258,665 tonnes compared to 248,801 tonnes in 2007. Zinc metal inventories are now approximately 22,000 tonnes above the normal operating level. Most of the 2008 inventory build-up was due to weak demand for jumbos, the product that is consumed by the steel industry.

As a result of the weakness in the demand for the jumbo product, the Fund has started an initiative to maximize the production of zinc slab, a product that is deliverable into London Metal Exchange ("LME") warehouses. Currently, the Fund could deliver slab into an LME warehouse and receive a warehousing incentive of approximately US 2 cents per pound. The advantage is that it enables the Fund to generate revenue, including a small premium, and to monetize some of the excess inventory. Once the additional line is up and running, it will give the Fund flexibility to respond to fluctuations in end use demand.

PROCESSING FEE

In 2009, the processing fee will be 38.0 cents per pound, compared to 37.5 cents per pound in 2008. The processing fee is adjusted annually by (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.

PREMIUMS 

Premiums also came under pressure in 2008, averaging 5.7 cents US per pound compared to 11.2 cents US per pound in 2007. The decrease in realized premiums reflects a significant decrease in 2008 contract premiums from the high levels realized in 2007.

In the fourth quarter of 2008, premiums averaged 4.1 cents US per pound, compared to 9.7 cents US per pound in the fourth quarter of 2007. The lower fourth-quarter premium was the result of spot sales into a weak market.

BYPRODUCTS 

In the fourth quarter of 2008, the Fund generated $10.6 million in revenue from the sale of its byproduct copper in cake and sulphuric acid, compared to $5.5 million in the fourth quarter of 2007. The $5.1 million increase was largely due to a significantly higher netback from sulphuric acid, partially offset by the negative impact of copper price settlements.

In 2008, the Fund generated $46.7 million in revenue from the sale of copper in cake and sulphuric acid, compared to $30.5 million in 2007. 

Sulphuric Acid

The Fund's sulphuric acid sales have slowed dramatically since early January because of the sharp drop in North American industrial activity. In addition, the Fund's US customers have seen their competitiveness reduced by the stronger US dollar. These factors have resulted in a drop in sulphuric acid orders as customers cut production to reduce product inventories. 

The Fund produces sulphuric acid, a byproduct of zinc refining. Xstrata Canada Corporation ("Xstrata Canada") has an agency agreement with the Fund to sell its sulphuric acid.

The production of zinc and sulphuric acid is linked. Should the demand for sulphuric acid not improve, the lack of storage tank capacity may impact the Fund's ability to produce zinc. In an effort to alleviate the problem, Xstrata Canada is pursuing increased contractual and spot sales, including sales into the international vessel market and investigating alternative storage options. 

In spite of the slowdown in sulphuric acid sales since January, the Fund continues to operate at full capacity. If the Fund is required to respond to the events noted above, its profitability may be negatively impacted. 

The fundamentals for sulphuric acid improved in 2008 and the Fund's netbacks rose to US$60 per tonne compared to US$20 per tonne in 2007. This generated $27.5 million in Net Revenues in 2008 compared to $9.1 million in 2007.

The following table provides a summary of the sulphuric acid production, sales, selling price and netback for the fourth quarter and for the years 2008 and 2007:



----------------------------------------------------------------------------
Fourth Quarter Year
2008 2007 2008 2007
----------------------------------------------------------------------------
Sulphuric acid production (tonnes) 107,024 111,640 422,905 426,520
Sulphuric acid sales (tonnes) 107,303 106,989 426,112 426,149
Average pool selling price (US$/tonne) 145 73 117 71

Sulphuric acid netback (US$/tonne)(1) 76 22 60 20
----------------------------------------------------------------------------
(1) after deduction for selling and transportation costs and reseller profit

 


In the fourth quarter of 2008, the Fund realized US$76 per tonne compared to US$22 per tonne in the fourth quarter of 2007. The improvement in 2008 is the result of higher spot sale prices and the impact from contract business being rolled over at higher prices.

EXCHANGE RATE

A weaker Canadian dollar has a positive impact on the Fund's financial results. In the fourth quarter of 2008, a one-cent Canadian depreciation in the average Canadian/US exchange rate would have positively impacted the Fund's cash available for distribution by approximately $0.15 million ($0.6 million on an annual basis). The average Canadian/US exchange rate was weaker at US$1.213 in the fourth quarter of 2008 compared to US$0.982 in the fourth quarter of 2007. 

COSTS

Production costs include labour, energy, supplies and other costs directly associated with the production process. Production costs in the fourth quarter of 2008 were lower at $38.7 million, compared to $43.0 million in the fourth quarter of 2007. Production costs in 2008 were higher at $175.7 million, compared to $158.5 million in 2007. Higher energy, supply and labour costs resulted in an $11.3 million increase. The remainder of the increase ($5.9 million) was a result of a lower inventory build-up in 2008 than in 2007. 

RECOVERIES

In the past few years, management has undertaken a series of revenue-generating projects that would increase capacity in different parts of the plant. One of the projects addressed how to improve zinc recoveries. For 2008, recoveries were higher at 97.4% compared to 96.3% in 2007.

CAPITAL EXPENDITURES

Capital expenditures in the fourth quarter of 2008 were $12.0 million, compared to $8.1 million in the fourth quarter of 2007. 

Capital spending was revised to $28 million in 2008 and it came in on target at $28.3 million. This compares to capital spending of $26.0 million in 2007.

A total of $22.4 million was spent on sustaining capital and $0.7 million was spent on capital projects to remove the magnesium and selenium from the new feed mix. An additional $4.7 million was spent on revenue-generating projects.

Operating Cash Flows 

Cash realized from operations, before net change in non-cash working capital items in the fourth quarter of 2008 was $22.3 million compared to $20.9 million in the fourth quarter of 2007. During the fourth quarter of 2008, non-cash working capital decreased by $5.9 million due to the decrease in inventory and accounts receivable partially offset by a decrease in the accounts payable and accrued liabilities. 

Cash realized from operations, before net change in non-cash working capital items in 2008, was $77.3 million compared to $81.8 million in 2007. During 2008, non-cash working capital decreased by $45.0 million due to a decrease in accounts receivable and inventory partially offset by an increase in accounts payable and accrued liabilities. The average monthly LME zinc price decreased to US$0.50 per pound in December 2008, from US$1.07 per pound in December 2007. This resulted in a decrease in the value of the Fund's accounts receivable and inventory.

Standardized Distributable Cash 

Standardized distributable cash is defined as the GAAP measure of cash from operating activities after adjusting for capital expenditures, restrictions on distributions arising from compliance with financial covenants restrictive at the time of reporting, and minority interests.

Standardized distributable cash should not be seen as a measurement of liquidity or be used as a substitute for other measures, in accordance with GAAP. Management believes that, in addition to net earnings, standardized distributable cash is a useful supplemental measure for evaluating the Fund's performance as the standardized distributable cash net of the fluctuations in non-cash working capital items provides investors with an indication of cash available for distributions and working capital needs. Investors are cautioned, however, that standardized distributable cash should not be construed as an alternative to the statement of cash flows as a measure of liquidity and cash flows. The method of calculating standardized distributable cash for the purposes of this press release may differ from that used by other issuers and, accordingly, standardized distributable cash in this press release may not be comparable to standardized distributable cash used by others.

A reconciliation of cash realized from operations to standardized distributable cash for the periods ending December 31, 2008 and 2007 is provided below:



($ thousands) Fourth Quarter Year-to-date
2008 2007 2008 2007
---------------------------------------------

Cash realized from operations 28,219 29,067 122,340 67,870
Less: portion attributable to
minority interest (7,055) (7,267) (30,585) (16,968)
----------------------------------------------------------------------------
Cash realized from operations
attributable to Priority
Unitholders (a) 21,164 21,800 91,755 50,902

Capital adjustments:
Purchase of property, plant
and equipment (11,977) (8,072) (28,351) (25,997)
Proceeds from government
assistance - 694 478 2,526
Proceeds on sale of property,
plant and equipment - 2 193 65
Accretion on long-term debt (62) (64) (255) (254)
----------------------------------------------------------------------------
(12,039) (7,440) (27,935) (23,660)
Plus: portion of capital
adjustments attributable
to minority interest 3,010 1,860 6,984 5,915
----------------------------------------------------------------------------
Capital adjustments
attributable to Priority
Unitholders (b) (9,029) (5,580) (20,951) (17,745)

----------------------------------------------------------------------------
Standardized distributable
cash (a) + (b) 12,135 16,220 70,804 33,157
----------------------------------------------------------------------------
Other adjustments including
discretionary items:
Increase/(decrease) in
non-cash working capital (5,925) (8,121) (45,060) 13,975
Decrease/(increase) in
operating reserve 2,496 (757) 1,653 (7,187)
Less/(plus) portion of
other adjustments
attributable to minority
interest 856 2,220 10,851 (1,697)
----------------------------------------------------------------------------
Distributions declared to
Priority Unitholders 9,562 9,562 38,248 38,248
----------------------------------------------------------------------------

Weighted average number of
Priority Units outstanding
(basic and diluted) 37,497,975 37,497,975 37,497,975 37,497,975
Standardized distributable
cash per Priority Unit $0.32 $0.43 $1.89 $0.88
Distributions declared per
Priority Unit $0.255 $0.255 $1.02 $1.02

 


The Fund has included the amortization of deferred financing fees as a capital adjustment. The fees associated with completing a notes offering in 2003 are being spread over the term of the note offering for the calculation of standardized distributable cash.

In 2008, standardized distributable cash was $70.8 million and distributions declared to Priority Unitholders were $38.3 million.

Distribution Policy

From what we know today and in light of the proposed tax changes scheduled for January 1, 2011, our goal is to continue paying monthly distributions (dividends) to unitholders whether the Fund is a trust or a corporation. The Fund is likely to continue as a trust until 2011 because it is the most tax-efficient way to provide distributions to the unitholders.

Management and the board of trustees periodically review cash distributions, taking into consideration current and prospective performance. Some of the factors considered in decisions related to distributions include cash amounts required to service debt obligations, current business conditions, capital expenditures, taxes, working capital requirements and other items considered to be prudent. The Fund's policy is to make distributions to unitholders equal to cash flows from operations, before variations in working capital and such reserves for operating and capital expenditures as may be considered appropriate by the trustees. The Fund determines the cash available for distribution 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.

The amount of monthly distribution to unitholders is a function of Fund's debt management strategy and productive capacity maintenance program. The Fund's calculation, as compared to the CICA's standardized distributable cash, excludes changes in non-cash working capital as the changes within the working capital components are often temporary by nature and, if needed, can be financed with the Fund's Revolving Facility.

One of the main factors influencing the non-cash working capital balances is the LME price for zinc metal. As zinc metal prices increase, inventory and accounts receivable increase, resulting in higher non-cash working capital balances. When zinc metal prices decrease, inventory and accounts receivable decrease, resulting in lower non-cash working capital balances. 

The following table provides information on cumulative cash distributions, cumulative standardized distributable cash and cumulative pay-out ratio for the years 2008 and 2007:



Since inception, Since inception,
May 3, 2002, May 3, 2002,
($ thousands) to Dec. 31, 2008 to Dec. 31, 2007
Cumulative distributions to
Priority Unitholders including
amounts paid for the
repurchase of Priority Units $ 254,168 $ 215,920
Cumulative standardized
distributable cash $ 240,852 $ 170,050
Cumulative pay-out ratio to
Priority Unitholders 106% 127%

Cumulative distributions to
Priority and Ordinary
Unitholders including amounts
paid for the repurchase of Units $ 338,892 $ 287,894
Cumulative standardized
distributable cash to Priority and
Ordinary Unitholders $ 321,136 $ 226,733
Cumulative pay-out ratio to
Priority and Ordinary Unitholders 106% 127%

 


The reason for the 106% cumulative pay-out ratio is due to the $40 million increase in non-cash working capital since the inception of the Fund. The amount of the increase attributable to the Priority Units is $30 million. Excluding the impact of the increase in working capital on the calculation, the cumulative pay-out ratio would adjust to 94%. As discussed earlier, the Fund does not include changes in non-cash working capital when determining the amount of cash to be distributed as the changes within the working capital components are often temporary by nature and, if needed, can be financed with the Fund's Revolving Facility.

Notional Operating Reserve and Capital and Site Restoration Reserve 

In order to meet the Fund's goal to provide a stable, monthly distribution, a notional operating reserve is utilized. In a period in which standardized distributable cash, net of the changes in non-cash working capital attributable to Priority Unitholders, is greater than the distributions declared to the Priority Unitholders, the notional operating reserve will increase. In a period during which standardized distributable cash, net of the changes in non-cash working capital attributable to Priority Unitholders, is less than the distributions declared to the Priority Unitholders, the notional operating reserve will decrease. The notional 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 2008, the notional operating reserve decreased by $1.7 million to $16.6 million. This compares to a reserve of $18.3 million at the end of 2007.

The Fund also utilizes a notional capital and site restoration reserve. In a period in which unexpected or unusually high capital expenditures are required, the Fund has the ability to reduce the notional capital and site restoration reserve, while adhering to the Fund's trust indentures and debt covenants. As of December 31, 2008, the notional capital and site restoration reserve was $5.0 million (December 31, 2007 - $5.0 million).

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2008, the Fund's total debt was $196.6 million, down from $240.3 million at the end of December 2007 and down from the $200.3 million at the end of September 2008. The Fund's cash and cash equivalents at December 31, 2008 totalled $3.5 million, unchanged from December 31, 2007. With the fall in the zinc price during 2008, working capital requirements have been reduced.

The Fund has a Revolving Facility with a syndicate of Canadian chartered banks in place that is used for general corporate purposes, including financing working capital. In April 2008, the Revolving Facility was extended to May 3, 2010. The amount available to be drawn on the Revolving Facility varies on a quarterly basis and is based on percentages of the Fund's eligible inventory and accounts receivable from the previous quarter. The maximum available to be drawn at any time is $200 million and the minimum available to be drawn is $55 million. The Fund has the ability to draw down the Revolving Facility in both Canadian and US dollars. The amount available to be drawn based on the Fund's December 31, 2008 balance sheet is $82 million. Fluctuations in working capital balances as a result of operations are generally funded by, or used to repay, the Revolving Facility.

The Fund has $153.5 million of senior secured notes (the "Notes") outstanding. When issued, the Notes had a term of seven years and will mature on December 20, 2010. The Notes offering was made by way of a private placement and the proceeds were used to repay a term facility that had been outstanding since the inception of the Fund.

Both the Revolving Facility and the Notes contain customary representations, warranties, covenants and conditions to funding. The Fund's inability to meet these representations, warranties, covenants and conditions may require it to seek additional funding sources and may impact upon the Fund's ability to make distributions. All of the assets of the Fund have been pledged in support of the obligations under the Notes and the Revolving Facility.

The main covenants under the Revolving Facility agreement require the Fund to maintain, at the end of each quarter, a leverage ratio, an interest coverage ratio, and a current ratio. The leverage ratio at the end of each quarter, on a rolling four-quarter basis, is calculated by dividing the total debt at the end of the period by the earnings before interest, taxes, depreciation and amortization ("EBITDA") for the period, as defined in the Revolving Facility agreement, and must be no greater than 4.25 to 1. The interest coverage ratio at the end of each quarter, on a rolling four-quarter basis, is calculated by dividing the EBITDA for the period by the total interest expense for that period net of the interest expense related to any subordinated loans, as defined in the Revolving Facility agreement, and must be no less than 3 to 1. The current ratio is calculated at the end of each quarter by dividing the current assets by the total of the current liabilities plus the Revolving Facility, as defined in the Revolving Facility agreement, at the balance sheet date, and must be no less than 1 to 1. 

All of the covenants under the Revolving Facility agreement were met as at December 31, 2008 and are summarized below:



----------------------------------------------------------------------------
December 31, 2008
----------------------------------------------------------------------------
Leverage ratio(1) (must not exceed 4.25 to 1) 2.2

Interest coverage ratio(1) (must be greater than 3 to 1) 6.7

Current ratio (must be no less than 1 to 1) 1.6
----------------------------------------------------------------------------
(1) twelve-month rolling average

 


The Revolving Facility agreement lists events that constitute an event of default should they occur. Events that constitute a default include the non payment by the Fund of principal, interest or other obligations of the Fund in respect of the Revolving Facility agreement and a breach of any covenant pursuant to the Revolving Facility agreement. If any event of default occurs under the Revolving Facility agreement, the Revolving Facility lenders will be under no further obligation to make advances to the Fund and may require the Fund to repay any outstanding obligation pursuant to the Revolving Facility agreement, which may impact the Fund's ability to make cash distributions. There were no conditions of default existing during the three month period ending December 31, 2008.

The Fund has provided covenants to the Noteholders, including the commitment to the punctual payment of principal and interest accrued on the Notes, in accordance with the terms of the Trust Indenture. The Fund is required to maintain a letter of credit or cash, for the benefit of the holders of the Notes, for an amount equal to or greater than three months' interest expense. The letter of credit amounted to $2.6 million as at December 31, 2008. All of the covenants under the Trust Indenture were met for the three month period ending December 31, 2008.


OTHER DEVELOPMENTS

On December 31, 2008 Roger Garon retired from the Fund's Board of Trustees. Mr. Garon had been a Board member since the inception of the Fund in May of 2002. On behalf of the Fund, Mario Chapados would like to thank Mr. Garon for his contribution and support.

On January 1, 2009 John Eby joined the Board of Trustees. Mr. Eby has 29 years of experience as a Senior Commercial and Investment banker in a broad range of industries. He is also a director of Wajax Income Fund, Monterey Exploration Limited, Crombie Real Estate Income Trust and Inmet Mining. He holds an MBA from Queen's University.


FORWARD-LOOKING INFORMATION

The outlook for 2009 is uncertain with the duration and depth of the global crisis difficult to predict. Lower overall industrial activity has led to a significant drop in the demand for zinc and sulphuric acid. 

Under these circumstances, the Fund finds it very difficult to provide a reliable 2009 forecast for its key drivers. Therefore, it will not provide guidance for 2009. This decision will be reassessed at the end of the first quarter.

Forward-looking Information involves 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 Information.

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 in cake; (4) the ability to manage sulphuric acid inventories; (5) changes to the supply and demand for specific zinc metal products and the impact on the Fund's realized premiums; (6) the impact of month prior pricing; (7) the ability of the Fund to continue to service customers in the same geographic region; (8) 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-a-vis the US dollar; and increasing transportation and distribution costs; (9) 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, the sensitivity of the Fund's interest expense to increases in interest rates; (10) changes in recoveries and capital expenditure requirements; (11) the negotiation of collective agreements with its unionized employees; (12) general business and economic conditions; (13) transportation disruptions; (14) 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; (15) potential negative financial impact from regulatory investigations, claims, lawsuits and other proceedings; (16) loan default and refinancing risk; and (17) reliance on Xstrata Canada for the operation and maintenance of the Processing Facility. 

Noranda Income Fund is an income trust whose units trade on the Toronto Stock Exchange under the symbol "NIF.UN". The Noranda Income Fund owns the CEZinc processing facility and ancillary assets (the "CEZinc processing facility") located in Salaberry-de-Valleyfield, Quebec. The CEZinc 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 by-products from zinc concentrates purchased from mining operations. The Processing Facility is operated and managed by Canadian Electrolytic Zinc Limited.

Further information about the Noranda Income Fund can be found at www.norandaincomefund.com 



NORANDA INCOME FUND

INTERIM CONSOLIDATED BALANCE SHEETS

(unaudited)

($ thousands)

Dec. 31 Dec. 31
2008 2007
-------- --------
ASSETS

Current assets:
Cash and cash equivalents 3,455 3,702
Accounts receivable
Trade 32,520 64,210
Xstrata Canada 36,583 22,617
Financial instruments - 964
Firm commitments 4,773 719
Inventories 79,943 129,066
Prepaids and other assets 2,110 2,195
-------- --------
159,384 223,473

Property, plant and equipment 308,258 314,489
-------- --------
467,642 537,962
-------- --------

LIABILITIES AND EQUITY

Current liabilities:
Accounts payable and accrued liabilities
Trade 22,819 18,547
Xstrata Canada 22,708 44,801
Financial instruments 5,332 735
Distributions payable 4,250 4,250
-------- --------
55,109 68,333

Future tax liability 13,147 13,147
Future site restoration and reclamation 12,806 12,130
Long-term debt 196,615 240,269
Interests of Ordinary Unitholders 50,783 54,312

Unitholders' Interest:
Unitholders' equity 191,273 191,273
Deficit (52,091) (41,502)
-------- --------
139,182 149,771
-------- --------
467,642 537,962
-------- --------



NORANDA INCOME FUND

INTERIM CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT
AND COMPREHENSIVE INCOME

(unaudited)

($ thousands)

Three months Twelve Months
Ended Dec. 31 Ended Dec. 31
----------------------- -----------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------

Revenues
Sales 114,055 202,590 619,770 1,000,913
Transportation and
distribution costs (3,859) (4,408) (19,053) (15,642)
----------- ----------- ----------- -----------
110,196 198,182 600,717 985,271
----------- ----------- ----------- -----------

Raw material purchase costs 32,587 125,484 303,155 722,433
----------- ----------- ----------- -----------
Revenues less raw material
purchase costs 77,609 72,698 297,562 262,838
----------- ----------- ----------- -----------

Other expenses
Production 38,664 42,992 175,731 158,511
Selling, general and
administration 3,686 4,589 17,964 19,637
Foreign exchange loss (gain) 12,636 (804) 17,849 (18,528)
Commodity financial
instrument loss (gain) 1,692 (2,563) 1,594 (642)
Commodity hedging loss
(gain) 326 (754) (88) 150
Amortization of property,
plant and equipment 7,242 8,179 32,826 30,281
Reclamation 407 335 1,153 (2,881)
----------- ----------- ----------- -----------
64,653 51,974 247,029 186,528
----------- ----------- ----------- -----------

Earnings before interest,
minority interest and income
tax 12,956 20,724 50,533 76,310
----------- ----------- ----------- -----------
Interest expense, net 2,938 4,504 13,654 22,287
----------- ----------- ----------- -----------
Earnings before minority
interest and income tax 10,018 16,220 36,879 54,023
----------- ----------- ----------- -----------
Minority interest in
earnings for Ordinary
Unitholders 2,504 4,055 9,220 13,506
----------- ----------- ----------- -----------
Earning before income tax 7,514 12,165 27,659 40,517
----------- ----------- ----------- -----------
Income tax expense - (1,489) - 13,147
----------- ----------- ----------- -----------
Net earnings and
comprehensive income 7,514 13,654 27,659 27,370
----------- ----------- ----------- -----------

Deficit beginning of period (50,043) (45,594) (41,502) (30,624)
----------- ----------- ----------- -----------
Distributions to Priority
Unitholders (9,562) (9,562) (38,248) (38,248)
----------- ----------- ----------- -----------

Deficit end of period (52,091) (41,502) (52,091) (41,502)
----------- ----------- ----------- -----------

Net earnings per Priority
Unit (basic and diluted) $ 0.20 $ 0.36 $ 0.74 $ 0.73

Weighted average Priority
Units outstanding 37,497,975 37,497,975 37,497,975 37,497,975



NORANDA INCOME FUND

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

($ thousands)

Three months Twelve Months
Ended Dec. 31 Ended Dec. 31
------------------ ------------------
2008 2007 2008 2007
-------- --------- --------- ---------
Cash realized from (used for)
operations:
Net earnings for the period 7,514 13,654 27,659 27,370
Items not affecting cash:
Amortization of property, plant and
equipment 7,241 8,179 32,826 30,281
Accretion of reclamation expense 406 335 1,153 (2,881)
Minority interest in earnings for
Ordinary Unitholders 2,504 4,055 9,220 13,506
Mark-to-market loss (gain) on
commodity financial instruments 2,018 (3,317) 1,506 (492)
Change in fair value of embedded
derivatives 1,943 (720) 3,522 55
Future income tax expense - (1,489) - 13,147
Accretion on long-term debt 62 64 255 254
Loss from sale of property, plant and
equipment 740 271 1,616 799
Site restoration expenditures (134) (86) (477) (194)
-------- --------- --------- ---------
22,294 20,946 77,280 81,845
-------- --------- --------- ---------
Net change in non-cash working
capital items 5,925 8,121 45,060 (13,975)
-------- --------- --------- ---------
28,219 29,067 122,340 67,870
-------- --------- --------- ---------

Cash realized from (used for)
investment activities:
Purchases of property, plant and
equipment (11,977) (8,072) (28,351) (25,997)
Proceeds from government assistance - 694 478 2,526
Proceeds on sales of property, plant
and equipment - 2 193 65
-------- --------- --------- ---------
(11,977) (7,376) (27,680) (23,406)
-------- --------- --------- ---------

Cash realized from (used for)
financing activities:

Distributions - Priority Unitholders (9,562) (9,562) (38,248) (38,248)
- Ordinary Unitholders (3,187) (3,187) (12,750) (12,750)
Long-term debt issued under the
Revolving Facility 43,130 191,524 282,500 659,024
Long-term-debt repaid under the
Revolving Facility (46,909) (197,800) (326,409) (662,500)
-------- --------- --------- ---------
(16,528) (19,025) (94,907) (54,474)
-------- --------- --------- ---------

Change in cash and cash equivalents
during the period (286) 2,666 (247) (10,010)

Cash and cash equivalents, beginning
of period 3,741 1,036 3,702 13,712
-------- --------- --------- ---------

Cash and cash equivalents, end of
period 3,455 3,702 3,455 3,702
-------- --------- --------- ---------


FOR FURTHER INFORMATION PLEASE CONTACT:

Financial information: Michael Boone
Vice President & Chief Financial Officer of Canadian
Electrolytic Zinc Limited, Noranda Income Fund's Manager
(416) 775-1561
Email: mboone@xstrata.ca
Website: www.norandaincomefund.com



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