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FOR: NORANDA INCOME FUND

Noranda Income Fund Reports Third Quarter Net Earnings of $10.2 Million and Lower Long-Term Debt

Nov 10, 2008 - 16:45 ET

VALLEYFIELD, QUEBEC--(Marketwire - Nov. 10, 2008) - The Noranda Income Fund (the "Fund")(TSX:NIF.UN) reported net earnings of $10.2 million for the third quarter of 2008, compared to $6.4 million in the same quarter a year ago. Long-term debt was reduced to $200.3 million at the end of September from $244.6 million at the end of June. Cash realized from operations was $60.5 million for the third quarter of 2008, compared to $21.1 million in the same quarter a year ago.

"The Fund's net earnings benefited from higher zinc sales volumes, sulphuric acid revenues and financial instrument gains, improved zinc recoveries and a lower interest expense, partially offset lower production and premiums, the impact of month prior pricing and higher production costs and amortization." said Mario Chapados, President and Chief Executive Officer of the Noranda Income Fund's Manager. "Also during the quarter, long-term debt was reduced as lower zinc prices resulted in a reduction in the Fund's working capital levels. There are no debt re-financings until 2010. Production for 2008 is forecast at 268,000 tonnes and sales at 263,000 tonnes. As a consequence of the current uncertain economic climate and a decline in orders from our steel customers, the Fund has reduced the sales forecast."

Net earnings of $20.1 million were reported for nine months ending September 30, 2008 compared to $13.7 million in the first nine months of 2007. Cash realized from operations was $94.1 million for the first nine months of 2008, compared to $38.8 million in the same period a year ago.

As a reminder to investors, the Fund's exposure to zinc prices is relatively small. Its key drivers are the processing of zinc concentrate into metal, the premiums realized on metal sales, the sale of copper and sulphuric acid byproducts and metal recoveries achieved in excess of metal recoveries contractually payable. The Fund's exposure to zinc prices is on the recovery gain.

The third quarter Management Discussion and Analysis will be available this afternoon on the Fund's website at www.norandaincomefund.com/investor/financials.html.

Financial Results

This analysis 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 nine months ended September 30, 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 analysis has been prepared as of November 10, 2008. Additional information relating to the Fund, including the Fund's annual information form is available on SEDAR at www.sedar.com.

Q3 2008 Highlights

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

- The cumulative payout ratio (excluding changes in working capital) from the inception of the Fund until the end of September 2008 was 93%.

- Long-term debt was reduced to $200.3 million at the end of September from $244.6 million at the end of June 2008 as lower zinc prices reduced the Fund's working capital requirements.

- As of September 30, 2008, 43% of the Fund's long-term debt is at a variable rate, enabling it to benefit from the recent drop in interest rates.

- The leverage ratio was reduced to 2.2 at the end of September 2008, compared to 2.6 at the end of June 2008.

- The Fund has no refinancing obligations until 2010. The Revolving Facility matures on May 3, 2010 while the Senior Secured Notes of $153 million mature on December 20, 2010.

- Zinc metal sales volumes in the third quarter and for the first nine months of 2008 were 7% and 11%, respectively, higher than in the same periods of 2007.

- Byproduct revenues were $10.7 million compared to $9.5 million in the third quarter of 2007.

- Sulphuric acid netbacks in the third quarter and for the first nine months of 2008 increased to US$59 per tonne and US$54 per tonne, respectively, from US$22 per tonne and US$19 per tonne in the same periods of 2007.

- Zinc recoveries in the third quarter of 2008 were 97.7% compared to 95.7% in the same quarter a year ago.

- Capital spending in the third quarter and for the first nine months of 2008 was $6.3 million and $16.4 million, respectively, compared to $5.9 million and $17.9 million in the same periods of 2007.

RESULTS OF OPERATIONS

Consolidated Net Earnings (Third quarter 2008 compared to third quarter 2007)

The Fund reported net earnings and comprehensive income of $10.2 million for the third quarter of 2008, compared to $6.4 million in the same quarter a year ago. Higher zinc sales volumes, sulphuric acid revenues and financial instrument gains, improved recoveries and a lower interest expense were offset by lower premiums and production volumes, and higher production costs and amortization.

Revenues less raw material purchase costs ("Net Revenues") in the third quarter of 2008 were $75.8 million, compared to $62.7 million in the same quarter of 2007. The $13.1 million increase was due to higher zinc metal sales, sulphuric acid revenues, processing fee and recoveries partially offset by lower premiums and the impact of prior month pricing.



Production Cost Breakdown
($ millions) Third Quarter
2008 2007 Increase
---- ---- --------
Production costs 42.6 40.3 $2.3
Change in inventory 1.4 (1.7) $3.1
---- ---- --------
44.0 38.6 $5.4

 


Production costs in the third quarter of 2008 were $44.0 million, $5.4 million higher than the $38.6 million recorded in the third quarter of 2007. Higher contractor and supply costs resulted in a $2.3 million increase. The remainder of the increase ($3.1 million) was a result of inventory being reduced in the third quarter of 2008 versus inventory being increased in the third quarter of 2007.

Selling, general and administration costs in the third quarter of 2008 were $4.6 million, compared to $5.1 million in the same quarter of 2007.

The foreign exchange loss for third quarter of 2008 was $2.9 million, compared to a gain of $8.5 million in the third 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 third quarter of 2008, the commodity hedging loss was $0.1 million and the financial instrument gain was $1.4 million. In the third quarter of 2007, the commodity hedging gain was $0.04 million and the financial instrument loss was $5.2 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 third quarter of 2008, amortization of property, plant and equipment was $8.3 million compared to $7.6 million in the third quarter of 2007. The increase was due to higher sales volumes in the third quarter of 2008 versus the third quarter of 2007.

Reclamation for the three month period ending September 30, 2008 was $0.3 million, unchanged from the third quarter of 2007.

In third quarter of 2008, net interest expense was $3.4 million compared to $5.9 million in the third quarter of 2007. The decrease in interest expense was due to lower average amounts of long-term debt outstanding during the quarter ended September 30, 2008 than the quarter ended September 30, 2007, as well as lower variable interest rates.

Minority interest in earnings of subsidiaries in the third quarter of 2008 was $3.4 million, down from $2.1 million in the third quarter of 2007 due to the Fund's higher earnings before income tax.

Consolidated Net Earnings (First nine months 2008 compared to first nine months of 2007)

Net earnings and comprehensive income of $20.1 million were reported for the first nine months ending September 30, 2008 compared to $13.7 million in the first nine months of 2007. The $6.4 million increase was mainly due to higher zinc metal sales and sulphuric acid revenues, the absence of income tax expense in 2008, the impact of month prior pricing and a lower interest expense, partially offset by lower premiums, higher production costs, higher amortization charges and a stronger Canadian dollar.

Revenues less raw material purchase costs in the first nine months of 2008 were $220.0 million, compared to $190.1 million in the same quarter of 2007. The $29.9 million increase was due to higher zinc sales volumes, sulphuric acid revenues, processing fee and recoveries partially offset by lower premiums and a stronger Canadian dollar.



Production Cost Breakdown
($ millions) Year-to-date
--------------
2008 2007 Increase
----- ----- --------
Production costs 132.0 123.5 $ 8.5
Change in inventory 5.1 (8.0) $13.1
----- ----- --------
137.1 115.5 $21.6

 


Production costs in the first nine months of 2008 were $137.1 million, $21.6 million higher than the $115.5 million recorded in the first nine months of 2007. Higher energy, supply and labour costs resulted in an $8.5 million increase. The remainder of the increase ($13.1 million) was a result of inventory being reduced in the first nine months of 2008 versus increased in the first nine months of 2007.

Selling, general and administration costs in the first nine months of 2008 were $14.3 million, compared to $15.1 million in the first nine months of 2007.

The foreign exchange loss for first nine months of 2008 was $5.2 million, compared to a gain of $17.7 million in the first nine months 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).

In the first nine months of 2008, the commodity hedging gain was $0.1 million and the financial instrument gain was $0.4 million. In the same period of 2007, the commodity hedging loss was $0.1 million and the financial instrument loss was $2.7 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 first nine months of 2008, amortization of property, plant and equipment was $25.6 million compared to $22.1 million in the same period of 2007. The increase was due to higher sales volumes in the current year.

Reclamation for the nine months ending September 30, 2008 was $0.7 million compared to a recovery of $3.2 million in the same period of 2007. The recovery in 2007 was 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 the first nine months of 2008, net interest expense was $10.7 million compared to $17.8 million in the first nine months of 2007. The decrease in interest expense was due to lower average amounts of long-term debt outstanding, as well as lower variable interest rates.

Minority interest in earnings of subsidiaries in the first nine months of 2008 was $6.7 million, down from $9.5 million in the first nine of 2007 due to the Fund's lower earnings before income tax.

KEY PERFORMANCE DRIVERS

The following table provides a summary of the key performance drivers for 2008 and 2007:



----------------------------------------------------------------------------
Third Quarter Year-to-date
2008 2007 2008 2007
----------------------------------------------------------------------------

Zinc metal production (tonnes) 63,676 69,242 195,091 195,436
Zinc metal sales (tonnes) 65,459 61,335 201,463 181,261
Zinc concentrate processed (tonnes) 123,913 123,651 379,337 379,310
Zinc recovery (%) 97.7 95.7 97.8 96.4
Processing fee (cents/pound) 37.5 37.0 37.5 37.0
Zinc metal premiums (US$/pound) 0.060 0.121 0.063 0.113
Byproduct revenues ($ millions) 10.7 9.5 36.1 25.0
Copper in copper cake production
(tonnes) 827 862 2,375 2,316
Copper in copper cake sales (tonnes) 922 895 2,596 2,365
Sulphuric acid production (tonnes) 104,131 104,699 315,881 314,880
Sulphuric acid sales (tonnes) 99,595 108,738 318,809 319,160
Average LME zinc price (US$/pound) 0.80 1.46 0.96 1.56
Average LME copper price (US$/pound) 3.48 3.50 3.62 3.22
Sulphuric acid netback (US$/tonne) 59 22 54 19
Average US/Cdn. exchange rate 1.04 1.05 1.02 1.11

 


PRODUCTION

In the third quarter of 2008, zinc metal production was 63,676 tonnes, compared to 69,242 tonnes in the same quarter of 2007. During the quarter, production was impacted by five sudden voltage sags from our electricity supplier and by limits on the cell house cooling capacity. Management took steps to reduce the impact of these power sags and the operation is currently not as sensitive to them. Production was back to normal in October. During the quarter, in-process inventory increased by 2,000 tonnes. This in-process inventory will be converted into zinc metal during the fourth quarter. Zinc recoveries were higher in the third quarter of 2008 at 97.7%, compared to 95.7% in the same quarter a year ago.

Production in the first nine months of 2008 was 195,091 tonnes compared to 195,436 tonnes in the same period of 2007. The 2008 production target has been revised to 268,000 tonnes.

The liners protecting the concrete walls in the electrolysis cell house are approaching the end of their life and will have to be replaced. Management believes that a gradual replacement of these liners over a period of 4 to 6 years can be done without interrupting production and that it would cost $22 million. If this proves to be unsuccessful, the second alternative will be to take a shutdown of approximately six weeks in the middle of 2011. The cost of a complete shutdown is under evaluation.

A final decision should be available in the first half of 2009. The Fund continues to work on the first approach of a gradual replacement of the liners.

The target for production is subject to various risks and uncertainties. The assumptions for them can be found in the "Forward-looking Information" below.

SALES

Zinc metal sales in the third quarter were firm at 65,459 tonnes and inventories were reduced further. September sales began to show signs of softness as steel mill demand eased in response to rising automotive inventories and slowing vehicle production.

Sales of 65,459 tonnes in the third quarter of 2008 compared to 61,335 tonnes in the third quarter of 2007, and inventories decreased by approximately 1,800 tonnes from June 30, 2008 to the end of September 2008.

Sales in the first nine months of 2008 were 201,463 tonnes compared to 181,261 tonnes in the same period of 2007.

The US credit crisis is expected to have a negative impact on the outlook for sales for the fourth quarter. Consumer durable demand is contracting, impacting galvanized steel shipments to the transportation and appliance markets. Many of our steel customers have responded by cutting production and advancing planned maintenance outages to reduce product and raw material inventories. The Fund will be seeking spot sales opportunities in the fourth quarter to partially offset the decline in contract sales, although this may be challenging in the current market environment.

Given the uncertain short-term market outlook, the Fund's target sales volume for 2008 have been revised lower from 275,000 tonnes to 263,000 tonnes.

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

PROCESSING FEE

In 2008, the processing fee was increased to 37.5 cents per pound, compared to 37.0 cents per pound in 2007. 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

For the third quarter of 2008, premiums averaged 6.0 cents US per pound, compared to 12.1 cents US per pound in the third quarter of 2007. The decrease in realized premiums reflects a decrease in 2008 contract premiums from the high levels achieved in 2007.

The forecast for the premiums in 2008 is 6.0 cents US per pound.

The Fund's target for premiums is subject to various risks and uncertainties. The assumptions can be found in the "Forward-looking Information" below.

BYPRODUCTS

In the third quarter of 2008, the Fund generated $10.7 million in revenue for the sale of its byproduct copper cake and sulphuric acid, compared to $9.5 million in the third quarter of 2007. The $1.2 million increase was largely due to a significantly higher netback from sulphuric acid, partially offset by the negative impact of copper price settlements.

Sulphuric Acid

The Fund markets its sulphuric acid through a reseller, a wholly-owned subsidiary of Xstrata Canada Corporation ("Xstrata Canada"), which pools the Fund's output with production from four other smelters, all owned by Xstrata Canada and located in eastern Canada, to obtain distribution efficiencies. The Fund's sulphuric acid has been sold through the reseller since before the Fund's inception in 2002. Most of the pooled production is sold into the U.S. and Canadian industrial markets with the majority of sales being done under contract in the reseller's name. The sulphuric acid netback for each of the five smelters is calculated by reducing the average pool selling price, by the transportation cost to move each smelter's acid to market and the reseller's profit. The individual smelter transportation cost is determined by recognizing the geographic location of each plant vis-a-vis the ultimate customer. These costs can be significant if sales are in the mid-west or west coast of the U.S. and Canada. Also sulphuric acid prices tend to vary based on regional supply and demand.

The following table provides a summary of the sulphuric acid production, sales, selling price and netback for the third quarter and for the first nine months of 2008 and 2007:



----------------------------------------------------------------------------
Third Quarter Year-to-date
2008 2007 2008 2007
----------------------------------------------------------------------------

Sulphuric acid production (tonnes) 104,131 104,699 315,881 314,880
Sulphuric acid sales (tonnes) 99,595 108,738 318,809 319,160
Average pool selling price (US$/tonne) 135 70 114 69
Sulphuric acid netback (US$/tonne)(1) 59 22 54 19
----------------------------------------------------------------------------
(1) after deduction for selling and transportation costs and reseller profit
(4% and an additional 1% for U.S. sales).

 


The average pool selling price in the third quarter of 2008 increased to US$135 per tonne from US$70 per tonne in 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. In the third quarter of 2008, the Fund realized US$59 per tonne compared to US$22 per tonne in the third quarter of 2007. The pricing mechanism for the fund's sulphuric acid netback can result in a lag between the average pool selling price for the reseller and the netback for the Fund.

Approximately 10% to 15% of the pool's sulphuric acid is sold outside of contractual relationships, and the latest monthly average pool selling price (October 2008) for sales into the North American industrial market, before deduction of transport costs and reseller's profit, was US$359 per tonne.

Sulphuric acid is a hazardous material that requires special equipment for storage and transportation. In addition, most smelters have limited (a few weeks) storage capacity on site. Therefore, in order to ensure the continued sale of sulphuric acid in a safe and efficient manner on a long-term basis, the Fund's reseller maintains a high level of contractual business. As a result, the netback from contractual business is less volatile than from spot sales.

A breakdown of the timing of contract renegotiation is shown below:



% of Pool Contracts Date New Contract Becomes Effective
------------------- -----------------------------------
Spot sales 15% immediately
Annual contract 15% 2008
Annual and
multi-year
contracts 40% January 1, 2009
Multi-year contract 20% January 1, 2010
Multi-year contract 10% 2011

 


Contractual business is done over periods ranging from one to three years. Roughly 40% of the pool's contracts will be re-negotiated later this year for sales starting on January 1, 2009. This means that, by January 1, 2009, about 70% of sulphuric acid sales will be at the recently-negotiated pricing. In addition, multi-year contracts representing approximately 20% of the pool's contracts will be re-negotiated in 2009 for sales starting on January 1, 2010. And approximately 10% of the pool's multi-year contracts will be renegotiated in 2011.

The Supply and Processing Agreement between the Fund and Xstrata Canada requires that any related party transaction is required to be on terms that are no less favourable to the Fund than to those available from a reputable non-related party. As part of the Audit Committee's review of related party contracts between Xstrata Canada and the Fund, the Audit Committee engaged a third party during the third quarter to review the Fund's sulphuric acid netbacks. The Committee is completing its review, but to-date the Fund's netbacks appear consistent with the terms of the sales agreement and the market conditions at the time of the sales.

The market conditions for sulphuric acid have improved over the last number of months and the Fund's netbacks have risen sharply. There is a potential for higher sulphuric acid netbacks in 2009 if the Fund continues to capture this pricing in the upcoming contract negotiations. Contract negotiations are currently in progress and are expected to be completed over the next two months.

The Fund's target for sulphuric acid netbacks is subject to various risks and uncertainties. The assumptions can be found in the "Forward-looking Information" below.

EXCHANGE RATE

A weaker Canadian dollar has a positive impact on the Fund's financial results. In the third 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 $0.225 million ($0.9 million on an annual basis). The average Canadian/US exchange rate was unchanged at US$1.042 in the third quarter of 2008 compared to US$1.045 in the third quarter of 2007.

COSTS

Production costs include labour, energy, supplies and other costs directly associated with the production process. Production costs in the third quarter of 2008 were higher at $44.0 million, compared to $38.6 million in the third quarter of 2007. See Results of Operations for more details.

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. In the first nine months of 2008, recoveries were 97.8% compared to 96.4% in the same period of 2007s.

CAPITAL EXPENDITURES

Capital expenditures in the third quarter of 2008 were $6.3 million, compared to $5.9 million in the third quarter of 2007.

Capital spending has been revised to $28 million in 2008. It is expected that $23 million will be spent on sustaining capital, of this amount; $22 million is for regular maintenance capital. The capital cost to remove the magnesium and selenium from the new feed mix has been reduced from a total of $10 million (spread out over two years) to $1 million in 2008 and $3 million in 2009 because more impurities are being removed at the mine. In addition, the replacement of the cellhouse tank liners is not advancing as quickly as originally thought. About $5 million is expected to be spent on revenue-generating projects.

The Fund's target for capital spending is subject to various risks and uncertainties. The assumptions can be found in the "Forward-looking Information" below.

Operating Cash Flows

Cash realized from operations, before net change in non-cash working capital items in the third quarter of 2008 was $19.3 million compared to $20.8 million in the third quarter of 2007. During the third quarter of 2008, non-cash working capital decreased by $41.2 million due to the decrease in inventory and accounts receivable partially offset by a decrease in the accounts payable and accrued liabilities. These changes in working capital resulted from the reduction in the prices of zinc that has occurred over the last few quarters.

Cash realized from operations, before net change in non-cash working capital items in the first nine months of 2008 was $55.0 million compared to $60.9 million in the same period of 2007. During the first nine months of 2008, non-cash working capital decreased by $39.1 million due to a decrease in accounts receivable and inventory partially offset by a decrease in accounts payable and accrued liabilities.

Standardized Distributable Cash

The following computation and disclosure of standardized distributable cash is, in all material respects, in accordance with the revised Staff Notice 52-306 and the revised National Policy 41-201, Income Trusts and Other Indirect Offerings issued by the Canadian Securities Administrators.

During the third quarter of 2007, the Canadian Performance Reporting Board of the CICA published an Interpretive Release titled Standardized Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure. The Fund adopted these recommendations for its December 31, 2007 MD&A disclosure and the table below provides a reconciliation of cash realized from operations to 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 MD&A may differ from that used by other issuers and, accordingly, standardized distributable cash in this MD&A 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 September 30, 2008 and 2007 is provided below:



($ thousands) Third Quarter Year-to-date
2008 2007 2008 2007
----------------------------------------------
Cash realized from operations 60,507 21,051 94,121 38,803
Less: portion attributable to
minority interest (15,126) (5,263) (23,530) (9,701)
----------------------------------------------------------------------------
Cash realized from operations
attributable to Priority
Unitholders(a) 45,381 15,788 70,591 29,102

Capital adjustments:
Purchase of property, plant
and equipment (6,348) (5,909) (16,374) (17,925)
Proceeds from government
assistance - 87 478 1,832
Proceeds on sale of
property, plant and equipment 21 3 193 63
Accretion on long-term debt (65) (64) (193) (190)
----------------------------------------------------------------------------
(6,392) (5,883) (15,896) (16,220)
Plus: portion of capital
adjustments attributable to
minority interest 1,598 1,471 3,974 4,055
----------------------------------------------------------------------------
Capital adjustments
attributable to Priority
Unitholders(b) (4,794) (4,412) (11,922) (12,165)

----------------------------------------------------------------------------
Standardized distributable
cash (a) + (b) 40,587 11,376 58,669 16,937
----------------------------------------------------------------------------

Other adjustments including
discretionary items:
Increase/(decrease) in
non-cash working capital (41,226) (221) (39,135) 22,096
Decrease/(increase) in
operating reserve (141) (2,198) (843) (6,431)
Less/(plus) portion of
other adjustments
attributable to minority
interest 10,342 605 9,995 (3,916)
----------------------------------------------------------------------------
Distributions declared to
Priority Unitholders 9,562 9,562 28,686 28,686
----------------------------------------------------------------------------

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 $1.08 $0.30 $1.56 $0.45
Distributions declared per
Priority Unit $0.255 $0.255 $0.765 $0.765

 


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 the above reconciliation, in order to comply with the guidance of the CICA publication on standardized distributable cash, the item "Increase/(decrease) in non-cash working capital" is excluded from the calculation of standardized distributable cash, and is included in the reconciliation of distributions declared to Priority Unitholders from the standardized distributable cash.

In the third quarter of 2008, standardized distributable cash was $40.6 million and distributions declared to Priority Unitholders were $9.6 million.

Distribution Policy

The Fund's goal is to provide stable, monthly distributions to unitholders. 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.

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 the third quarter of 2008, the notional operating reserve increased by $0.1 million to $19.1 million.

The operating reserve currently represents about 4 1/2 months of the current distribution level, and is greater than the Fund's target three-month payout level. With the current uncertainty in global credit markets and the North American economy, the Fund considers it prudent, at this time, not to increase its monthly distributions or issue a special distribution.

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 September 30, 2008, the notional capital and site restoration reserve was $5.0 million.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2008, the Fund's total debt was $200.3 million, down from $240.3 million at the end of December 2007 and down from the $244.6 million at the end of June 2008. The Fund's cash and cash equivalents at September 30, 2008 totalled $3.7 million, unchanged from December 31, 2007. With the fall in the zinc price during 2008, working capital requirements have been reduced. If the zinc price remains at the current price of US$0.50 and if the Fund is able to maintain a reasonable level of sales, working capital requirements should continue to fall and the Fund should be able to further reduce its long-term debt.

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 will be 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 September 30, 2008 balance sheet is $96 million.

Fluctuations in working capital balances as a result of operations are generally funded by, or used to repay, the Revolving Facility. During the third quarter of 2008, $43.2 million of debt was drawn and $87.5 million was repaid related to the fluctuations in working capital.

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.

Borrowings under the Revolving Facility bear interest rates that vary with the prime rate, the bankers' acceptance rate or the Libor rates plus applicable margins, and vary based on certain financial ratios of the Fund. The Notes are comprised of $114,500 fixed-rate notes ("A-1 Notes") with a coupon of 6.529%, and $39,000 floating rate notes ("A-2 Notes") at a rate of the 3-month Canadian Dollar Offer Rate plus 1.94%. As at September 30, 2008 the effective rate on the A-2 Notes was 5.34%, compared to 6.75% as at December 31, 2007. With roughly 43% of the long-term debt set at variable rates, the Fund will be able to benefit from the recent drop in interest rates. The Fund believes it has sufficient capital resources to carry on the business.



OUTLOOK

----------------------------------------------------------------------------
The 2008 targets for the key drivers of the Fund are:
Zinc metal production: 268,000 tonnes
Zinc metal sales: 263,000 tonnes
Processing fee: 37.5 cents per pound
Zinc metal premium: 6.0 cents US per pound
Sulphuric acid netback US$58 per tonne
Capital expenditures: $28 million
----------------------------------------------------------------------------

 


Impact of the current market conditions

Economic conditions have deteriorated rapidly since the credit crunch and this could negatively impact the Fund's sales, premiums and copper prices. Having said this, it is important to remember that the processing fee which accounted for 70% of Net Revenues in 2007and which will account for the bulk of Net Revenues in 2008 is 37.5 cents Canadian. 2008 production and sales are expected to exceed 2007 levels. At the same time, sulphuric acid revenues have been increasing.

In the first nine months of 2008, long-term debt was reduced as a result of lower zinc prices, thereby reducing the Fund's working capital requirements. The zinc price has continued to fall in the fourth quarter. If these lower price levels and reasonable sales levels were to be maintained, the Fund should continue to see a reduction in its working capital requirements and a lower level of long-term debt. The Fund's long-term debt does not mature until 2010 so that it will not be required to seek any refinancing during this current market uncertainty.

Looking out to 2009, because contract negotiations are currently taking place, it is difficult to provide guidance on premiums and sulphuric acid pricing. Capital spending in 2009 will be tailored to the expected revenue stream. We intend to report in early 2009 with our expectations for all these drivers.

The Manager's ability to provide for stable, monthly distributions and meet the targets identified above is subject to the various risks and the assumptions can be found in the "Forward-looking Information" below.

FORWARD-LOOKING INFORMATION

The Fund provides Forward-looking Information for the current year on zinc metal production, zinc metal sales, processing fee, zinc metal premiums, byproduct revenues and capital expenditures. The Fund provides this Information to shareholders and analysts because they are the key drivers of the business. Readers are cautioned that this information may not be appropriate for other reasons.

The Fund updates its Forward-looking Information in each of our quarterly MD&A's.

This discussion contains Forward-looking Information concerning the Fund's objectives and 2008 general business outlook, zinc metal production and sales targets, estimated processing fee, zinc premium target, estimated recovery rates, expected byproduct revenues and capital expenditures forecast. Forward-looking Information 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 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 cake; (4) changes to the supply and demand for specific zinc metal products and the impact on the Fund's realized premiums; (5) the impact of month prior pricing; (6) the ability of the Fund to continue to service customers in the same geographic region; (7) 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; (8) 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; (9) changes in recoveries and capital expenditure requirements; (10) the negotiation of collective agreements with its unionized employees; (11) general business and economic conditions; (12) transportation disruptions; (13) 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; (14) potential negative financial impact from regulatory investigations, claims, lawsuits and other proceedings; (15) loan default and refinancing risk; and (16) reliance on Xstrata Canada for the operation and maintenance of the Processing Facility.

This Forward-looking Information represents our views as of the date of this MD&A. The Fund anticipates that subsequent events and developments may cause its views to change.

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)

Sept. 30 Dec. 31
2008 2007
---------- ---------

ASSETS

Current assets:
Cash and cash equivalents 3,741 3,702
Accounts receivable
Trade 53,994 64,210
Xstrata Canada 20,605 22,617
Financial instruments 1,377 964
Firm commitments 5,696 719
Inventories 81,515 129,066
Prepaids and other assets 2,441 2,195
---------- ---------
169,369 223,473

Property, plant and equipment 305,488 314,489
---------- ---------
474,857 537,962
---------- ---------

LIABILITIES AND EQUITY

Current liabilities:
Accounts payable and accrued liabilities
Trade 16,146 18,547
Xstrata Canada 30,138 44,801
Financial instruments 5,615 735
Distributions payable 4,250 4,250
---------- ---------
56,149 68,333

Future tax liability 13,147 13,147
Future site restoration and reclamation 12,534 12,130
Long-term debt 200,332 240,269
Interests of Ordinary Unitholders 51,465 54,312

Unitholders' Interest:
Unitholders' equity 191,273 191,273
Deficit (50,043) (41,502)
---------- ---------
141,230 149,771
---------- ---------
474,857 537,962
---------- ---------



NORANDA INCOME FUND

INTERIM CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT
AND COMPREHENSIVE INCOME

(unaudited)

($ thousands)

Three months Nine Months
Ended Sept. 30 Ended Sept. 30
------------------------ ------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------

Revenues
Sales 143,052 255,290 505,715 798,323
Transportation and
distribution costs (4,835) (4,053) (15,194) (11,234)
----------- ----------- -----------
138,217 251,237 490,521 787,089
----------- ----------- ----------- -----------

Raw material purchase
costs 62,427 188,579 270,568 596,949
----------- ----------- ----------- -----------
Revenues less raw
material purchase costs 75,790 62,658 219,953 190,140
----------- ----------- ----------- -----------
Other expenses
Production 44,014 38,554 137,067 115,519
Selling, general and
administration 4,618 5,108 14,278 15,048
Foreign exchange loss
(gain) 2,884 (8,452) 5,211 (17,724)
Commodity hedging loss
(gain) 103 (41) (98) 112
Financial instruments
loss (gain) (1,421) 5,187 (414) 2,713
Amortization of
property, plant and
equipment 8,313 7,583 25,585 22,102
Reclamation 267 314 747 (3,216)
----------- ----------- ----------- -----------
58,778 48,253 182,376 134,554
----------- ----------- ----------- -----------
Earnings before interest,
minority interest and
income tax 17,012 14,405 37,577 55,586
----------- ----------- ----------- -----------
Interest expense, net 3,398 5,857 10,716 17,783
----------- ----------- ----------- -----------
Earnings before minority
interest and income tax 13,614 8,548 26,861 37,803
----------- -----------
Minority interest in
earnings for Ordinary
Unitholders 3,404 2,137 6,716 9,451
----------- ----------- ----------- -----------
Earning before income tax 10,210 6,411 20,145 28,352
----------- -----------
Income tax expense - - - 14,636
----------- ----------- ----------- -----------
Net earnings and
comprehensive income 10,210 6,411 20,145 13,716
----------- ----------- ----------- -----------

Deficit beginning of
period (50,691) (42,443) (41,502) (30,624)
----------- ----------- ----------- -----------
Distributions to
Priority Unitholders (9,562) (9,562) (28,686) (28,686)
----------- ----------- ----------- -----------

Deficit end of period (50,043) (45,594) (50,043) (45,594)
----------- ----------- ----------- -----------

Net earnings per
Priority Unit (basic
and diluted) $ 0.27 $ 0.17 $ 0.54 $ 0.37

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 Nine Months
Ended Sept. 30 Ended Sept. 30
---------------------- ------------------------
2008 2007 2008 2007
--------- ----------- ----------- -----------

Cash realized from
(used for) operations:
Net earnings for the
period 10,210 6,411 20,145 13,716
Items not affecting cash:
Amortization of property,
plant and equipment 8,313 7,583 25,585 22,102
Accretion of reclamation
expense 267 314 747 (3,216)
Minority interest in
earnings for Ordinary
Unitholders 3,404 2,137 6,716 9,451
Mark-to-market loss
(gain) on commodity
financial instruments (1,318) 5,146 (512) 2,825
Change in fair value of
embedded derivatives (1,874) (852) 1,579 775
Future income tax expense - - - 14,636
Accretion on long-term
debt 65 64 193 190
Loss from sale of
property, plant and
equipment 336 81 876 528
Site restoration
expenditures (122) (54) (343) (108)
--------- ----------- ----------- -----------
19,281 20,830 54,986 60,899
--------- ----------- ----------- -----------
Net change in non-cash
working capital items 41,226 221 39,135 (22,096)
--------- ----------- ----------- -----------
60,507 21,051 94,121 38,803
--------- ----------- ----------- -----------

Cash realized from (used
for) investment
activities:
Purchases of property,
plant and equipment (6,348) (5,909) (16,374) (17,925)
Proceeds from government
assistance - 87 478 1,832
Proceeds on sales of
property, plant and
equipment 21 3 193 63
--------- ----------- ----------- -----------
(6,327) (5,819) (15,703) (16,030)
--------- ----------- ----------- -----------

Cash realized from (used
for) financing activities:

Distributions - Priority
Unitholders (9,562) (9,562) (28,686) (28,686)
- Ordinary
Unitholders (3,188) (3,188) (9,563) (9,563)
Long-term debt issued
under the Revolving
Facility 43,150 164,400 239,370 467,500
Long-term-debt repaid
under the Revolving
Facility (87,500) (166,600) (279,500) (464,700)
--------- ----------- ----------- -----------
(57,100) (14,950) (78,379) (35,449)
--------- ----------- ----------- -----------

Change in cash and cash
equivalents during the
period (2,920) 282 39 (12,676)

Cash and cash equivalents,
beginning of period 6,661 754 3,702 13,712
--------- ----------- ----------- -----------

Cash and cash equivalents,
end of period 3,741 1,036 3,741 1,036
--------- ----------- ----------- -----------


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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