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FOR: NORANDA INCOME FUND

Noranda Income Fund Reports Third Quarter Results

- Net Revenues Were Up 8% for the Quarter

- Net Earnings for the Quarter of $2.2 Million Compared to a Net Loss of $1.3 Million for the Same Period in 2009

- Cash Realized from Operations Before Net Change in Non-Cash Working Capital for the Quarter was $16.8 Million Up from $9.4 Million from the Prior Year

- Debt was Reduced by $8.3 Million During the Quarter

Nov 9, 2010 - 06:00 ET

VALLEYFIELD, QUÉBEC--(Marketwire - Nov. 9, 2010) - Noranda Income Fund (the "Fund") (TSX:NIF.UN)

SELECTED MANAGEMENT'S DISCUSSION AND ANALYSIS

This selected Management's Discussion and Analysis ("MD&A") 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, 2010 and with the audited consolidated financial statements of the Fund and the notes thereto for the year ended December 31, 2009. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

The Board of Trustees carries out its responsibility by reviewing this disclosure, principally through the Audit Committee, and it approves this disclosure prior to publication.

This selected MD&A is based on various assumptions (see "Forward-looking Information" below.) All dollar amounts are shown in Canadian dollars unless otherwise specified. The selected MD&A has been prepared as of November 8, 2010. Additional information relating to the Fund, including the Fund's annual information form, is available on SEDAR at www.sedar.com.

Q3 2010 Highlights  
  Third Quarter   Year-to-date
  2010   2009   2010   2009
Zinc metal production (tonnes) 66,605   51,871   198,215   163,013
Zinc metal sales (tonnes) 66,276   65,793   203,398   178,632
Processing fee (cents/pound) 38.5   38.0   38.5   38.0
Zinc recovery (%) 98.2   96.9   97.4   97.4
Average zinc metal premium (U.S.$/pound) 0.047   0.038   0.043   0.035
Byproduct revenues ($ millions) 9.3   6.6   21.9   21.0
Average U.S./Cdn. exchange rate 1.039   1.097   1.036   1.170
1 tonne equals 2,204.62 pounds              
  • Zinc metal production and sales were 28% and 1%, respectively higher than the corresponding quarter last year.
  • Byproduct revenues were 41% higher than last year's revenues.
  • Cash realized from operations before net change in non-cash working capital for the quarter was $16.8 million up from $9.4 million from the prior year.
  • Long-term debt was reduced by $8.3 million during the quarter.

Highlights – Subsequent to the End of the Quarter:

  • Four new highly qualified and experienced Independent Trustees joined the Board and formed the independent committee ("the Independent Committee").
  • TD Securities Inc. ("TD Securities") was appointed to act as the Fund's exclusive independent financial advisor, reporting directly to the Independent Committee.
  • The Noranda Operating Trust (the "Operating Trust") received a one-month extension on its existing credit facility ("Revolving Facility").
  • The Special Meeting of Unitholders of the Fund scheduled for November 15th has been cancelled.

RESULTS OF OPERATIONS

Consolidated Net Earnings (Third quarter 2010 compared to third quarter 2009)

Revenues less raw material purchase costs ("Net Revenues") in the third quarter of 2010 were $60.6 million, compared to $56.1 million in the same quarter of 2009. Net Revenues were higher due to higher zinc metal sales, and higher zinc premiums, copper prices and sulphuric acid netbacks, partially offset by the sale of high cost inventory and a stronger Canadian dollar.

In the third quarter of 2010, high cost inventory that was built up by the Fund in the second quarter was sold, resulting in lower margins and net earnings for the Fund.

Production Cost Breakdown            
($ millions)            
  Third Quarter   Increase/  
  2010   2009   decrease  
Labour $14.6   $12.6   2.0  
Energy 14.9   12.2   2.7  
Operating supplies 9.2   7.8   1.4  
Other 3.1   3.5   (0.4 )
Production cost before changes in inventory 41.8   36.1   5.7  
   
Change in inventory 0.9   8.7   (7.8 )
  $42.7   $44.8   (2.1 )

Production costs before change in inventory in the third quarter of 2010 were $41.8 million, $5.7 million higher than the $36.1 million recorded in the third quarter of 2009. Production during the third quarter of 2009 ran at 80% of the 2008 level, resulting in lower energy and operating supplies costs. The increase in costs in 2010 is mostly due to an increase in the cost of labour, energy and operating supplies, as a result of higher zinc metal production in the third quarter of 2010 than in the corresponding period of 2009.

Selling, general and administration costs in the third quarter of 2010 were $4.9 million compared to $3.8 million in the same period of 2009.

The foreign exchange gain for the third quarter of 2010 was $2.2 million compared to a gain of $6.7 million in the third quarter of 2009. The foreign exchange gain was primarily a result of the impact of the strengthening of the Canadian dollar on the Fund's net U.S. monetary liabilities. The foreign exchange gain was largely offset by a decrease in the value of in-process and finished inventory. The decrease in the value of inventory is realized in Net Revenues as the metal is sold to customers (thereby decreasing the Net Revenue recorded by the Fund). The Fund's main U.S. denominated balances are comprised of cash and cash equivalents, accounts receivable, accounts payable and a portion of long-term debt.

In the third quarter of 2010, the commodity hedging loss was $0.6 million and the financial instruments loss was $1.4 million. In the third quarter of 2009, the commodity hedging loss was $0.1 million and the financial instruments loss was $2.7 million. During the period, the change in the market value of the Fund's financial instruments resulted in these amounts being recorded.

In the third quarter of 2010, amortization was $7.6 million compared to $10.4 million in the third quarter of 2009. The higher amortization in 2009 was due to the significant drawdown of inventory during the third quarter of 2009. In addition, during the first quarter of 2010, the Fund reviewed and increased the useful life of certain property, plant and equipment, based on experience with these assets, to better reflect their use in time.

These changes were applied prospectively from January 1, 2010. This resulted in a decrease in amortization expense for the three month period ended September 30, 2010 by $1.1 million.

In the third quarter of 2010, net interest expense was $2.6 million, compared to $2.5 million in the third quarter of 2009. The increase in net interest expense during the third quarter of 2010 was due to higher interest spreads on the Revolving Facility, offset by a lower average outstanding debt and variable interest benchmark rate compared to the third quarter of 2009.

Minority interest in earnings of subsidiaries in the third quarter of 2010 was an expense of $0.7 million, down from a credit of $0.4 million in the third quarter of 2009. The increase was due to the Fund's higher earnings in 2010.

The Fund reported net earnings of $2.2 million for the third quarter of 2010, compared to a net loss of $1.3 million in the same quarter a year ago.

Consolidated Net Earnings (Nine months 2010 compared to nine months of 2009)

In the first nine months of 2010, the Processing Facility ran at its normal operating level; whereas in 2009, the Processing Facility operated at 80% capacity utilization from March 1st to September 30th because of the weakness in the sulphuric acid market.

Net Revenues in the first nine months of 2010 were $208.5 million, compared to $154.6 million in the same period of 2009. The $53.9 million increase was due to higher sales volumes for zinc and sulphuric acid, higher premiums and higher sulphuric acid netbacks, partially offset by a stronger Canadian dollar.

Production Cost Breakdown  
($ millions) Year-to-date   Increase/  
  2010   2009   Decrease  
Labour $45.3   $41.4   3.9  
Energy 46.0   42.0   4.0  
Operating supplies 27.0   23.8   3.2  
Other 10.7   9.8   0.9  
Production cost before changes in inventory 129.0   117.0   12.0  
   
Change in inventory 4.4   7.5   (3.1 )
  $133.4   $124.5   8.9  

Production costs before change in inventory in the first nine months of 2010 were $129.0 million compared to $117.0 million recorded in the first nine months of 2009. As noted above, production from March 1 to September 30 ran at 80% of capacity. The increase in costs in 2010 is mostly due to an increase in the cost of labour, energy and operating supplies, as a result of higher zinc metal production in the first nine months of 2010 than in the corresponding period of 2009.

Selling, general and administration costs in the first nine months of 2010 were $15.4 million, compared to $13.2 million in the first nine months of 2009.

The foreign exchange loss in the first nine months of 2010 was $1.6 million, compared to a gain of $7.7 million in the first nine months of 2009. The large foreign exchange gain in 2009 was a result of a weakening Canadian dollar on the Fund's net U.S. dollar monetary liability. The foreign exchange gain was largely offset by a decrease in the value of in- process and finished inventory. The decrease 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 2009).

In the first nine months of 2010, the commodity hedging loss was $0.3 million and the financial instrument gain was $3.7 million. During the period, the change in the market value of the Fund's financial instruments resulted in these amounts being recorded.

In the first nine months of 2010, amortization was $25.4 million, compared to $26.9 million in the first nine months of 2009. During the first quarter of 2010, the Fund reviewed and increased the useful life of certain property, plant and equipment, based on experience with these assets, to better reflect their use in time. These changes were applied prospectively from January 1, 2010. This resulted in a decrease in amortization expense for the six month period ended September 30, 2010 by $3.3 million. This impact on earnings was partially offset by the impact of the significant drawdown in zinc metal inventory during the first nine months of 2009.

In the first nine months of 2010, reclamation expense was $0.5 million, compared to a recovery of $3.9 million recorded in the first nine months of 2009. The recovery was due to a decline in the expected future reclamation spending, which has resulted in a reduction in the present value of future site restoration and reclamation liabilities based on a review of the site restoration and reclamation expenditures completed by the Fund in the second quarter of 2009, including work from a third-party engineering firm.

In the first nine months of 2010, net interest expense was $9.8 million compared to $7.3 million in the same period of 2009. The increase in net interest expense in 2010 was due to higher interest spreads on the Revolving Facility and transaction costs on the extension of the Revolving Facility, partially offset by a lower average outstanding debt and variable interest benchmark rate compared to the same period of 2009.

Minority interest in earnings of subsidiaries in the first nine months of 2010 was an expense of $6.4 million, down from a credit of $1.6 million in the same period of 2009. The decrease was due to the Fund's higher earnings in 2010.

Net earnings for the first nine months of 2010 totalled $17.8 million, compared to a net loss of $4.7 million in the first nine months of 2009.

KEY PERFORMANCE DRIVERS

The following table provides a summary of the key performance drivers for the third quarters and years-to-date 2010 and 2009:

  Third Quarter Year-to-date
  2010 2009 2010 2009
 
Zinc metal production (tonnes) 66,605 51,871 198,215 163,013
Zinc metal sales (tonnes) 66,276 65,793 203,398 178,632
Zinc concentrate processed (tonnes) 123,708 99,790 360,391 322,151
Zinc recovery (%) 98.2 96.9 97.4 97.4
Zinc grade (%) 55.1 54.6 54.3 53.8
Processing fee (cents/pound) 38.5 38.0 38.5 38.0
Average zinc metal premium (U.S.$/pound) 0.047 0.038 0.043 0.035
Byproduct revenues ($ millions) 9.3 6.6 21.9 21.0
Copper in copper cake production (tonnes) 797 653 2,317 2,085
Copper in copper cake sales (tonnes) 581 584 1,477 1,858
Sulphuric acid production (tonnes) 101,821 80,502 300,078 266,657
Sulphuric acid sales (tonnes) 103,150 79,675 313,930 260,217
Average LME zinc price (U.S.$/pound) 0.91 0.80 0.96 0.67
Average LME copper price (U.S.$/pound) 3.29 2.66 3.25 2.11
Sulphuric acid netback (U.S.$/tonne) 48 32 38 33
Average U.S./Cdn. exchange rate 1.039 1.097 1.036 1.170

PRODUCTION

Zinc metal production for the third quarter of 2010 was 28% higher at 66,605 tonnes (year-to-date 198,215 tonnes), compared to 51,871 tonnes in the third quarter of 2009 (year-to-date 163,013 tonnes). Metal production in 2010 was 22% higher than in the same period for the prior year. Production in 2009 was negatively impacted by the fact that the Processing Facility ran at 80% of its capacity for the seven month period March 1, 2009 to September 30, 2009.

The production target for 2010 is 265,000 tonnes. Production in 2010 is expected to be slightly lower than plant capacity because of the cell house rehabilitation program, which began this year. The rehabilitation program requires two cells to be off-line throughout the year, which is expected to reduce availability by approximately 2%. Rehabilitation of the entire cell house is forecast to take 3 to 4 years to complete. The rehabilitation program progressed as expected during the third quarter.

The production target is subject to various risks and uncertainties. Some of the assumptions underlying this information can be found in the "Forward-looking Information" below.

RECOVERIES

Recoveries for the third quarter of 2010 were 98.2% (year-to-date 97.4%) compared to the 96.9% for the third quarter of 2009 (year-to-date 97.4%). The Fund pays for 96% of the zinc in the concentrate it purchases; therefore, any recovery over 96% results in additional revenue for the Fund.

SALES

Zinc metal is used in a wide range of industries. Its major use is in the production of galvanized steel. Zinc sales in the third quarter were 66,276 tonnes (year-to-date 203,398 tonnes), compared to 65,793 tonnes in the third quarter of 2009 (year-to-date 178,632 tonnes). Sales to the steel sector continue to show improvement over the prior year.

Inventory quantities of finished zinc metal at the end of the third quarter were essentially unchanged from the end of the second quarter.

The Fund's target for 2010 sales remains at 270,000 tonnes.

The sales target is subject to various risks and uncertainties. Some of the assumptions underlying this information can be found in the "Forward-looking Information" below.

PREMIUMS

Premiums averaged 4.7 cents U.S. per pound in the third quarter of 2010 (year-to-date 4.3 cents U.S. per pound), compared to 3.8 cents U.S. per pound in the third quarter of 2009 (year-to-date 3.5 cents U.S. per pound). The increase in realized premiums compared to the previous year reflects the impact of improved annual contract premiums and an increase in the level of spot premiums.

The 2010 year forecast for zinc premiums is approximately 4.3 cents U.S. per pound, based on the current expected sales mix.

The Fund's premium target for 2010 is subject to various risks and uncertainties. Some of the assumptions underlying this information can be found in the "Forward-looking Information" below.

PROCESSING FEE

In 2010, the processing fee was contractually increased to 38.5 cents per pound, compared to 38.0 cents per pound in 2009. The processing fee is adjusted annually: (i) upward by 1% and (ii) upward or downward by 10% of the year-over-year percentage change in the average cost of electricity per megawatt hour for the Fund.

BYPRODUCTS

In the third quarter of 2010, the Fund generated $9.3 million in revenue from the sale of its copper cake and sulphuric acid (year-to-date $21.9 million), compared to $6.6 million in the third quarter of 2009 (year-to-date $21.0 million).

COPPER

Copper revenues during the third quarter of 2010 were $4.1 million (year-to-date $8.7 million), compared to $3.7 million (year-to-date $10.1 million) as higher copper prices were partially offset by higher treatment charges and penalties. In 2009, the Fund's copper cake production was being shipped to Xstrata's Kidd copper metallurgical facility for conversion. With the closure of this facility in May 2010, new alternatives had to be identified for the sale of this product. The Fund's copper cake contains 65% to 75% copper and is produced in the purification process. Because of the entrainment of impurities such as cadmium, this residue is complex to treat, limiting the options available for treatment. Currently, a large portion of the copper cake produced is sold to a customer in Europe. The Fund is in the process of testing this material at two other facilities in Europe. The Fund expects to sell by the end of 2011 all existing copper cake inventory, as well as its production for the remainder of 2011.

As at September 30, 2010, there were 1,727 tonnes of copper cake in inventory with an estimated value of $8.2 million, based on the September 30, 2010 copper price and exchange rate, and the estimated treatment charges and transportation cost. The book value associated with this inventory as of September 30, 2010 was $2.4 million.

SULPHURIC ACID

Revenues from the sale of sulphuric acid rose to $5.1 million (year-to-date $12.5 million) from $2.9 million in the third quarter of 2009 (year-to-date $10.4 million). Sulphuric acid netbacks in the third quarter of 2010, which were supported by higher spot pricing, improved to U.S. $48 per tonne compared (year-to-date U.S. $38 per tonne) to U.S. $32 per tonne in the third quarter of 2009 (year-to-date U.S. $33 per tonne). Sales volumes were also higher in the most recent quarter at 103,150 tonnes compared to 79,675 tonnes a year ago.

During the third quarter, the fundamentals for sulphuric acid continued to improve as supply tightened and industrial demand grew in step with increased manufacturing activity. Demand for sulphuric acid outside of the industrial market was strong and regular contract customers witnessed a pick-up in demand from their customers. While it is expected that the Sudbury operations of Vale Inco will resume full production in the near-term with the end of the strike that had closed its operations, the market is forecasted to remain relatively balanced for the remainder of 2010.

The netback in the third quarter of 2010 increased to U.S. $48 per tonne from U.S. $32 per tonne in the third quarter of 2009 due to improved market fundamentals leading to higher selling prices on non-contractual business.

EXCHANGE RATE

A stronger Canadian dollar has had a negative impact on the Fund's financial results. In the third quarter of 2010, a one-cent Canadian appreciation in the average Canadian/U.S. exchange rate would have negatively impacted the Fund's net earnings before minority interest and income tax by approximately $0.125 million ($0.5 million on an annual basis).

COSTS

Production costs include labour, energy, supplies and other costs directly associated with the production process, plus or minus changes in inventory levels. Production costs in the third quarter of 2010 were lower at $42.7 million (year-to-date $133.4 million), compared to $44.8 million in the third quarter of 2009 (year-to-date $124.5 million) due to the impact of the draw down of inventory levels.

CAPITAL EXPENDITURES

Capital expenditures in the third quarter of 2010 were $3.6 million (year-to-date $16.3 million), compared to $4.7 million in the third quarter of 2009 (year-to-date $18.0 million).

For 2010, the forecast for capital spending is $24 million, $1 million less than the previous forecast because some projects are being delayed until 2011. The bulk of the spending is on sustaining capital, including $3.4 million to replace the liners in the cell house.

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

OPERATING CASH FLOWS

Cash realized from operations, before net changes in non-cash working capital items in the third quarter of 2010 was $16.8 million compared to $9.4 million in the third quarter of 2009. During the third quarter of 2010, non-cash working capital increased by $6.1 million due to an increase in accounts receivable and inventories, partially offset by a decrease in accounts payable and accrued liabilities due in part to the increase in the zinc price.

Year-to-date cash realized from operations, before net changes in non-cash working capital items was $51.4 million compared to $19.6 million in 2009. Year-to-date non- cash working capital increased by $14.0 million due to an increase in accounts receivable and a decrease in accounts payable and accrued liabilities, partially offset by a decrease in inventory.

DISTRIBUTION POLICY

Distribution Policy and Limitation

The Fund has not paid any distributions to Priority Unitholders or Ordinary Unitholders in 2010. The Fund's long-term goal is to provide stable, monthly distributions to Unitholders.

The Fund's policy is to make cash distributions to distribute to its Unitholders of an amount equal to its net cash flows from operations in a year (without taking into account variations in working capital), less amounts put towards debt reduction and such reserves for operating and capital expenditures as the Board of Trustees of the Operating Trust considers appropriate.

On October 27, 2010, the Fund completed an amendment with the syndicate of Canadian chartered banks (the "Syndicate") to further extend the maturity date of its Revolving Facility from November 3, 2010 to December 3, 2010. The extension provides the Fund with additional time to pursue the refinancing of its existing indebtedness with regard to the Revolving Facility and the senior secured notes ("Senior Notes"), and allows the Operating Trust to continue working with its independent financial advisor, TD Securities, to review refinancing alternatives.

Consistent with the terms of the previous six-month extension of the Revolving Facility in April of this year, the Fund is not permitted to make cash distributions to the holders of its units during the period from November 3, 2010 to December 3, 2010 (the "Extension Period").

Distributions and Taxable Income

Under the terms of its trust indenture, the Fund is required on December 31st of each year to distribute to its Unitholders an amount equal to the Fund's taxable income for the year, to the extent that such amount has not already been distributed in the year. To the extent that such distributions cannot be made in cash, they are required to be made by an in-kind distribution of Fund units (in which units are automatically consolidated such that the number of units held by a Unitholder after the distribution of additional units and the consolidation is the same number of units held by the Unitholder immediately prior to the distribution of additional units). The Fund currently expects to generate taxable income for 2010, however, it has not yet made any cash distributions to Unitholders. The Fund may be required, as a result, to make an in-kind distribution of Fund units on December 31, 2010. Accordingly, Unitholders will have taxable income for Canadian tax purposes without any corresponding cash distributions unless a cash distribution is permitted under the terms of the Operating Trust's debt commitments prior to year end. The Fund currently estimates that the taxable income for 2010 will be approximately 40 cents per Priority Unit.

Tax Pools

The Fund has certain tax pools available to shelter taxable income. The largest of these tax pools comprise capital cost allowance ("CCA"). As at the end of December 31, 2009, the CCA tax pools available were as follows. These pools are available to the Unitholders in their respective interest in the Noranda Income Limited Partnership.

Class   Federal   Québec   Rate
($ thousands)            
1   $9,620   $9,619   4%
1   3,328   3,328   10%
3   776   718   5%
6   4   4   10%
8   6   3   20%
10   73   28   30%
17   10   8   8%
26   364   353   5%
39   -   1   25%
41   137,335   147,357   25%
Total   $151,516   $161,419    

Refinancing

The Fund currently expects to complete the refinancing of both the Revolving Facility and the Senior Notes prior to their maturities through bridge and/or longer term facilities.

In addition, it expects that the terms and conditions of any long-term refinancing may include an obligation to repay a significant portion of the debt before May 3, 2017, the date Xstrata Canada Corporation's ("Xstrata Canada's") supply obligation under the current Supply and Processing Agreement terminates.

Depending on the actual nature of the long-term financing that may be implemented and the related mandatory repayments that may be imposed by such long-term financing, such mandatory repayments may reduce the Fund's future free cash flow and cash available for distribution.

The Fund's ability to implement a refinancing plan with respect to the Revolving Facility and the Senior Notes is subject to various risks and uncertainties, including obtaining any necessary credit support from Xstrata Canada and/or the Manager, which currently provide credit support for the Fund's outstanding indebtedness, that may be required or determined to be beneficial to the Fund and the Operating Trust in connection with any refinancing plan. Some of the risks and assumptions underlying this information can be found in the sections entitled "Liquidity and Capital Resources" and "Forward-looking Information" below.

During the third quarter of 2010, the notional operating reserve increased by $13.0 million to $52.2 million. In spite of the improvement during the quarter, as mentioned above, cash distributions cannot be paid to Unitholders during the Extension Period of the Revolving Facility. Going forward, the ability for the Fund to make distributions will be dependant on the terms and the repayment requirements of the refinancing of the debt, amongst other things.

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.

As a result of the limitation on distributions that has been put in place by the Revolving Facility, as extended, there is no standardized distributable cash for the third quarter of 2010.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2010, the Fund's total debt (short and long-term) was $184.9 million, down from $207.9 million at the end of December 2009. The Fund's cash and cash equivalents at September 30, 2010 totalled $0.9 million, down from $2.9 million at December 31, 2009.

The Fund has a Revolving Facility in place that is used for general corporate purposes, including financing working capital. Under the extension of the Revolving Facility, the amount available to be drawn will continue to vary on a quarterly basis and will continue to be based on the same percentages of the Fund's inventory and accounts receivable from the previous quarter. In April, 2010, the maximum available to be drawn at any time was reduced to $120 million from $200 million. With the most recent one-month extension, the maximum available to be drawn has been further reduced to $100 million to reflect the debt repayments that have been made during 2010.

The Fund has the ability to draw down the Revolving Facility in both Canadian and U.S. dollars. The amount available as at September 30, 2010 was $100 million, of which $34.2 million was drawn, including letters of credit outstanding.

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 2010, $51.6 million of debt was drawn and $59.9 million was repaid related to the fluctuations in working capital.

The Fund has $153.5 million of Senior Notes outstanding. The Senior Notes have a term of seven years and mature on December 20, 2010.

Both the Revolving Facility and the Senior 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 Senior 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 not exceed 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 (which includes the Revolving Facility but excludes the Senior Notes), 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 September 30, 2010 and are summarized below:

Ratio September 30, 2010
Leverage ratio1 (must not exceed 4.25 to 1) 2.3 to 1
Interest coverage ratio1 (must be no less than 3 to 1) 6.0 to 1
Current ratio (must be no less than 1 to 1) 1.8 to 1
1 four rolling-quarter 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 as at September 30, 2010.

The Fund has provided covenants to the holders of Senior Notes, including the commitment to the punctual payment of principal and interest accrued on the Senior Notes, in accordance with the terms of the Operating Trust Indenture. The Fund is required to maintain a letter of credit or cash, for the benefit of the holders of the Senior Notes, for an amount equal to or greater than three months' interest expense. The total letters of credit outstanding as of September 30, 2010 was $2.8 million.

All of the covenants under the trust indenture relating to the Senior Notes were met for the three month period ending September 30, 2010.

As at September 30, 2010, the Fund had a working capital deficiency of $65.5 million, due to the upcoming maturity in 2010 of the Revolving Facility and the Senior Notes. As discussed above, the Fund currently expects to refinance the debt prior to their maturities. The Fund's inability to further extend the Revolving Facility or refinance the Senior Notes may require it to seek additional financing sources. The refinancing may be done at less favourable terms than what currently exist and may restrict future distributions and require that a portion of the debt be paid down. There is no assurance that such indebtedness could be renewed or refinanced, which would have a material adverse effect on the Fund. The Fund's ability to implement a refinancing plan with respect to the Revolving Facility and the Senior Notes is subject to various risks and uncertainties, including obtaining any necessary credit support from Xstrata Canada and/or the Manager, which currently provide credit support for the Fund's outstanding indebtedness, that may be required or determined to be beneficial to the Fund and the Operating Trust in connection with any refinancing plan.

This credit support by Xstrata Canada is currently provided in the form of:

  • limited recourse and/or unconditional guarantees, pledges and general security agreements provided by affiliates of Xstrata Canada, including Canadian Electrolytic Zinc Limited (the Manager), which acts as the administrator of the Fund and manager of the Operating Trust and the Processing Facility;
  • consent agreements pursuant to which the Manager has restricted its ability to terminate the Administration Agreement and Management and Operating Agreement relating to the Fund, the Operating Trust and Noranda Income Limited Partnership (which is the direct owner of the Processing Facility); and
  • consent agreements pursuant to which Xstrata Canada has also restricted its ability to terminate the Supply and Processing Agreement while the Fund's current Revolving Facility is outstanding, even if such agreement is breached by Noranda Income Limited Partnership.

No independent obligation exists that would require Xstrata Canada and/or its affiliates to provide a similar level of credit support in connection with any refinancing of the Revolving Facility. The lack of continued credit support by Xstrata Canada and its affiliates, if withheld in connection with any refinancing plan, could have a material adverse effect on the available credit, if any, and the related terms, conditions and covenants that may be extended to or required from the Fund and its affiliates in connection with any refinancing. As discussed elsewhere in this selected MD&A, the Independent Committee of the Board has retained TD Securities as its independent financial advisor to assist it with its consideration of potential financing alternatives.

The Fund has provided forward-looking information regarding a longer-term extension of the Revolving Facility and the refinancing of the Senior Notes and it is subject to various risks and uncertainties. Some of the assumptions underlying this information can be found in the "Forward-looking Information" below.

OUTLOOK

Industrial activity in the United States during the third quarter of 2010 maintained the momentum established in the previous quarter. The Purchasing Manager's Index ("PMI") for the United States continues to predict expansionary economic conditions with a reading in October at 56.9. In the automotive market, light vehicle sales in the United States increased 2.6% for the quarter to 11.6 million units. October vehicle sales showed further growth at a seasonally adjusted annual rate of 12.26 million units. Spending on residential and non-residential construction in the United States is unchanged from second quarter levels.

Zinc metal sales volumes were steady to all end-use sectors in the third quarter. Zinc sales in the fourth quarter are expected to match production.

The fundamentals for sulphuric acid have rebounded in 2010 in part due to the May 2010 closure of Xstrata Zinc's Kidd copper and zinc metallurgical facilities in Timmins, Ontario and the strike at Vale Inco's operations in Sudbury, Ontario, which positively impacted the regional supply/demand balance for sulphuric acid during the first seven months of 2010. While the strike at Vale Inco's Sudbury operations has ended, the market for sulphuric acid is expected to remain balanced.

The Fund is confirming the following guidance for the 2010 year:

Production: 265,000 tonnes
Sales: 270,000 tonnes
Average Premium: 4.3 cents U.S. per pound
Processing fee: 38.5 cents per pound
Capital expenditures $24 million

As discussed above, on October 27, 2010, the Fund announced that subject to the satisfaction of certain closing conditions, the Syndicate has agreed to extend the maturity date of the Operating Trust's existing Revolving Facility from November 3, 2010 to December 3, 2010. The extension allows the Independent Committee of the Board of Trustees of the Operating Trust to continue working with its independent financial advisor, TD Securities, to review financing alternatives with respect to the Revolving Facility and the Senior Notes. The Independent Committee is undertaking a thorough review of its refinancing options, together with TD Securities, to ensure that the Fund's capital structure is best suited for its operations going forward. Further details on any refinancing plans will be generally disclosed to Unitholders via news releases in accordance with applicable securities laws.

The Fund currently expects to complete the refinancing of both the Revolving Facility and the Senior Notes prior to their maturities through bridge and/or longer term facilities. The Board believes it has available to it all financing alternatives to implement an optimal long-term refinancing of the Fund's debt to maximize value for Priority Unitholders.

The Fund's ability to implement a refinancing plan with respect to the Revolving Facility and the Senior Notes is subject to various risks and uncertainties, including obtaining any necessary credit support from Xstrata Canada and/or the Manager, which currently provide credit support for the Fund's outstanding indebtedness, that may be required or determined to be beneficial to the Fund and the Operating Trust in connection with any refinancing plan. Some of the risks and assumptions underlying this information can be found in the sections entitled "Liquidity and Capital Resources" and "Forward-looking Information" below.

Under the terms of its trust indenture, the Fund is required on December 31st of each year to distribute to its Unitholders an amount equal to the Fund's after tax income for the year, to the extent that such amount has not already been distributed in the year. To the extent that such distributions cannot be made in cash, they are required to be made by an "in-kind" distribution of Fund units. The Fund currently expects to generate taxable income in 2010 however it has not made any cash distributions to Unitholders. The Fund may be required, as a result, to make a distribution in cash or in kind on December 31, 2010. For further details, see the section entitled "Distribution Policy" below.

The outlook for zinc, sulphuric acid fundamentals and net earnings is subject to various risks and uncertainties. The Fund's ability to meet the targets identified above is subject to the various risks and assumptions. Some of these risks and assumptions underlying this information can be found in the "Forward-looking Information" below.

FORWARD-LOOKING INFORMATION

This release, including sections entitled "Recent Developments, "Outlook", "Key Performance Drivers", "Distribution Policy" and "Liquidity and Capital Resources", contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. Amongst others, the Fund has made forward-looking statements for production, sales, premiums, the processing fee and capital expenditures, the Fund and the Operating Trust's future financing plans and business plans and operation of the Processing Facility, future liabilities and obligations of the Fund, and the anticipated financial and operating results of the Fund and distributions to Unitholders. The Fund provides this information because they are the key drivers of the business. Readers are cautioned that this information may not be appropriate for other reasons.

These statements and information are based, among others, on the Fund's current assumptions, expectations, estimates, objectives, plans and intentions regarding projected revenues and expenses, the economic and industry environments in which he Fund operates or which could affect the Fund's activities, the Fund's ability to attract and retain clients and consumers as well as the Fund's operating costs, raw materials and energy supplies which are subject to a number of risks and uncertainties.

Forward-looking information involves known and unknown risks, uncertainties and other factors, which may cause the actual events, results or performance to be materially different from any future events, 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: (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-à-vis the U.S. 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 and the condition of financial and credit markets; (13) transportation disruptions; (14) 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 associated with the Revolving Facility and the Senior Notes; (17) reliance on Xstrata Canada for the operation and maintenance of the Processing Facility, the Fund and the Operating Trust and credit support in connection with the Revolving Facility and any refinancing of the Revolving Facility and the Senior Notes; and (18) the other general risks and uncertainties set out in the Fund's continuous disclosure documents on file with the Canadian Securities Regulatory Authorities, including its 2009 annual information form and management's discussion and analysis relating to its fiscal 2009 Annual Consolidated Financial Statements.

Forward-looking statements can generally be identified by the use of words such as "anticipates", "believes", "plans", "intends", "estimates", "are expected", "is forecast", "approximately" or variations of such words and phrases, or statements that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. or words and expressions of similar nature. Forward-looking information involves known and unknown risks, uncertainties and other factors, which may cause the actual events, results or performance to be materially different from any future events, results or performance expressed or implied by the forward-looking information. As a result, the Fund cannot guarantee that any forward-looking statements will materialize. Assumptions, expectations and estimates made in the preparation of forward-looking statements and risks that could cause the Fund's actual events, results or performance to differ materially from the Fund's current expectations are discussed throughout this document and in our most recently filed Annual Report which is available on SEDAR at www.sedar.com. Forward-looking information contained in this release is based on management's current estimates, expectations and assumptions, which management believes are reasonable as of the current date. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. Except as required by law, the Fund does not undertake to update these forward- looking statements, whether written or oral, that may be made from time to time by the Fund or on the Fund's behalf.

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, Québec. 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 CEZ 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  
  2010     2009  
ASSETS  
   
Current assets:  
Cash and cash equivalents 934     2,895  
Accounts receivable          
Trade 78,952     77,126  
Xstrata Canada 31,303     8,270  
Commodity hedging instruments 1,187     4,409  
Commodity financial instruments 82     -  
Inventories 83,950     110,875  
Prepaids and other assets 1,706     949  
  198,114     204,524  
           
Long-term commodity hedging instruments 410     1,110  
Property, plant and equipment 287,561     295,756  
  486,085     501,390  
           
           
LIABILITIES AND EQUITY          
           
Current liabilities:          
Accounts payable and accrued liabilities          
Trade 16,606     16,254  
Xstrata Canada 60,898     72,477  
Commodity financial instruments -     3,587  
Firm commitments 1,222     4,112  
Current portion of the long-term debt 184,854     207,886  
  263,580     304,316  
           
Long-term firm commitments 422     1,111  
Future tax liability 14,641     13,147  
Future site restoration and reclamation 9,418     9,006  
Interests of Ordinary Unitholders 55,046     48,619  
           
Unitholders' Interest:          
Unitholders' equity 191,273     191,273  
Deficit (48,295 )   (66,082 )
  142,978     125,191  
  486,085     501,390  
           
                 
NORANDA INCOME FUND  
                 
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND DEFICIT  
AND COMPREHENSIVE INCOME (LOSS)  
                 
(unaudited)  
   
                 
($ thousands)  
                 
  Three months   Nine months  
  ended Sept 30   ended Sept 30  
                 
  2010   2009   2010   2009  
                 
Revenues                
Sales 157,049   132,674   485,939   324,359  
Transportation and distribution costs (4,159 ) (3,987 ) (11,585 ) (10,592 )
  152,890   128,687   474,354   313,767  
                 
Raw material purchase costs 92,267   72,567   265,878   159,203  
Revenues less raw material purchase costs 60,623   56,120   208,476   154,564  
Other expenses                
Production 42,653   44,847   133,418   124,485  
Selling, general and administration 4,890   3,826   15,368   13,154  
Foreign exchange (gain) loss (2,170 ) (6,698 ) 1,592   (7,745 )
Commodity hedging loss 568   76   344   69  
Financial instruments (gain) loss 1,412   2,733   (3,669 ) 615  
Amortization of property, plant and equipment 7,585   10,363   25,427   26,856  
Reclamation 177   174   536   (3,900 )
  55,115   55,321   173,016   153,534  
Earnings before interest, minority interest and income tax 5,508   799   35,460   1,030  
Interest expense, net 2,636   2,489   9,752   7,318  
Earnings (loss) before minority interest and income tax 2,872   (1,690 ) 25,708   (6,288 )
Minority interest in earnings for Ordinary Unitholders 718   (422 ) 6,427   (1,572 )
Net earnings (loss) before income tax 2,154   (1,268 ) 19,281   (4,716 )
Future Income tax expense -   -   1,494   -  
Net earnings (loss) and comprehensive income (loss) 2,154   (1,268 ) 17,787   (4,716 )
                 
Deficit beginning of period (50,449 ) (66,226 ) (66,082 ) (52,091 )
Distributions to Priority Unitholders -   -   -   (10,687 )
                 
Deficit end of period (48,295 ) (67,494 ) (48,295 ) (67,494 )
                 
                 
Net earnings (loss) per Priority Unit (basic and diluted) $ 0.06   $ (0.03 ) $ 0.47   $ (0.13 )
                 
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 Month  
    ended Sept 30   ended Sept 30  
    2010   2009   2010     2009  
                     
Cash realized from (used for) operations:                  
Net earnings (loss) for the period 2,154   (1,268 ) 17,787     (4,716 )
Items not affecting cash:                  
Amortization of property, plant and equipment 7,585   10,363   25,427     26,856  
Reclamation   177   174   536     (3,900 )
Minority interest in earnings for Ordinary Unitholders 718   (422 ) 6,427     (1,572 )
Future income tax expense -   -   1,494     -  
Mark-to-market loss on commodity hedging instruments 568   76   344     69  
Mark-to-market loss (gain) on financial instruments (980)   2,733   79     615  
Change in fair value of embedded derivatives 6,441   (2,412 ) (2,422 )   1,324  
Accretion on long-term debt 65   65   191     193  
Loss from sale of property, plant and equipment 192   139   529     871  
Write-down of inventory -   -   1,144     -  
Site restoration expenditures (100)   (93 ) (124 )   (165 )
    16,820   9,355   51,412     19,575  
Net change in non-cash working capital items (6,078)   (18,635 ) (13,983 )   4,779  
    10,742   (9,280 ) 37,429     24,354  
                     
Cash realized from (used for) investment activities:                  
Purchases of property, plant and equipment (3,633)   (4,735 ) (16,340 )   (18,033 )
Proceeds on sales of property, plant and equipment 33   5   172     5  
    (3,600)   (4,730 ) (16,168 )   (18,028 )
                     
Cash realized from (used for) financing activities:                  
                     
Distributions - Priority Unitholders -   (1,500 ) -     (13,874 )
  - Ordinary Unitholders -   -   -     (2,125 )
Long-term debt issued under the Revolving Facility 51,588   94,002   250,190     193,012  
Long-term-debt repaid under the Revolving Facility (59,876)   (81,000 ) (273,412 )   (185,500 )
    (8,288)   11,502   (23,222 )   (8,487 )
                     
Change in cash and cash equivalents during the period (1,146)   (2,508 ) (1,961 )   (2,161 )
                     
Cash and cash equivalents, beginning of period 2,080   3,802   2,895     3,455  
Cash and cash equivalents, end of period 934   1,294   934     1,294  


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
mboone@xstrata.ca



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