NORANDA INCOME FUND
TSX : NIF.UN

NORANDA INCOME FUND

May 03, 2010 12:20 ET

Noranda Income Fund Reports First Quarter Net Earnings of $7.1 Million

VALLEYFIELD, QUÉBEC--(Marketwire - May 3, 2010) - Noranda Income Fund (the "Fund") (TSX:NIF.UN) reported net earnings of $7.1 million for the first quarter of 2010, compared to a net loss of $2.7 million in the same quarter a year ago.

"We've had a good quarter with net earnings of $7.1 million. During the quarter, the Processing Facility operated at normal operating levels.  Production and sales met targeted levels.  We are encouraged by the improvement we've seen in both fundamentals and demand for our products." said Mario Chapados, President and Chief Executive Officer of the Noranda Income Fund's Manager. "While there has been a clear and broad-based improvement in underlying economic trends and more stability in the financial markets, the Fund still faces some challenges, such as low zinc premiums and a stronger Canadian dollar. In addition, management is working with its current lenders to refinance its long-term debt."

Subsequent to the end of the quarter, the Fund entered into an amendment with a syndicate of Canadian chartered banks (the "Syndicate") to extend the maturity date of its existing credit facility (the "Revolving Facility") from May 3, 2010 to November 3, 2010 (the "Extension Period"). Discussions to complete a longer-term extension of the Revolving Facility with the Syndicate will continue with the intention to have the extension coincide with the refinancing of the $153.5 million senior secured notes (the "Notes") that mature on December 20, 2010, prior to the November 3, 2010, the end of the Extension Period.

One of the requirements of the extension of the maturity date of the Revolving Facility is that no cash distributions be paid to Unitholders during the Extension Period. The Fund will be in a better position to consider the resumption of distributions once the refinancing of the debt has been completed, and the terms of the refinancing are known.For more details, see Limitation on Distributions below.

The Independent Committee of the Board of Trustees of the Fund continues to work with its financial and legal advisors to review strategic alternatives available to the Fund, as well as review financing alternatives proposed by the management for the Revolving Facility and the senior secured notes. The Independent Committee has retained Gryphon Partners to act as financial advisor and Heenan Blaikie LLP to act as legal counsel.

Outlook

Recently released economic data on the state of the global economy is positive and indicates that the developed world is recovering and China remains strong. Industrial production has been stronger than what was forecast just a few months ago. While both global and North American economic growth has exceeded expectations so far this year, the pace may slow towards the middle of the year.

In North America, manufacturing continued to gather momentum during the first quarter, as evidenced by the expansionary trends emerging from the Purchasing Manager's Index ("PMI") survey for March 2010.

The trend seen in the PMI index has also been reflected in the Fund's zinc and sulphuric acid sales. The demand for zinc has benefitted from a strong pick-up in the steel industry. Steel capacity utilization reached 70% in March compared to 65% in December. Our customers are reporting high utilization rates at their continuous galvanizing operations in 2010. One of the end uses of zinc that is seeing strength is automotive sales which improved to a rate of 11.8 million units per year rate in March, 2010 up from 11 million units at the end of 2009. However, the important non-residential construction sector remains soft. 

The fundamentals for sulphuric acid also continue to improve. Demand for sulphuric acid outside of the industrial market has been strong and regular contract customers are witnessing a pick-up in demand from their customers. The strike at the Sudbury operations of Vale Inco continues to have a positive impact on the regional supply/demand balance for sulphuric acid.

The outlook for zinc and sulphuric acid fundamentals is subject to various risks and uncertainties. The assumptions can be found in the "Forward-looking Information" below.

Annual General Meeting and Conference Call

Noranda Income Fund is holding its Annual General Meeting today at
3 p.m. in the Gallery Room at the TSX Broadcast & Conference Centre, The Exchange Tower, 130 King Street West, Toronto, Ontario. We would be very pleased if you could join us. 

An Investor Conference Call to discuss the first quarter results of fiscal 2010 will be held at 08:30 AM Eastern time on Tuesday, May 4th, 2010. To participate in the conference call, please dial 416-695-6622 or toll free 1-800-769-8320. A live audio webcast of the conference call, together with supporting presentation slides, will be available on our website at www.norandaincomefund.com. For those unable to participate, a replay will be available. To access the replay, dial 416-695-5800 or toll free at 1-800-408-3053 with the pass code of 4838 134# until midnight, Eastern Time, on May 18, 2010.

Financial Results

This press release of the financial position and results of operations of the Fund should be read in conjunction with the unaudited consolidated interim financial statements of the Fund for the three months ended March 31, 2010 and with the audited consolidated financial statements of the Fund and the notes thereto for the period ended December 31, 2009. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). All dollar amounts are shown in Canadian dollars unless otherwise specified.

This press release is based on various assumptions (see "Forward-looking Information" below). The press release has been prepared as of May 3, 2010. Additional information relating to the Fund, including the Fund's annual information form is available on SEDAR at www.sedar.com.

Q1 2010 Highlights  
  First Quarter
  2010 2009
Zinc metal production (tonnes) 66,466 58,080
Zinc metal sales (tonnes) 66,554 62,248
Processing fee (cents/pound) 38.5 38.0
Zinc metal premiums (US$/pound) 0.039 0.022
Byproduct revenues ($ millions) 5.9 10.9
Average US/Cdn. exchange rate 1.041 1.245
  • The plant operated at normal operating capacity.
  • Zinc metal production and sales were 14% and 7%, respectively higher than the corresponding quarter last year.
  • On April 19, 2010, the Fund entered into an amendment with the Syndicate to extend the maturity date of its Revolving Facility from May 3, 2010 to November 3, 2010. Discussions to complete a longer-term extension of the Revolving Facility with the Syndicate will continue with the intention to have the extension coincide with the refinancing of the Notes prior to the end of the Extension Period.

RESULTS OF OPERATIONS

Consolidated Net Earnings (First quarter 2010 compared to first quarter 2009)

Revenues less raw material purchase costs ("Net Revenues") in the first quarter of 2010 were $66.6 million, compared to $61.0 million in the same quarter of 2009. The $5.6 million increase was due to higher zinc and sulphuric acid sales, processing fee and premiums, partially offset by lower sulphuric acid netbacks and copper sales, and a stronger Canadian dollar.

Production Cost Breakdown          
($ millions) First Quarter Increase/  
  2010   2009 (Decrease )
Labour 14.8   15.0 (0.2 )
Energy 17.0   16.4 0.6  
Operating supplies 8.4   8.7 (0.3 )
Other 2.9   2.7 0.2  
Production cost before changes in inventory 43.1   42.8 0.3  
           
Change in inventory (0.4 ) 1.4 (1.8 )
  42.7   44.2 (1.5 )

Production costs before changes in working capital in the first quarter of 2010 were $43.1 million, $0.3 million higher than the $42.8 million recorded in the first quarter of 2009. The increase in costs is mostly due to an increase in the cost of energy and reflects higher zinc metal production in the first quarter of 2010 when compared to the corresponding period in 2009.

Selling, general and administration costs in the first quarter of 2010 were $5.2 million, compared to $4.7 million in the same period of 2009.

The foreign exchange gain for first quarter of 2010 was $2.1 million, compared to a loss of $1.8 million in the first quarter of 2009. The foreign exchange gain was primarily a result of the impact of the strengthening Canadian dollar on the Fund's net US 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 US denominated balances are comprised of cash and cash equivalents, accounts receivable, accounts payable and a portion of long-term debt.

In the first quarter of 2010, the commodity hedging loss was $0.4 million and the commodity financial instruments gain was $2.8 million. In the first quarter of 2009, the commodity hedging loss was $0.1 million and the commodity financial instruments loss was $2.8 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 quarter of 2010, amortization was $8.6 million compared to $8.4 million in the first quarter 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. The impact on amortization expense for the three month period ended March 31, 2010 was to decrease amortization expense by $1.1 million.

In first quarter of 2010, net interest expense was $3.1 million compared to $2.5 million in the first quarter of 2009. The increase in net interest expense during the first quarter of 2010 was the result of higher average outstanding debt balances and higher interest spreads on the Revolving Facility, offset by a lower variable interest benchmark rate compared to the first quarter of 2009.

Minority interest in earnings of subsidiaries in the first quarter of 2010 was an expense of $2.9 million, up from a credit of $0.9 million in the first quarter of 2009. The increase was due to the Fund's higher earnings in 2010.

Future income tax expense for the first quarter of 2010 was $1.5 million reflecting the estimate of the unrecognized temporary differences outstanding as of March 31, 2010 that will remain outstanding as of January 1, 2011.

KEY PERFORMANCE DRIVERS

The following table provides a summary of the quarterly key performance drivers for the first quarter of 2009 and 2010:

  Q1/2010 Q1/2009
Zinc metal production (tonnes) 66,466 58,080
Zinc metal sales (tonnes) 66,554 62,248
Zinc concentrate processed (tonnes) 121,303 117,859
Zinc recovery (%) 97.0 97.6
Processing fee (cents/pound) 38.5 38.0
Zinc metal premiums (US$/pound) 0.039 0.022
Byproduct revenues ($ millions) 5.9 10.9
Copper in cake production (tonnes) 698 828
Copper in cake sales (tonnes) 490 834
Sulphuric acid production (tonnes) 103,177 97,982
Sulphuric acid sales (tonnes) 102,490 85,564
Average LME zinc price (US$/pound) 1.04 0.53
Average LME copper price (US$/pound) 3.28 1.56
Sulphuric acid netback (US$/tonne) 21 68
Average US/C$ exchange rate 1.041 1.245

PRODUCTION

The Processing Facility returned to normal operating capacity in October 2009. Zinc metal production for the first quarter of 2010 was on budget at 66,466 tonnes, compared to 58,080 tonnes in the first quarter of 2009. In the first quarter of 2009, March production was negatively impacted by the fact that the Processing Facility ran at 80% of its normal operating level.

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 reduces availability by approximately 2%. Rehabilitation of the entire cell house is expected to take 3 to 4 years to complete. The rehabilitation progressed as expected during the first 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 first quarter of 2010 were 97.0% compared to the 97.6% for the first quarter of 2009. The Fund pays for 96% of the zinc in the concentrate it purchases; therefore, any recovery over 96% results in metal recovery revenue for the Fund.

SALES

Zinc metal is used in a wide range of industries. Its major use, which accounts for 50% of the total zinc metal consumption in North America, is in the production of galvanized steel.

Zinc sales in the first quarter were solid at 66,554 tonne, matching production levels, and up from 62,248 tonnes in the first quarter of 2009. Zinc sales reflect a better customer mix with the steel sector showing the strongest growth in demand. In 2010, over 80% of the Fund's zinc metal sales are expected to be made to customers under annual contracts.

Inventories of zinc metal at end of March 2010 remained unchanged from year-end 2009.

The Fund's target for 2010 sales is 265,000 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 3.9 cents US per pound in the first quarter of 2010, compared to 2.2 cents US per pound in the first quarter of 2009. The increase in realized premiums in the first quarter of 2010 reflects a higher level of contract premiums as well as a pick-up in demand that has been witnessed in 2010. In addition, first quarter 2009 premiums were negatively impacted by the liquidation of an inventory of jumbos, for which there was low demand.

The forecast for zinc premiums for 2010 remains at approximately 4.0 cents US 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 first quarter of 2010, the Fund generated $5.9 million in revenue from the sale of its copper cake and sulphuric acid, compared to $10.9 million in the first quarter of 2009.

Copper revenues were largely unchanged at $3.4 million although sales were lower and the copper price was higher during the first quarter of 2010. The Fund expects copper shipments to increase throughout the remainder of 2010 based on sales agreements that have been reached with copper smelters in the first quarter of 2010.

Revenues from the sale of sulphuric acid fell to $2.2 million from $7.2 million in the first quarter of 2009. Although volume was higher during the quarter, the acid netback (which consists of the selling price of acid less selling and transportation costs and reseller profit) was US$21 per tonne compared to US$68 per tonne in the first quarter of 2009. 

Sulphuric Acid

The Fund produces sulphuric acid, a byproduct of the zinc refining process. Xstrata Canada Corporation has an agency agreement with the Fund to sell its sulphuric acid. The production of zinc and sulphuric acid is linked.

The following table provides a summary of the sulphuric acid production, sales, selling price and netbacks in the first quarters of 2010 and 2009:

  First Quarter
  2010 2009
     
Sulphuric acid production (tonnes) 103,177 97,982
Sulphuric acid sales (tonnes) 102,490 85,564
Average pool selling price (US$/tonne) 82 123
     
Sulphuric acid netback (US$/tonne) 1 21 68
1 after deduction for selling and transportation costs and reseller profit    

In the first quarter of 2010, the Fund operated at normal operating capacity and, therefore, sulphuric acid production was in line with historical results. However in the first quarter of 2009, while January and February production levels were normal, March production was negatively impacted by the fact that the Fund ran at 80% of its normal operating level.

The netback in the first quarter of 2010 decreased to US$21 per tonne from US$68 per tonne in the first quarter of 2009. In the first quarter of 2010, the decrease was due to lower selling prices on contract business. 

The majority of the Fund's sulphuric acid is sold to the U.S. and Canadian industrial market. In 2010, approximately 75% of the Fund's sulphuric acid is sold under annual contracts in order to ensure the continued sale of sulphuric acid in a safe and efficient manner on a long-term basis. The remaining 25% of the sulphuric acid is sold based on short-term prices that are negotiated between the buyer and the seller. As a result, the Fund's netback is much less volatile than what would be seen on the spot market. 

The fundamentals for sulphuric acid also continue to improve as supply has tightened and industrial demand has grown in step with increased manufacturing activity in the first quarter of 2010. Demand for sulphuric acid outside of the industrial market has been very strong and regular contract customers are witnessing a pick-up in demand from their customers. The strike at the Sudbury operations of Vale Inco continues to have a positive impact on the regional supply/demand balance for sulphuric acid.

EXCHANGE RATE

A stronger Canadian dollar has a negative impact on the Fund's financial results. In the first quarter of 2010, a one-cent Canadian appreciation in the average Canadian/US exchange rate would have negatively impacted the Fund's cash from operations 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. Production costs in the first quarter of 2010 were lower at $42.7 million, compared to $44.2 million in the first quarter of 2009.

CAPITAL EXPENDITURES

Capital expenditures in the first quarter of 2010 were $6.2 million, compared to $5.8 million in the first quarter of 2009.

For 2010, the forecast for capital spending is $24 million, unchanged from 2009. The bulk of the spending will be on sustaining capital to keep the plant in good working order, including $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 first quarter of 2010 was $17.3 million compared to $12.2 million in the first quarter of 2009. During the first quarter of 2010, non-cash working capital increased by $12.5 million due to a reduction in accounts payable and accrued liabilities that resulted from the timing of zinc concentrate arrivals.

Standardized Distributable Cash

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

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

A reconciliation of cash realized from operations to standardized distributable cash for the periods ending March 31, 2010 and 2009 is provided below:

($ thousands) First Quarter  
  2010   2009  
Cash realized from operations   4,804     15,672  
Less: portion attributable to minority interest   (1,201 )   (3,918 )
Cash realized from operations attributable to Priority Unitholders (a)   3,603     11,754  
             
Capital adjustments:            
  Purchase of property, plant and equipment   (6,223 )   (5,786 )
  Proceeds on sale of property, plant and equipment   8     -  
  Accretion on long-term debt   (64 )   (64 )
    (6,279 )   (5,850 )
Plus: portion of capital adjustments attributable to minority interest   1,570     1,463  
Capital adjustments attributable to Priority Unitholders (b)   (4,709 )   (4,387 )
             
Standardized distributable cash (a) + (b)   (1,106 )   7,367  
             
Other adjustments including discretionary items:            
  Increase/(decrease) in non-cash working capital   12,543     (3,486 )
  Decrease/(increase) in operating reserve   (11,068 )   913  
  Less/(plus) portion of other adjustments attributable to minority interest   (369 )   643  
  Impact of Ordinary Unit subordination   -     750  
Distributions declared to Priority Unitholders   -     6,187  
             
Weighted average number of Priority Units outstanding (basic and diluted)   37,497,975     37,497,975  
Standardized distributable cash per Priority Unit $ (0.03 ) $ 0.20  
Distributions declared per Priority Unit $ -   $ 0.165  
             

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 February 2009, the distribution to Priority Unitholders was reduced to 4 cents per unit. The subordination feature was triggered, and the Ordinary Unitholders received no distributions. The amount that was paid to the Priority Units and was not paid to the Ordinary Units will accumulate and be paid to the Ordinary Units if there is excess cash available for distribution above the Base Distribution amount of 8.333 cents per unit in a subsequent month. As of March 31, 2010, the accumulated distribution deficiency was $2.5 million.

In the first quarter of 2010, standardized distributable cash was $(1.1) million and distributions declared to Priority Unitholders were nil.

In the first half of 2009, market conditions deteriorated rapidly and this impacted financial and operating results as well as distributions. In response to these market conditions, the Fund took a number of steps to maintain liquidity and a strong balance sheet including the decision to suspend distributions. 

Market conditions picked up in the second half of 2009 and early 2010, with improved demand and restocking by our consumers being the main drivers. The Fund returned to normal operating capacity in October. In spite of these favourable trends, the Fund still faces some challenges, such as low zinc premiums and a stronger Canadian dollar. In addition, the Fund has started to prepare for the renewal of both its Revolving Facility and its senior secured notes.

Limitation on Distributions

On April 19th, 2010, the Fund entered into an amendment with the Syndicate to extend the maturity date of its Revolving Facility from May 3, 2010 to November 3, 2010. The extension will enable the Fund to pursue the refinancing of its existing indebtedness, including the Revolving Facility and its $153.5 million Notes that mature on December 20, 2010.

One of the requirements of the extension of the Revolving Facility is that no cash distributions be paid to Unitholders during the Extension Period.

The Fund expects to be required to reduce the amount of long-term debt within its capital structure as it moves towards May 2, 2017 when the current term of the long-term fixed processing fee supply contract (the "Supply and Processing Agreement") expires. As a result, the Fund expects that the refinancing of its long-term debt that matures in 2010 will include mandatory repayments of principal over the remainder of the term of the Supply and Processing Agreement. These mandatory repayments are expected to reduce the Fund's future free cash flow and cash available for distribution.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2010, the Fund's total debt (short and long-term) was $209.4 million, up from $207.9 million at the end of December 2009. The Fund's cash and cash equivalents at March 31, 2010 totalled $2.9 million, unchanged from 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. The maximum available to be drawn at any time has been reduced to $120 million from $200 million to reflect the lower zinc price environment since the amendment in the fourth quarter of 2007. The decrease in the maximum available credit will reduce the standby fees that the Operating Trust is currently paying.

The Fund has the ability to draw down the Revolving Facility in both Canadian and US dollars. The amount available based on the Fund's March 31, 2010 balance sheet was $120 million of which $56 million was drawn.

Fluctuations in working capital balances as a result of operations are generally funded by, or used to repay, the Revolving Facility. During the first quarter of 2010, $110.2 million of debt was drawn and $108.8 million was repaid related to the fluctuations in working capital.

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

Revolving Facility Extension and Update on Financing

The Fund has received an extension to its Revolving Facility from May 3, 2010 to November 3, 2010. Discussions to complete a longer-term extension of the Revolving Facility with the Syndicate will continue with the intention to have the extension coincide with the refinancing of the Notes prior to November 3, 2010, the end of the Extension Period.

Over the course of 2010, the Fund expects to approach the senior secured noteholders with the goal of refinancing the Notes on a long-term basis.

The Fund was encouraged by the April 20, 2010 announcement that DBRS had confirmed the rating of the senior secured notes at BBB, with a Stable trend. In addition, the senior secured notes have been removed from Under Review with Negative Implications due to DBRS's expectation that the Trust will be able to successfully refinance both the senior secured notes and its short-term credit facilities in a timely fashion. A rating is not a recommendation to buy, sell or hold securities and may be subject to revisions or withdrawal at any time by a rating organization.

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

The main covenants under the Revolving Facility agreement require the Fund to maintain, at the end of each quarter, a leverage ratio, an interest coverage ratio, and a current ratio.

  • The leverage ratio at the end of each quarter, on a rolling four-quarter basis, is calculated by dividing the total debt at the end of the period by the earnings before interest, taxes, depreciation and amortization ("EBITDA") for the period, as defined in the Revolving Facility agreement for the period. For the period ending March 31, 2010, the leverage ratio must not exceed 5.25 to 1. For periods ending after March 31, 2010, the leverage ratio 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 plus the Revolving Facility, as defined in the Revolving Facility agreement, at the balance sheet date, and must be no less than 1 to 1.

All of the covenants under the Revolving Facility agreement were met as at March 31, 2010 and are summarized below:

  March 31, 2010
Leverage ratio1 (must not exceed 5.25 to 1) 3.9 to 1
   
Interest coverage ratio1 (must be no less than 3 to 1) 4.7 to 1
   
Current ratio (must be no less than 1 to 1) 1.5 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 during the three month period ending March 31, 2010.

The Fund has provided covenants to the Noteholders, including the commitment to the punctual payment of principal and interest accrued on the Notes, in accordance with the terms of the Trust Indenture. The Fund is required to maintain a letter of credit or cash, for the benefit of the holders of the Notes, for an amount equal to or greater than three months' interest expense. The letter of credit amounted to $2.6 million as at March 31, 2010. All of the covenants under the Trust Indenture were met for the three month period ending March 31, 2010.

As at March 31, 2010, the Fund had a working capital deficiency of $86.0 million, due to the upcoming maturity in 2010 of the Revolving Facility and the Notes. As discussed above, the Fund expects to approach the Syndicate and the Noteholders in the course of 2010 with the goal of refinancing the Revolving Facility and the Notes on a long-term basis. The refinancing is expected to eliminate the current working capital deficiency. The Fund's inability to further extend the Revolving Facility or refinance the Notes may require it to seek additional financing sources. The refinancing may be done at less favourable terms than what currently exist, and it may require that a portion of the debt be repaid. There is no assurance that such indebtedness could be renewed or refinanced, which can have a material adverse effect on the Fund.

The Fund has provided forward-looking information regarding a longer term extension of the Revolving Facility and the refinancing of the 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

The Fund is providing guidance for 2010 production, sales, premiums, processing fee and capital expenditures

Production: 265,000 tonnes
Sales: 265,000 tonnes
Premiums: 4 cents US per pound
Processing fee: 38.5 cents per pound
Capital expenditures $24 million

The Fund's ability to meet the targets identified above is subject to the various risks and the assumptions. Some of these risks and assumptions underlying this information can be found in the "Forward-looking Information" below.

FORWARD-LOOKING INFORMATION

This report, including the "Outlook" section, contains forward-looking statements within the meaning of securities laws. Amongst others, the Fund has made forward-looking statements for 2010 on production, sales, premiums, the processing fee and capital expenditures. 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 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.

Examples of such risks, uncertainties and other factors include, but are not limited to, the following: (1) the Fund's ability to operate at normal production levels; (2) the dependence upon the continuing supply of zinc concentrates (terms of the Supply and Processing Agreement); (3) the demand for zinc metal, sulphuric acid and copper in cake; (4) the ability to manage sulphuric acid inventories; (5) changes to the supply and demand for specific zinc metal products and the impact on the Fund's realized premiums; (6) the impact of month prior pricing; (7) the ability of the Fund to continue to service customers in the same geographic region; (8) the sensitivity of the Fund's Net Revenues to reductions in realized zinc metal prices including premiums, copper prices, sulphuric acid prices; the strengthening of the Canadian dollar vis-à-vis the US dollar; and increasing transportation and distribution costs; (9) the sensitivity of the Fund's production costs to increases in electricity rates, other energy costs, labour costs and operating supplies used in its operations, the sensitivity of the Fund's interest expense to increases in interest rates; (10) changes in recoveries and capital expenditure requirements; (11) the negotiation of collective agreements with its unionized employees; (12) general business and economic conditions; (13) transportation disruptions; (14) the legislation governing air emissions, discharges into water, waste, hazardous materials and workers' health and safety, as well as the impact of future legislation and regulations on expenses, capital expenditures, taxation and restrictions on the operation of the Processing Facility; (15) potential negative financial impact from regulatory investigations, claims, lawsuits and other proceedings; (16) loan default and refinancing risk; and (17) reliance on Xstrata Canada for the operation and maintenance of the Processing Facility.

Forward-looking statements can generally be identified by the use of the conditional tense, the words "may", "should", "would", "believe", "plan", "expect", "intend", "anticipate", "estimate", "foresee", "objective" or "continue" or the negative of these terms or variations of them or words and expressions of similar nature. Actual results could differ materially from the conclusion, forecast or projection stated in such 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 results 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 report, including the "Outlook" section, 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, 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 CEZinc processing facility is operated and managed by Canadian Electrolytic Zinc Limited.

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

   
 NORANDA INCOME FUND  
   
 INTERIM CONSOLIDATED BALANCE SHEETS  
   
 (unaudited)  
   
 ($ thousands)  
         
         
  March 31   Dec. 31  
   2010    2009  
ASSETS        
         
Current assets:        
Cash and cash equivalents 2,899   2,895  
Accounts receivable        
  Trade 81,909   77,126  
  Xstrata Canada 14,470   8,270  
Commodity hedging instruments 1,854   4,409  
Inventories 96,695   110,875  
Prepaids and other assets 1,890   949  
  199,717   204,524  
         
Long-term commodity hedging instrument 536   1,110  
Property, plant and equipment 293,578   295,756  
  493,831   501,390  
         
LIABILITIES AND EQUITY        
         
Current liabilities:        
Accounts payable and accrued liabilities        
  Trade 16,998   16,254  
  Xstrata Canada 56,644   72,477  
Commodity financial instruments 766   3,587  
Firm commitments 1,919   4,112  
Current portion of the long term debt 209,364   207,886  
  285,691   304,316  
         
Long-term firm commitments 556   1,111  
Future tax liability 14,641   13,147  
Future site restoration and reclamation 9,186   9,006  
Interests of Ordinary Unitholders 51,479   48,619  
         
Unitholders' Interest:        
Unitholders' equity 191,273   191,273  
Deficit (58,995 ) (66,082 )
  132,278   125,191  
  493,831   501,390  
   
NORANDA INCOME FUND  
   
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND DEFICIT  
AND COMPREHENSIVE INCOME (LOSS)  
   
(unaudited)  
   
($ thousands)  
         
  Three months  
  ended March 31  
         
  2010   2009  
             
Revenues            
Sales   171,157     106,103  
Transportation and distribution costs   (3,550 )   (3,625 )
    167,607     102,478  
             
Raw material purchase costs   101,011     41,517  
Revenues less raw material purchase costs   66,596     60,961  
Other expenses            
Production   42,691     44,153  
Selling, general and administration   5,180     4,673  
Foreign exchange (gain) loss   (2,068 )   1,848  
Commodity hedging loss   381     72  
Financial instruments (gain) loss   (2,821 )   2,769  
Amortization of property, plant and equipment   8,551     8,370  
Reclamation   177     252  
    52,091     62,137  
Earnings (loss) before interest and minority interest and income tax   14,505     (1,176 )
Interest expense, net   3,064     2,475  
Earnings (loss) before minority interest and income tax   11,441     (3,651 )
Minority interest in earnings for Ordinary Unitholders   2,860     (913 )
Earnings (loss) before income tax   8,581     (2,738 )
Income tax expense   1,494     -  
Net earnings (loss) and comprehensive income (loss)   7,087     (2,738 )
             
Deficit beginning of period   (66,082 )   (52,091 )
Distributions to Priority Unitholders   -     (6,187 )
             
Deficit end of period   (58,995 )   (61,016 )
             
             
Net earnings per Priority Unit (basic and diluted) $ 0.19   $ (0.07 )
             
Weighted average Priority Units outstanding   37,497,975     37,497,975  
   
NORANDA INCOME FUND  
   
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS  
   
(unaudited)  
   
($ thousands)  
   
   Three months  
   ended March 31  
  2010   2009  
         
Cash realized from (used for) operations:        
Net earnings (loss) for the period 7,087   (2,738 )
Items not affecting cash:        
  Amortization of property, plant and equipment 8,551   8,370  
  Reclamation 177   252  
  Minority interest in earnings for Ordinary Unitholders 2,860   (913 )
  Future income tax expense 1,494   -  
  Mark-to-market loss (gain) on commodity hedging instruments 381   72  
  Mark-to-market loss (gain) on financial instruments (1,281 ) 2,769  
  Change in fair value of embedded derivatives (2,171 ) 3,934  
  Accretion on long-term debt 64   64  
  Loss from sale of property, plant and equipment 182   457  
  Site restoration expenditures 3   (81 )
  17,347   12,18  
Net change in non-cash working capital items (12,543 ) 3,486  
  4,804   15,672  
         
Cash realized from (used for) investment activities:        
Purchases of property, plant and equipment (6,223 ) (5,786 )
Proceeds on sales of property, plant and equipment 8   -  
  (6,215 ) (5,786 )
         
Cash realized from (used for) financing activities:        
         
Distributions - Priority Unitholders -   (7,875 )
  - Ordinary Unitholders -   (2,125 )
Long-term debt issued under the Revolving Facility 110,215   65,603  
Long-term-debt repaid under the Revolving Facility  (108,800 ) (68,316 )
  1,415   (12,713 )
         
Change in cash and cash equivalents during the period 4   (2,827 )
         
Cash and cash equivalents, beginning of period 2,895   3,455  
Cash and cash equivalents, end of period 2,899   628  

Contact Information

  • Noranda Income Fund
    Michael Boone
    Vice President & Chief Financial Officer of Canadian
    Electrolytic Zinc Limited, Noranda Income Fund's Manager
    416 775-1561
    mboone@xstrata.ca