NORANDA INCOME FUND
TSX : NIF.UN

NORANDA INCOME FUND

July 30, 2009 14:04 ET

Noranda Income Fund Reports Second Quarter Net Loss of $0.7 Million

VALLEYFIELD, QUEBEC--(Marketwire - July 30, 2009) - The Noranda Income Fund (the "Fund") (TSX:NIF.UN) reported a net loss of $0.7 million for the second quarter of 2009, compared to net earnings of $3.7 million in the same quarter a year ago.

"The second quarter was challenging for the Fund. The combination of operating the plant at 80% capacity, very weak byproduct revenues, lower zinc metal sales and relatively low premiums resulted in the Fund recording a $0.7 million loss. In response to these market conditions, we have suspended the monthly distribution to Priority Unitholders(1) starting in the month of July." said Mario Chapados, President and Chief Executive Officer of the Noranda Income Fund's Manager. "We regret the suspension of the monthly distribution to Unitholders. As evidenced by the second quarter results, profitability and cash flow have been negatively impacted by operating at less than full capacity and by weak market conditions. In order to maintain liquidity and protect the long-term viability of the Fund, the Board of Trustees felt that it was prudent to stop paying the monthly cash distribution until there is an overall improvement in the economic outlook for the Fund."

"When we look out to the second half of the year, we are seeing some encouraging signs, but investors are cautioned that this improvement is from a very low level. Zinc demand from steel mills appears to have stabilized as inventories are now in line with current consumption from the automotive and construction sectors, and customers are now expecting an improvement in orders for the third quarter. In addition, with the expansion of the slab line now in place at the Processing Facility, the Fund should be able to increase spot sales going forward and reduce zinc metal inventories. In addition, there is a potential for the regional supply demand balance for sulphuric acid to improve with the strike at the Sudbury operations of Vale Inco. For the third quarter of 2009, the Fund expects that premiums to be about 4.0 cents US per pound based on the current expected sales mix."

The outlook for third quarter 2009 premiums is subject to various risks and uncertainties. The assumptions can be found in the "Forward-looking Information" below.

(1) Monthly distributions have not been paid to Ordinary Unitholders since February 2009 when the Processing Facility reduced production to 80% of the 2008 level because of the weakness in sulphuric acid sales and the shortage of sulphuric acid storage capacity.

Financial Results

This press release of the financial position and results of operations of the Fund should be read in conjunction with the unaudited consolidated interim financial statements of the Fund for the three and six months ended June 30, 2009 and with the audited consolidated financial statements of the Fund and the notes thereto for the period ended December 31, 2008. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

This press release is based on various assumptions (see "Forward-looking Information" below.) All dollar amounts are shown in Canadian dollars unless otherwise specified. The press release has been prepared as of July 30, 2009. Additional information relating to the Fund, including the Fund's annual information form is available on SEDAR at www.sedar.com.



Q2 2009 Highlights

Second Quarter Year-to-date
2009 2008 2009 2008
---- ---- ---- ----
Zinc metal production (tonnes) 53,062 67,355 111,142 131,415
Zinc metal sales (tonnes) 50,591 73,847 112,839 136,004
Processing fee (cents/pound) 38.0 37.5 38.0 37.5
Zinc metal premiums (US$/pound) 0.047 0.060 0.033 0.064
Byproduct revenues ($ millions) 3.5 14.6 14.4 25.4
Average US/Cdn. exchange rate 1.167 1.010 1.206 1.007


RESULTS OF OPERATIONS

Consolidated Net Earnings (Second quarter 2009 compared to second quarter 2008)

Revenues less raw material purchase costs ("Net Revenues") in the second quarter of 2009 were $37.5 million, compared to $75.8 million in the same quarter of 2008. The $38.3 million or 50% decrease was due to lower sales, premiums and byproduct revenues partially offset by higher recoveries and a weaker Canadian dollar.

During the second quarter, the profit margin (difference between LME price for zinc and the carrying cost) on the Fund's inventory of both concentrate and metal, increased by approximately $3.8 million because some higher-priced inventory was sold. This resulted in higher raw material purchase costs and lower realized Net Revenues. This is important because of the negative impact it had on second quarter earnings.

The Fund makes a portion of its sales based on the average price from the previous month (month prior pricing). In a market in which zinc prices are rising, a portion of the Fund's revenues will lag behind the higher zinc prices; while in a market in which zinc prices are falling, a portion of the Fund's revenues will benefit from higher zinc prices from the month prior. In the second quarter of 2009, month prior pricing had a negative impact of approximately $0.9 million on the Fund's Net Revenues, as the average monthly zinc price increased from US$0.55 per pound in March 2009 to US$0.71 per pound in June 2009. In the second quarter of 2008, month prior pricing had a positive impact of approximately $1.7 million on the Fund's Net Revenues, as the average monthly zinc price decreased from US$1.14 per pound in March 2008 to US$0.86 per pound in June 2008.



Production Cost Breakdown

($ millions) Second Quarter Increase/
2009 2008 (Decrease)
---- ---- ----------
Labour 13.8 16.5 (2.7)
Energy 13.5 15.2 (1.7)
Operating supplies 7.4 8.6 (1.2)
Other 3.4 4.1 (0.7)
---- ---- ----------
Production cost before changes in inventory 38.1 44.4 (6.3)

Change in inventory (2.6) 6.6 (9.2)
---- ---- ----------
35.5 51.0 (15.5)


Production costs in the second quarter of 2009 were $35.5 million, $15.5 million lower than the $51.0 million recorded in the second quarter of 2008. Production during the quarter ran at 80% of 2008 level resulting in lower energy and operating supplies costs. Labour costs were reduced as a result of the initiatives introduced in March to cut manpower costs. The $9.2 million decrease from the change in inventory resulted from an increase of inventory in the second quarter of 2009 compared to a drawdown in inventory in the second quarter of 2008.

Selling, general and administration costs in the second quarter of 2009 were $4.7 million, compared to $4.8 million in the same period of 2008.

The foreign exchange gain for the second quarter of 2009 was $2.9 million, compared to a gain of $1.7 million in the second quarter of 2008. The foreign exchange gain was a result of a strengthening Canadian dollar against the US dollar on the Fund's net monetary liabilities. The foreign exchange gain was more than 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). During the second quarter of 2009, the Fund estimates that the overall impact of the strengthening of the Canadian dollar negatively impacted the Fund's earnings before minority interest by $1.7 million. The Fund maintains cash and cash equivalents, accounts receivable and accounts payable and long-term debt in US dollars.

In the second quarter of 2009, the commodity hedging gain was $0.1 million and the commodity financial instruments gain was $4.9 million. In the second quarter of 2008, the commodity hedging loss was $0.1 million and the commodity financial instruments loss was $3.6 million. During the period, the change in the market value of the Fund's financial instruments resulted in these amounts being recorded.

In the second quarter of 2009, amortization was $8.1 million compared to $9.4 million in the second quarter of 2008. The decrease was due to an increase in zinc metal inventory during the second quarter of 2009 compared to a decrease in zinc metal inventory during the second quarter of 2008.

The reclamation recovery for the three months ended June 30, 2009 was $4.3 million compared to an expense of $0.2 million in the same period of 2008. During the quarter, a review of the site restoration and reclamation expenditures was completed by the Fund, including work from a third-party engineering firm. 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. The sources of the reduced reclamation spending came from the following items:

- The Fund identified opportunities to recycle some of the residues in operations, therefore, reducing the amount of residues that need to be treated; and

- The projected life of some of the residue ponds was extended by optimizing their storage capacity, thereby deferring the timing of some of the expenditures for the projects.

In second quarter of 2009, net interest expense was $2.4 million compared to $3.5 million in the second quarter of 2008. The decrease in interest expense was due to a reduction of outstanding debt and lower average variable interest rates during the second quarter of 2009 compared to the second quarter of 2008.

Minority interest in earnings of subsidiaries in the second quarter of 2009 was a credit of $0.2 million, down from an expense of $1.2 million in the second quarter of 2008. The decline was due to the Fund's lower earnings in 2009.

Consolidated Net Earnings (Six months 2009 compared to six months of 2008)

The net loss for the first six months of 2009 totalled $3.4 million, compared with net earnings of $9.9 million for 2008. The $13.3 million decrease was mainly due to lower production, sales, byproduct revenues and premiums, partially offset by lower interest expense, reclamation recovery and a weaker Canadian dollar.

Net Revenues the first six months of 2009 were $98.4 million, compared to $144.2 million in 2008. The $45.8 million decrease was due to lower sales volumes, byproduct revenues, and premiums, partially offset by the impact of a weaker Canadian dollar.



Production Cost Breakdown


($ millions) Year-to-date Increase/
2009 2008 (Decrease)
---- ---- ----------
Labour 28.8 32.3 (3.5)
Energy 29.8 32.4 (2.6)
Operating supplies 16.0 17.5 (1.5)
Other 6.3 7.2 (0.9)
---- ---- ----------
Production cost before changes in inventory 80.9 89.4 (8.5)

Change in inventory (1.3) 3.7 (5.0)
---- ---- ----------
79.6 93.1 (13.5)


Production costs the first six months of 2009 were $79.6 million, $13.5 million lower than the $93.1 million recorded in 2008. Production in 2009 has run at 80% of the 2008 level since March, resulting in lower energy and operating supplies costs. Labour costs were reduced as a result of the initiatives introduced in March to cut manpower costs. The $5.0 million decrease from the change in inventory resulted from an inventory drawdown during the same period of 2008.

Selling, general and administration costs the first six months of 2009 were $9.3 million, compared to $9.7 million in 2008.

The foreign exchange gain the first six months of 2009 was $1.0 million, compared to a loss of $2.3 million in 2008. The foreign exchange gain was a result of a strengthening Canadian dollar on the Fund's net US 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 the first six months of 2009, the commodity financial instrument gain was $2.1 million and the commodity hedging gain was nil. During the year, the change in the market value of the Fund's financial instruments resulted in these amounts being recorded.

In the first six months of 2009, amortization was $16.5 million, $0.8 million lower than the $17.3 million incurred in the first six months of 2008. The decrease in amortization was in part due to higher sales during 2008.

In the first six months of 2009, reclamation was credit of $4.1 million, compared to an expense of $0.5 million which was recorded in the same period of 2008 (see above).

In the first six months of 2009, net interest expense was $4.8 million compared to $7.3 million in the same period of 2008. The decrease in interest expense was due to a lower average amount of long-term debt outstanding, as well as lower variable interest rates.

Minority interest in earnings of subsidiaries in the first six months of 2009 was a credit of $1.2 million, down from an expense of $3.3 million in the first six months of 2008. The decline was due to the Fund's lower earnings in 2009.



KEY PERFORMANCE DRIVERS

The following table provides a summary of the key performance drivers for
the second quarter and years 2009 and 2008:
--------------------------------------------------------------------------
Six Months
Second Quarter Ended June 30
2009 2008 2009 2008
--------------------------------------------------------------------------

Zinc metal production (tonnes) 53,062 67,355 111,142 131,415
Zinc metal sales (tonnes) 50,591 73,847 112,839 136,004
Zinc concentrate processed (tonnes) 104,502 130,656 222,361 255,424
Zinc recovery (%) 98.3 97.9 97.7 97.9
Processing fee (cents/pound) 38.0 37.5 38.0 37.5
Zinc metal premiums (US$/pound) 0.047 0.060 0.033 0.064
Byproduct revenues ($ millions) 3.5 14.6 14.4 25.4
Copper in copper cake production (tonnes) 604 791 1,432 1,458
Copper in copper cake sales (tonnes) 440 807 1,274 1,674
Sulphuric acid production (tonnes) 88,173 108,421 186,155 211,750
Sulphuric acid sales (tonnes) 94,978 127,139 180,542 219,214
Average LME zinc price (US$/pound) 0.67 0.96 0.60 1.03
Average LME copper price (US$/pound) 2.12 3.38 1.84 3.68
Sulphuric acid netback (US$/tonne) 2.75 61.38 34.46 51.66
Average US/Cdn. exchange rate 1.167 1.010 1.206 1.007
--------------------------------------------------------------------------


PRODUCTION

In the second quarter of 2009, zinc metal production was 53,062 tonnes, compared to 67,355 tonnes in the second quarter of 2008. Production was negatively impacted by the 20% reduction in production that remained in effect during the quarter. The reduction in output was due to the current weakness in sulphuric acid sales and the lack of sulphuric acid storage capacity at the plant and at third party storage facilities.

The outlook for the remainder of 2009 is uncertain with the duration and depth of the global crisis difficult to predict. Lower overall industrial activity has led to a significant drop in demand for zinc and sulphuric acid. Under these circumstances, it is very difficult to provide a reliable 2009 forecast for production. This decision will be re-assessed at the end of the third quarter of 2009.

RECOVERIES

Recoveries for the second quarter of 2009 were 98.3% compared to the 97.9% for the second quarter of 2008. 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.

As a result of the financial crisis, the demand for zinc from the major end use markets contracted in the fourth quarter of 2008. This trend continued into 2009, with real consumption reduced further as customers servicing the automotive and construction industries rebalanced their inventories with the current level of demand.

While second quarter orders from steel mills were 40% lower than in the same period a year ago, demand from the steel sector has stabilized. Many customers are now expecting some improvement in the third quarter.

As a result of the weakness in the steel sector's demand for the jumbo product, the Fund has increased its zinc slab casting capacity to provide for more commercial flexibility. Annual capacity on the existing slab line has been increased 30% to 100,000 tonnes. A second slab line is being commissioned adding a further 80,000 tonnes to 100,000 tonnes of annual slab capacity. With both lines running by the beginning of the third quarter, the Fund will have the possibility to produce up to 75% of its annual output as zinc slab. As a result, the Fund will be in a better position to make spot sales and reduce inventories.

Sales were 50,591 tonnes in the second quarter of 2009 compared to 73,847 tonnes in the second quarter of 2008. Inventories increased by 2,471 tonnes during the second quarter, but they have been reduced by 1,697 tonnes since the beginning of the year.

As the new slab capacity becomes operational, inventories are expected to be reduced by approximately 17,000 tonnes during the second half of the year. If successful, the Fund could realize an additional $3.4 million in earnings before interest, minority interest and amortization and reduce the carrying costs for the excess inventory by approximately $25 million during the second half of the year.

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

PREMIUMS

For the second quarter of 2009, premiums averaged 4.7 cents US per pound, compared to 6.0 cents US per pound in the second quarter of 2008. Realized premiums in the second quarter of 2009 were 2.5 cents US per pound higher than the previous quarter, when an inventory of jumbos was liquidated during a period of low demand.

The forecast for the zinc premiums during the second half of 2009 is approximately 4.0 cents US per pound, based on the current expected sales mix.

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

PROCESSING FEE

In 2009, the processing fee was increased to 38.0 cents per pound, compared to 37.5 cents per pound in 2008. 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 Processing Facility.

BYPRODUCTS

In the second quarter of 2009, the Fund generated $3.5 million in revenue from the sale of its copper cake and sulphuric acid, compared to $14.6 million in the second quarter of 2008. Both sulphuric acid and copper revenues were lower.

Revenues from the sale of sulphuric acid fell to $0.3 million from $7.9 million as a result of lower netbacks and sales volumes.

Copper revenues fell to $3.2 million from $6.7 million in 2008 as a result of lower copper prices and sales volumes in the second quarter of 2009. Some copper shipments were delayed from the second into the third quarter due to the timing of the shipments. Copper shipments are expected to be higher in the third quarter.

Sulphuric Acid

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

The following table provides a summary of the sulphuric acid production, sales, selling price and netbacks in the second quarter and first six months of 2009 and 2008:



-------------------------------------------------------------------------
Second Quarter Year-to-date
2009 2008 2009 2008
-------------------------------------------------------------------------
Sulphuric acid production (tonnes) 88,173 108,421 186,155 211,750
Sulphuric acid sales (tonnes) 94,978 127,139 180,542 219,214
Average pool selling price (US$/tonne) 67 114 94 103
Sulphuric acid netback (US$/tonne)(1) 3 61 34 52
-------------------------------------------------------------------------
(1) after deduction for selling and transportation costs and reseller
profit


Sulphuric acid production has been negatively impacted by the monthly 20% reduction in output since March 2009. The reduction in output was due to the current weakness in sulphuric acid sales and the lack of sulphuric acid storage capacity. With the continuing weakness in sulphuric acid demand, the production cutback has been extended until at least August.

The Fund's sulphuric acid sales slowed dramatically in the first half of 2009 because of the sharp drop in North American industrial activity. This resulted in lower orders for sulphuric acid as customers cut their production to reduce product inventories. The largest drop in orders came from pulp and paper and chemical processing consumers. At the same time, the fertilizer industry which has historically been a market for the Fund's spot sales operated at lower than expected level, offering minimal opportunities for spot sales during the first half of 2009.

Sulphuric sales of 94,978 tonnes during the second quarter of 2009 were in line with 80% production level at which the plant was operating.

Overall, the sulphuric acid market appears to have reached bottom with sales stabilizing in the last several months. In a continuing effort to alleviate the problem, Xstrata Canada is pursuing increased contractual and spot sales as agent on behalf of the Fund.

Most of the sales in the second quarter of 2009 were sold into a very weak market. The netback fell to US$3 per tonne from US$61 per tonne in the second quarter of 2008. Factors negatively impacting the second quarter netback included:

- One-time costs incurred to establish additional third-party storage facilities.

- Lower selling prices on contract business and purchase order business.

- Low selling prices on spot sales that were necessary to manage inventories.

There are a few signs that the fundamentals for sulphuric acid might improve in the remainder of the year.

- On July 13, 2009, the Sudbury operations of Vale Inco went on strike. Vale Inco is a major producer of sulphuric acid. If the strike continues for some time, it has the potential to positively impact the regional supply/demand balance for sulphuric acid.

- The opportunity to make sales outside of the industrial market has improved.

If there is an improvement in sulphuric acid fundamentals, it is expected to have a positive impact on the Fund's netbacks.

Having said this, the outlook for the remainder of 2009 is uncertain with the duration and depth of the global crisis difficult to predict. Lower overall industrial activity has led to a significant drop in demand for sulphuric acid. Under these circumstances, it is very difficult to provide a reliable 2009 forecast for netbacks and production levels. This decision will be re-assessed at the end of the third quarter of 2009.

The target for copper shipments and the outlook for sulphuric acid are subject to various risks and uncertainties. The assumptions for them can be found in the "Forward-looking Information" below.

EXCHANGE RATE

A weaker Canadian dollar has a positive impact on the Fund's financial results. In the second quarter of 2009, a one-cent Canadian depreciation in the average Canadian/US exchange rate would have positively impacted the Fund's cash available for distribution by approximately $0.125 million ($0.5 million on an annual basis). The average Canadian/US exchange rate depreciated from US$1.010 in the second quarter of 2008 to US$1.167 in the second quarter of 2009.

COSTS

Production costs include labour, energy, supplies and other costs directly associated with the production process. Production costs in the second quarter of 2009 were lower at $35.5 million, compared to $51.0 million in the second quarter of 2008.

CAPITAL EXPENDITURES

Capital expenditures in the second quarter of 2009 were $7.5 million, compared to $6.9 million in the second quarter of 2008. Regular maintenance accounted for $4.3 million, while profitability projects totalled $2.3 million, including $2.2 million for the new slab casting line.

During the first six months of 2009, capital expenditures totalled $13.3 million compared to $10.0 million in the same period of 2008.

For 2009, the forecast for capital spending is $24 million, $4 million lower than in 2008. The bulk of the spending will be on sustaining capital to keep the plant in good running order.

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

Operating Cash Flows

Cash realized from (used in) operations, before net change in non-cash working capital items in the second quarter of 2009 was $(2.0) million compared to $23.9 million in the second quarter of 2008. During the second quarter of 2009, non-cash working capital decreased by $19.9 million.

Cash realized from operations, before net change in non-cash working capital items in the first six months of 2009 was $10.2 million compared to $35.7 million in the same period of 2008. During the first six months of 2009, non-cash working capital decreased by $23.4 million due to a decrease in accounts receivable, and an increase in accounts payable and accrued liabilities partially offset by an increase in inventory.

Standardized Distributable Cash

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

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

A reconciliation of cash realized from operations to standardized distributable cash for the periods ending June 30, 2009 and 2008 is provided below:



Year-
($ thousands) Second Quarter to-date
2009 2008 2009 2008
---- ---- ---- ----
Cash realized from operations 17,962 26,514 33,634 33,614
Less: portion attributable to
minority interest (4,491) (6,629) (8,409) (8,404)
----------------------------------------------------------------------------
Cash realized from operations 13,471 19,885 25,225 25,210
attributable to Priority
Unitholders (a)

Capital adjustments:
Purchase of property, plant
and equipment (7,512) (6,869) (13,298) (10,026)
Proceeds from government
assistance - 478 - 478
Proceeds on sale of property,
plant and equipment - 97 - 172
Accretion on long-term debt (64) (64) (128) (128)
----------------------------------------------------------------------------
(7,576) (6,358) (13,426) (9,504)
Plus: portion of capital
adjustments attributable
to minority interest 1,894 1,589 3,357 2,376
----------------------------------------------------------------------------
Capital adjustments
attributable to
Priority Unitholders (b) (5,682) (4,769) (10,069) (7,128)
----------------------------------------------------------------------------
Standardized distributable
cash (a) + (b) 7,789 15,116 15,156 18,082

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

Other adjustments including
discretionary items:
Increase/(decrease) in non-cash (19,928) (2,644) (23,414) 2,091
working capital
Decrease/(increase) in
operating reserve 12,744 (4,762) 13,657 (702)
Decrease/(increase) in capital 1,298 - 1,298 -
reserve
Less/(plus) portion of other 1,472 1,852 2,115 (347)
adjustments attributable to
minority interest
Impact of Ordinary Unit 1,125 - 1,875 -
subordination
----------------------------------------------------------------------------
Distributions declared to
Priority Unitholders 4,500 9,562 10,687 19,124
----------------------------------------------------------------------------

Weighted average number of 37,497,975 37,497,975 37,497,975 37,497,975
Priority Units outstanding
(basic and diluted)
Standardized distributable cash
per Priority Unit $0.21 $0.40 $0.40 $0.48
Distributions declared per
Priority Unit $0.12 $0.255 $0.285 $0.51


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.

From February to June 2009, the distribution to Priority Unitholders was reduced to 4 cents per unit. The subordination feature was triggered, and since then, the Ordinary Unitholders have received no monthly distribution.

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 June 30, 2009, the accumulated distribution deficiency was $2.5 million.

In July 2009, the Fund suspended distributions to the Priority Unitholders as well. The Processing Facility has been operating sulphuric acid and zinc production at 80% of 2008 levels because of the weak demand for sulphuric acid. Profitability and cash flow have been negatively impacted by operating at less than full capacity and by weak market conditions. As a result, the Board of Trustees felt that it was prudent to stop paying the monthly cash distribution until there is an overall improvement in the economic outlook for the Fund.

In the second quarter of 2009, standardized distributable cash was $7.8 million and distributions declared to Priority Unitholders were $4.5 million.

Distribution Policy

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

Management and the board of trustees periodically review cash distributions, taking into consideration current and prospective performance. Some of the factors considered in decisions related to distributions include cash amounts required to service debt obligations, current business conditions, capital expenditures, taxes, working capital requirements and other items considered to be prudent. The Fund's policy is to make distributions to unitholders equal to cash flows from operations, before variations in working capital and such reserves for operating and capital expenditures as may be considered appropriate by the trustees. The Fund determines the cash available for distribution on a monthly basis for the unitholders of record of the Fund on the last business day of each calendar month and these distributions are to be paid on or about 25 days thereafter.

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

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

Notional Operating Reserve and Capital and Site Restoration Reserve

In order to meet the Fund's long-term goal to provide a stable, monthly distribution, a notional operating reserve is utilized. In a period in which standardized distributable cash, net of the changes in non-cash working capital attributable to Priority Unitholders, is greater than the distributions declared to the Priority Unitholders, the notional operating reserve will increase. In a period during which standardized distributable cash, net of the changes in non-cash working capital attributable to Priority Unitholders, is less than the distributions declared to the Priority Unitholders, the notional operating reserve will decrease. The notional operating reserve provides flexibility so that the Fund can maintain a stable, monthly distribution while adhering to the Fund's trust indentures and debt covenants. During the second quarter of 2009, the notional operating reserve decreased by $12.7 million to $3.0 million. This compares to a reserve of $16.6 million at the end of 2008.

The Fund also utilizes a notional capital and site restoration reserve. In a period in which unexpected or unusually high capital expenditures are required, the Fund has the ability to reduce the notional capital and site restoration reserve, while adhering to the Fund's trust indentures and debt covenants. As of June 30, 2009, the notional capital and site restoration reserve was $3.7 million (June 30, 2008 - $5.0 million).

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2009, the Fund's total debt (short-term and long-term) was $191.3 million, down from $196.6 million at the end of December 2008. The Fund's cash and cash equivalents at June 30, 2009 totalled $3.8 million, up from $3.5 million at December 31, 2008.

The Fund has a Revolving Facility in place that is used for general corporate purposes, including financing working capital, and that comes due on May 3, 2010. The amount available to be drawn on the Revolving Facility varies on a quarterly basis and will be based on percentages of the Fund's eligible inventory and accounts receivable from the previous quarter. The maximum available to be drawn at any time is $200 million and the minimum available to be drawn is $55 million. The Fund has the ability to draw down the Revolving Facility in both Canadian and US dollars. The amount available based on the Fund's June 30, 2009 balance sheet was $95 million of which $41 million was drawn (including $2.8 million for letters of credit).

Fluctuations in working capital balances as a result of operations are generally funded by, or used to repay, the Revolving Facility. During the second quarter of 2009, $53.0 million of debt was drawn and $55.8 million was repaid related to the fluctuations in working capital.

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

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

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

- The leverage ratio at the end of each quarter, on a rolling four-quarter basis, is calculated by dividing the total debt at the end of the period by the earnings before interest, taxes, depreciation and amortization ("EBITDA") for the period, as defined in the Revolving Facility agreement, and must 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 June 30, 2009 and are summarized below:



-------------------------------------------------------------------------
June 30, 2009
-------------------------------------------------------------------------
Leverage ratio (1) (must not exceed 4.25 to 1) 3.0

Interest coverage ratio (1) (must be no less than 3 to 1) 5.8

Current ratio (must be no less than 1 to 1) 1.4

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

(1) four quarter rolling average


The Revolving Facility agreement lists events that constitute an event of default should they occur. Events that constitute a default include the non payment by the Fund of principal, interest or other obligations of the Fund in respect of the Revolving Facility agreement and a breach of any covenant pursuant to the Revolving Facility agreement. If any event of default occurs under the Revolving Facility agreement, the Revolving Facility lenders will be under no further obligation to make advances to the Fund and may require the Fund to repay any outstanding obligation pursuant to the Revolving Facility agreement. There were no conditions of default existing during the three month period ending June 30, 2009.

Unless amended by the Revolving Facility syndicate, the Fund expects that it will be in breach of the Current ratio covenant as of December 31, 2009 because the Notes that mature on December 20, 2010 will be treated as current liabilities as of December 31, 2009. This breach in the covenant stems from the definition of current liabilities under the Revolving Facility agreement. The Fund has been in discussions with the Revolving Facility syndicate with respect of the expected breach and is working with them to address the issue prior to December 31, 2009.

If the Fund is required to continue to operate at less than full capacity and the weak market conditions continue, it may be in breach of the Leverage ratio covenant as of December 31, 2009. This stems from the reduced profitability and cash flow generated in 2009. The Fund has been in discussion with the Revolving Facility syndicate with respect of the potential breach and if required, it would work to address the issue prior to December 31, 2009. Management is encouraged by the near-term outlook where small improvements are expected in fundamentals for sulphuric acid and zinc, and it is now in a position to significantly reduce zinc inventories over the remainder of the year. The improved fundamentals and the reduction in zinc inventory are expected to result in an increase in the Fund's profitability and cash flow. In addition, a return to full production could also improve the Fund's economics and covenant ratio.

There is no assurance that the Fund will be successful in addressing the covenant breaches prior to December 31, 2009, which could have a material adverse effect on the Fund.

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 June 30, 2009. All of the covenants under the Trust Indenture were met for the three month period ending June 30, 2009.

The Fund expects to further extend the Revolving Facility beyond May 1, 2010 and to refinance the Notes as they approach their maturity date of December 20, 2010. The Fund's inability to further extend the Revolving Facility or refinance the Notes may require it to seek additional funding sources on less favourable terms. There is no assurance that such indebtedness could be renewed or refinanced, which can have a material adverse effect on the Fund. Further, should the Revolving Facility be extended, this may occur on terms less favourable than the current terms of these agreements, including changes in interest rates and restrictive covenants.

OUTLOOK

The Fund is providing guidance for third quarter 2009 premiums and annual targets for the processing fee and capital expenditures:



Q3 2009 target:
---------------
Zinc metal premium: 4.0 cents US per pound (based on the current
expected sales mix)

2009 annual targets:
--------------------
Processing fee: 38.0 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 can be found in the "Forward-looking Information" below.

FORWARD-LOOKING INFORMATION

The Fund has provided Forward-looking Information for the third quarter on premiums, and the 2009 estimated processing fee and capital expenditure forecast. The Fund provides this Information to shareholders and analysts because they are among the key drivers of the business. Readers are cautioned that this information may not be appropriate for other reasons.

Forward-looking Information involves known and unknown risks, uncertainties and other factors, which may cause the actual results or performance to be materially different from any future results or performance expressed or implied by the Forward-looking Information.

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

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

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



NORANDA INCOME FUND

INTERIM CONSOLIDATED BALANCE SHEETS

(unaudited)

($ thousands)

June 30 Dec. 31
2009 2008
---- ----
ASSETS

Current assets:
Cash and cash equivalents 3,802 3,455
Accounts receivable
Trade 44,106 32,520
Xstrata Canada 3,491 36,583
Firm commitments 2,579 4,773
Inventories 91,987 79,943
Prepaids and other assets 2,194 2,110
----- -----
148,159 159,384

Property, plant and equipment 303,948 308,258
------- -------
452,107 467,642
------- -------

LIABILITIES AND EQUITY

Current liabilities:
Accounts payable and accrued liabilities
Trade 15,112 22,819
Xstrata Canada 47,806 22,708
Commodity financial instruments 1,012 5,332
Distributions payable 1,500 4,250
Revolving facility 38,124 -
------ -----
103,554 55,109

Future tax liability 13,147 13,147
Future site restoration and reclamation 8,660 12,806
Long-term debt 153,128 196,615
Interests of Ordinary Unitholders 48,571 50,783

Unitholders' Interest:
Unitholders' equity 191,273 191,273
Deficit (66,226) (52,091)
-------- --------
125,047 139,182
-------- --------
452,107 467,642
-------- --------



NORANDA INCOME FUND

INTERIM CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND DEFICIT
AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

($ thousands)


Three months Six months
ended June 30 ended June 30
------------------- -------------------
2009 2008 2009 2008
---- ---- ---- ----

Revenues
Sales 85,583 195,598 191,685 362,663
Transportation and
distribution costs (2,980) (6,038) (6,605) (10,359)
------- ------- ------- --------
82,603 189,560 185,080 352,304
------- ------- ------- --------

Raw material purchase costs 45,119 113,799 86,636 208,141
------- ------- ------- --------

Revenues less raw material

purchase costs 37,484 75,761 98,444 144,163
------- ------- ------- --------
Other expenses
Production 35,485 50,972 79,638 93,053
Selling, general and
administration 4,655 4,805 9,328 9,660
Foreign exchange loss (gain) (2,895) (1,743) (1,047) 2,327
Commodity hedging loss (gain) (79) 89 (7) (201)
Commodity financial
instruments loss (gain) (4,887) 3,619 (2,118) 1,007
Amortization of property,
plant and equipment 8,123 9,360 16,493 17,272
Reclamation (4,326) 237 (4,074) 480
------- ------- ------- --------
36,076 67,339 98,213 123,598
------- ------- ------- --------

Earnings before interest,
minority interest and income
tax 1,408 8,422 231 20,565
------- ------- ------- --------

Interest expense, net 2,355 3,521 4,829 7,318
------- ------- ------- --------

Earnings (loss) before
minority interest (947) 4,901 (4,598) 13,247
------- ------- ------- --------

Minority interest in
earnings for Ordinary
Unitholders (237) 1,225 (1,150) 3,312
------- ------- ------- --------

Net earnings (loss) and
comprehensive income (loss) (710) 3,676 (3,448) 9,935
------- ------- ------- --------

Deficit beginning of period (61,016) (44,805) (52,091) (41,502)
------- ------- ------- --------

Distributions to Priority
Unitholders (4,500) (9,562) (10,687) (19,124)
------- ------- ------- --------

Deficit end of period (66,226) (50,691) (66,226) (50,691)
------- ------- ------- --------

Net earnings (loss) per
Priority Unit (basic and
diluted) $ (0.02) $ 0.10 $ (0.09) $ 0.26

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 Six months
ended June 30 ended June 30
------------------- ------------------
2009 2008 2009 2008
---- ---- ---- ----

Cash realized from (used for)
operations:
Net earnings (loss) for the period (710) 3,676 (3,448) 9,935
Items not affecting cash:
Amortization of property, plant and
equipment 8,123 9,360 16,493 17,272
Reclamation (4,326) 237 (4,074) 480
Minority interest in earnings for
Ordinary Unitholders (237) 1,225 (1,150) 3,312
Mark-to-market loss (gain) on
commodity financial instruments (4,966) 3,708 (2,125) 806
Change in fair value of embedded
derivatives (198) 5,414 3,736 3,453
Accretion on long-term debt 64 64 128 128
Loss from sale of property, plant
and equipment 275 253 732 540
Site restoration expenditures 9 (67) (72) (221)
------- -------- -------- --------
(1,966) 23,870 10,220 35,705
------- -------- -------- --------
Net change in non-cash working
capital items 19,928 2,644 23,414 (2,091)
------- -------- -------- --------
17,962 26,514 33,634 33,614
------- -------- -------- --------

Cash realized from (used for)
investment activities:
Purchases of property, plant and
equipment (7,512) (6,869) (13,298) (10,026)
Proceeds from Hydro Quebec -
incentive - 478 - 478
Proceeds on sales of property, plant
and equipment - 97 - 172
------- -------- -------- --------
(7,512) (6,294) (13,298) (9,376)
------- -------- -------- --------

Cash realized from (used for)
financing activities:

Distributions - Priority Unitholders (4,499) (9,562) (12,374) (19,124)
- Ordinary Unitholders - (3,187) (2,125) (6,375)
Long-term debt issued under the
Revolving Facility 53,000 100,628 118,000 196,220
Long-term-debt repaid under the
Revolving Facility (55,777) (102,000) (123,490) (192,000)
------- -------- -------- --------
(7,276) (14,121) (19,989) (21,279)
------- -------- -------- --------

Net change in cash and cash
equivalents during the period 3,174 6,099 347 2,959

Cash and cash equivalents, beginning
of period 628 562 3,455 3,702
------- -------- -------- --------
Cash and cash equivalents, end of
period 3,802 6,661 3,802 6,661
------- -------- -------- --------

Contact Information

  • 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