NORANDA INCOME FUND
TSX : NIF.UN

NORANDA INCOME FUND

May 04, 2009 13:00 ET

Noranda Income Fund Reports First Quarter Net Loss of $2.7 Million

OPERATING CASHFLOW CONSISTENT WITH Q1 2008

VALLEYFIELD, QUEBEC--(Marketwire - May 4, 2009) - The Noranda Income Fund (the "Fund") (TSX:NIF.UN) reported a net loss of $2.7 million for the first quarter of 2009, compared to net earnings of $6.3 million in the same quarter a year ago. Cash realized from operations before changes in working capital was $12.2 million, compared to $11.8 million in 2008.

The Fund would have recorded net earnings of $2.4 million in the first quarter of 2009, instead of a net loss, had it not been for the negative impact of two non-cash items. The combined impact of the commodity financial instrument loss and the change in the value of embedded derivatives relating to the provisional pricing in zinc concentrate purchases, negatively impacted net earnings in the quarter by $6.8 million, or $5.1 million after minority interest.

"During the first quarter of 2009, the Fund witnessed very weak demand for zinc and sulphuric acid. This translated into lower zinc premiums for the quarter as some spot sales were required to manage inventories. As previously announced, poor demand for sulphuric acid required the Fund to reduce March output by approximately 20%, compared to the first quarter of 2008. Copper prices, which were almost 50% lower than a year ago, negatively impacted copper revenues. Lower copper byproduct revenue, was offset by higher sulphuric acid netbacks as compared to the first quarter of 2008 as a result of the contracts that were negotiated in 2008. In response to these market conditions, the Fund has taken a number of steps to maintain liquidity and a strong balance sheet, including reducing the monthly distribution." said Mario Chapados, President and Chief Executive Officer of the Noranda Income Fund's Manager. "For the second quarter of 2009, the Fund expects that premiums to be about 3.5 to 4.0 cents US per pound."

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

Financial Results

This analysis of the financial position and results of operations of the Fund should be read in conjunction with the unaudited consolidated interim financial statements of the Fund for the three months ended March 31, 2009 and with the audited consolidated financial statements of the Fund and the notes thereto for the period ended December 31, 2008.

This press release is based on various assumptions (see "Forward-looking Information" below.) All dollar amounts are shown in Canadian dollars unless otherwise specified. The analysis has been prepared as of May 4, 2009. Additional information relating to the Fund, including the Fund's annual information form is available on SEDAR at www.sedar.com.



Q1 2009 Highlights

First Quarter
2009 2008
------ ------
Zinc metal production (tonnes) 58,080 64,060
Zinc metal sales (tonnes) 62,248 62,157
Processing fee (cents/pound) 38.0 37.5
Zinc metal premiums (US$/pound) 0.022 0.069
Byproduct revenues ($ millions) 10.9 10.8
Average US/Cdn. exchange rate 1.245 1.004


Findings of the Independent Committee Regarding Sulphuric Acid

In February 2009, the Fund announced that it had received notice from its sales agent, Xstrata Canada Corporation ("Xstrata Canada") that it was unable to arrange for sales and/or temporary storage for sulphuric acid in quantities equal to the normal rate of production (the "Acid Event Notice"). As a result, March and April production of sulphuric acid and zinc were reduced by approximately 20% and May production will be reduced by approximately the same amount.

Due to the strategic implications for the Fund and the negative impact of the reductions in sulphuric acid and zinc production on the Fund's profitability and cash flows, the Board of Trustees created an Independent Committee comprised of Lisa de Wilde (Chair), James C. Bacon, Gerard A. Limoges and John C. Eby to review the Acid Event Notice and to ensure the Fund is being treated fairly by its sales agent, Xstrata Canada.

The Independent Committee reported its findings to the Board of Trustees on May 4th, 2009. The Committee reported that, after consultation with independent legal advisors, external auditors as well as an industry expert, it is satisfied with the information provided by Xstrata Canada and has concluded that Xstrata Canada had a reasonable basis for sending the Acid Event Notice. The Independent Committee has also determined that the principles used by Xstrata Canada to allocate the production cuts amongst the Fund and the other Xstrata refineries are fair to the Fund. The Independent Committee will continue to monitor the application of such principles to the Fund's production and sales of sulphuric acid.

RESULTS OF OPERATIONS

Consolidated Net Earnings (First quarter 2009 compared to first quarter 2008)

Revenues less raw material purchase costs ("Net Revenues") in the first quarter of 2009 were $61.0 million, compared to $68.4 million in the same quarter of 2008. The $7.4 million decrease was due to lower premiums and copper revenues and the non-cash impact of change in the Fund's embedded derivatives, partially offset by higher sulphuric acid revenues and processing fee, and a weaker Canadian dollar.



Production Cost Breakdown
($ millions) First Quarter Increase/
2009 2008 (Decrease)
----- ----- ----------
Labour 16.3 17.1 (0.8)
Energy 16.4 17.3 (0.9)
Operating supplies 8.7 9.0 (0.3)
Other 1.4 1.5 (0.1)
---- ---- -----
Production cost before changes in inventory 42.8 44.9 (2.1)

Change in inventory 1.4 (2.8) 4.2
---- ---- -----
44.2 42.1 2.1


Production costs in the first quarter of 2009 were $44.2 million, $2.1 million higher than the $42.1 million recorded in the first quarter of 2008. Lower labour and energy costs were offset by the impact of the drawdown of inventory in 2009 compared to an increase in inventory in 2008.

The Fund has undertaken a number of initiatives to reduce labour costs as a result of the 20% reduction in throughput. They include:

- 45 jobs were temporarily cut

- Overtime was significantly reduced

- Some staff positions are not being replaced

- Contractors were reduced

- Summer jobs for students were cancelled for the year, and

- Reduced work hours for staff are under review.

These reductions are expected to generate savings of $2.5 million on a quarterly basis, starting in the second quarter of 2009.

The foreign exchange loss for first quarter of 2009 was $1.9 million, compared to a loss of $4.1 million in the first quarter of 2008. The foreign exchange loss was primarily a result of a weakening Canadian dollar against the US dollar on the Fund's net monetary liabilities. The foreign exchange loss was largely offset by an increase in the value of in-process and finished inventory. The increase in the value of inventory is realized in Net Revenues as the metal is sold to customers (thereby increasing the Net Revenue recorded by the Fund). The Fund maintains cash and cash equivalents, accounts receivable and accounts payable and long-term debt in US dollars.

In the first quarter of 2009, the commodity hedging loss was $0.1 million and the commodity financial instruments loss was $2.8 million. In the first quarter of 2008, the commodity hedging gain was $0.3 million and the commodity financial instruments gain was $2.6 million. During the period, the change in the market value of the Fund's financial instruments resulted in these amounts being recorded.

In the first quarter of 2009, amortization was $8.4 million compared to $7.9 million in the first quarter of 2008. The increase was due to the reduction in zinc metal inventory during the first quarter of 2009 compared to an increase in zinc metal inventory during the first quarter of 2008.

In first quarter of 2009, net interest expense was $2.5 million compared to $3.8 million in the first quarter of 2008. The decrease in interest expense was due to a reduction of outstanding debt and lower average variable interest rates during the first quarter of 2009 compared to the first quarter of 2008.

Minority interest in earnings of subsidiaries in the first quarter of 2009 was a credit of $0.9 million, down from an expense of $2.1 million in the first quarter 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 quarterly key performance
drivers for the past two years:

Q1/2009 Q1/2008
Zinc metal production (tonnes) 58,080 64,060
Zinc metal sales (tonnes) 62,248 62,157
Zinc concentrate processed (tonnes) 117,859 124,768
Zinc recovery (%) 97.6 98.0
Processing fee (cents/pound) 38.0 37.5
Zinc metal premiums (US$/pound) 0.022 0.069
Byproduct revenues ($ millions) 10.9 10.8
Copper in cake production (tonnes) 828 757
Copper in cake sales (tonnes) 834 867
Sulphuric acid production (tonnes) 97,982 103,329
Sulphuric acid sales (tonnes) 85,564 92,075
Average LME zinc price (US$/pound) 0.53 1.10
Average LME copper price (US$/pound) 1.56 3.54
Sulphuric acid netback (US$/tonne) 68 33
Average US/C$ exchange rate 1.245 1.004
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PRODUCTION

In the first quarter of 2009, zinc metal production was 58,080 tonnes, compared to 64,060 tonnes in the first quarter of 2008. During the quarter, in process inventory increased by approximately 3,400 tonnes and will be converted into zinc metal at some point during 2009.

Production was negatively impacted by the 20% reduction in March production. The reduction in output was due to the current weakness in sulphuric acid sales, and as a result, the lack of sulphuric acid storage capacity at the plant. With the continuing weakness in sulphuric acid demand, the production cutback has been extended to May.

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 second quarter of 2009.

RECOVERIES

Recoveries for the first quarter of 2009 were 97.6% compared to the 98.0% for the first 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

As a result of the financial crisis, the demand for zinc from all end use markets contracted in the fourth quarter of 2008 and this trend has continued into 2009. 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. This product is sold to customers that are supplying materials to the construction and automobile industries.

What is unusual about the current downturn is the rapid drop in demand that the Fund has seen for its products. The Fund has witnessed a 40% drop in orders from the steel companies in the last 5 months as they rebalanced their inventories and adjust to the current demand. The stimulus packages from the US and Canadian governments should be a positive influence on the demand for zinc, however, they are not expected to impact demand until the latter part of 2009.

As a result of the weakness in the steel sector's demand for the jumbo product, the Fund has started two initiatives in the first quarter of 2009 to maximize the production of zinc slab to provide for more commercial flexibility.

- The first initiative was the expansion of the existing slab line by 30,000 tonnes to 100,000 tonnes of annual production. This project was completed in March.

- The second initiative is the installation of a new line with capacity between 80,000 and 100,000 tonnes. The new line is expected to be operational by the end of June.

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. This product is the most saleable form of zinc, and it provides for more flexibility to make spot sales to traders and the LME. The Fund expects to be in a position to significantly reduce inventories starting in the third quarter of 2009 and expects to monetize approximately 15,000 tonnes of the excess inventory in the second half of 2009. This could reduce the amount of working capital to be financed by approximately $24 million at today's zinc price.

Sales of 62,248 tonnes in the first quarter of 2009 compared to 62,157 tonnes in the first quarter of 2008, and inventories decreased by 4,200 tonnes. Inventories are now about 18,000 tonnes above the normal inventory level.

PREMIUMS

For the first quarter of 2009, premiums averaged 2.2 cents US per pound, compared to 6.9 cents US per pound in the first quarter of 2008. The decrease in realized premiums in the first quarter of 2009 reflects the impact of liquidating an inventory of jumbos, for which there was low demand. As noted above, going forward, it is expected that the Fund will have the option to sell excess inventory in the form of zinc slab which will result in a higher average realized premium.

The forecast for the zinc premiums during the second quarter of 2009 is approximately 3.5 - 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 by (i) upward by 1% and (ii) upward or downward by 10% of the year-over-year percentage change in the average cost of electricity per megawatt hour for the Processing Facility.

BYPRODUCTS

In the first quarter of 2009, the Fund generated $10.9 million in revenue from the sale of its copper cake and sulphuric acid, compared to $10.8 million in the first quarter of 2008. While the total was unchanged, revenues from the sale of sulphuric acid rose to $7.2 million from $3.5 million in the first quarter of 2008. Copper revenues fell to $3.6 million from $6.9 million in 2008 as a result of lower copper price in the first quarter of 2009.

Sulphuric Acid

The Fund's sulphuric acid sales slowed dramatically in the first quarter of 2009 because of the sharp drop in North American industrial activity. In addition, the Fund's US customers have seen their competitiveness reduced by the stronger US dollar. These factors have resulted in lower orders for sulphuric acid as customers cut 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 in the past also operated at very low level during the first quarter of 2009.

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

Sulphuric acid production was negatively impacted by the 20% reduction in March production. The reduction in output was due to the current weakness in sulphuric acid sales, and as a result, the lack of sulphuric acid storage capacity at the plant. With the continuing weakness in sulphuric acid demand, the production cutback has been extended to May.

In an effort to alleviate the problem, Xstrata Canada is pursuing increased contractual and spot sales and investigating alternative storage options.

Despite the drop in demand, the Fund achieved high sulphuric acid netbacks during the first quarter of 2009 because of contract sales pricing. Netbacks rose to US$68 per tonne in the first quarter of 2009 compared to US$33 in the first quarter of 2008.

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



-----------------------------------------------------------------
First Quarter
2009 2008
-----------------------------------------------------------------

Sulphuric acid production (tonnes) 97,982 103,329
Sulphuric acid sales (tonnes) 85,564 92,075
Average pool selling price (US$/tonne) 123 92
Sulphuric acid netback (US$/tonne)(1) 68 33
-----------------------------------------------------------------
(1) after deduction for selling and transportation costs and
reseller profit


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. This decision will be re-assessed at the end of the second quarter of 2009.

EXCHANGE RATE

A weaker Canadian dollar has a positive impact on the Fund's financial results. In the first 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$1.004 in the first quarter of 2008 to US$1.245 in the first quarter of 2009.

COSTS

Production costs include labour, energy, supplies and other costs directly associated with the production process. Production costs in the first quarter of 2009 were higher at $44.2 million, compared to $42.1 million in the first quarter of 2008. Lower labour and energy costs were offset by the impact of the drawdown of inventory in the first quarter of 2009 compared to an increase in inventory in the first quarter of 2008.

CAPITAL EXPENDITURES

Capital expenditures in the first quarter of 2009 were $5.8 million, compared to $3.2 million in the first quarter of 2008. Regular maintenance accounted for $3.9 million, while profitability projects totalled $1.4 million, including $0.8 million spent on the new slab casting line.

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 operations, before net change in non-cash working capital items in the first quarter of 2009 was $12.2 million compared to $11.8 million in the first quarter of 2008. During the first quarter of 2009, non-cash working capital decreased by $3.5 million.

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, 2009 and 2008 is provided below:



($ thousands) First Quarter
2009 2008
------------------------
Cash realized from operations 15,672 7,100
Less: portion attributable to minority interest (3,918) (1,775)
---------------------------------------------------------------------------
Cash realized from operations attributable to
Priority Unitholders(a) 11,754 5,325

Capital adjustments:
Purchase of property, plant and equipment (5,786) (3,157)
Proceeds on sale of property, plant and equipment - 75
Accretion on long-term debt (64) (64)
---------------------------------------------------------------------------
(5,850) (3,146)
Plus: portion of capital adjustments attributable
to minority interest 1,463 786
---------------------------------------------------------------------------
Capital adjustments attributable to Priority
Unitholders(b) (4,387) (2,360)

---------------------------------------------------------------------------
Standardized distributable cash(a) + (b) 7,367 2,965
---------------------------------------------------------------------------

Other adjustments including discretionary items:
Increase/(decrease) in non-cash working capital (3,486) 4,735
Decrease/(increase) in operating reserve 913 4,060
Less/(plus) portion of other adjustments
attributable to minority interest 643 (2,199)
Impact of Ordinary Unit subordination 750 -
---------------------------------------------------------------------------
Distributions declared to Priority Unitholders 6,187 9,561
---------------------------------------------------------------------------

Weighted average number of Priority Units
outstanding (basic and diluted) 37,497,975 37,497,975
Standardized distributable cash per Priority Unit $0.20 $0.08
Distributions declared per Priority Unit $0.165 $0.255


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 cut in the distributions is reducing cash outflows by approximately $2.7 million on a monthly basis.

In the first quarter of 2009, standardized distributable cash was $7.4 million and distributions declared to Priority Unitholders were $6.2 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 goal is to continue paying monthly distributions (dividends) to unitholders whether the Fund is a trust or a corporation. The Fund is likely to continue as a trust until 2011 because it is the most tax-efficient way to provide distributions to the unitholders.

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

The negative impact of the current business conditions on the Fund's zinc and sulphuric acid markets resulted in the reduction in the distributions during the first quarter of 2009.

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 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 first quarter of 2009, the notional operating reserve decreased by $0.9 million to $15.7 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 March 31, 2009, the notional capital and site restoration reserve was $5.0 million (March 31, 2008 - $5.0 million).

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2009, the Fund's total debt was $194.0 million, down from $196.6 million at the end of December 2008. The Fund's cash and cash equivalents at March 31, 2009 totalled $0.6 million, down 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 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 March 31, 2009 balance sheet was $78 million of which $41 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 2009, $65.0 million of debt was drawn and $67.7 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 March 31, 2009 and are summarized below:



---------------------------------------------------------------------------
March 31, 2009
---------------------------------------------------------------------------
Leverage ratio(1) (must not exceed 4.25 to 1) 2.2

Interest coverage ratio(1) (must be no less than 3 to 1) 7.3

Current ratio (must be no less than 1 to 1) 1.5
---------------------------------------------------------------------------

(1) twelve-month rolling average


The Revolving Facility agreement lists events that constitute an event of default should they occur. Events that constitute a default include the non payment by the Fund of principal, interest or other obligations of the Fund in respect of the Revolving Facility agreement and a breach of any covenant pursuant to the Revolving Facility agreement. If any event of default occurs under the Revolving Facility agreement, the Revolving Facility lenders will be under no further obligation to make advances to the Fund and may require the Fund to repay any outstanding obligation pursuant to the Revolving Facility agreement, which may impact the Fund's ability to make cash distributions. There were no conditions of default existing during the three month period ending March 31, 2009.

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, 2009. All of the covenants under the Trust Indenture were met for the three month period ending March 31, 2009.

OTHER DEVELOPMENTS

Today, George Jones retired from the Fund's Board of Trustees. Mr. Jones has been a Board member since the inception of the Fund in May of 2002. His expertise in both zinc markets and the zinc industry was invaluable to the Fund. On behalf of the Fund, Mario Chapados would like to thank Mr. Jones for his support and wish him well in the future.

In place of George Jones, Manuel Alvarez Davila is expected to join the Board of Trustees today. Mr. Alvarez is the Chief Operating Officer, Xstrata Zinc Canada and General Manager Corporate, Xstrata Zinc. He joined Xstrata in 1998 and has held several positions, including COO of Xstrata Zinc Europe. Prior to that, Mr. Alvarez worked for Daimler-Benz Financial Services, Spain and as Managing Director of the FIAT Group Finance company in Spain. He holds degrees in Law and Business Administration from the Universidad Pontificia de Comillas in Madrid.

OUTLOOK



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

Q2 2009 target:
---------------
Zinc metal premium: 3.5 - 4.0 cents US per pound

2009 annual targets:
--------------------
Processing fee: 38.0 cents per pound
Capital expenditures $24 million


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

FORWARD-LOOKING INFORMATION

The Fund has provided Forward-looking Information for the second 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 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)

Mar.31 Dec. 31
2009 2008
---------- -----------

ASSETS

Current assets:
Cash and cash equivalents 628 3,455
Accounts receivable
Trade 33,304 32,520
Xstrata Canada 36,008 36,583
Firm commitments 1,203 4,773
Inventories 79,279 79,943
Prepaids and other assets 3,022 2,110
------- --------
153,444 159,384

Property, plant and equipment 305,229 308,258
------- --------
458,673 467,642
------- --------

LIABILITIES AND EQUITY

Current liabilities:
Accounts payable and accrued liabilities
Trade 17,542 22,819
Xstrata Canada 35,874 22,708
Commodity financial instruments 4,603 5,332
Distributions payable 1,500 4,250
------- --------
59,519 55,109

Future tax liability 13,147 13,147
Future site restoration and reclamation 12,977 12,806
Long-term debt 193,966 196,615
Interests of Ordinary Unitholders 48,807 50,783

Unitholders' Interest:
Unitholders' equity 191,273 191,273
Deficit (61,016) (52,091)
------- --------
130,257 139,182
------- --------
458,673 467,642
------- --------



NORANDA INCOME FUND

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

(unaudited)

($ thousands)

Three months
ended March 31
----------------------
2009 2008
------- --------

Revenues

Sales 106,103 167,065
Transportation and distribution costs (3,625) (4,321)
------- --------
102,478 162,744
------- --------

Raw material purchase costs 41,517 94,342
------- --------

Revenues less raw material purchase costs 60,961 68,402
------- --------

Other expenses
Production 44,153 42,081
Selling, general and administration 4,673 4,855
Foreign exchange loss 1,848 4,070
Commodity hedging loss (gain) 72 (290)
Commodity financial instruments loss (gain) 2,769 (2,612)
Amortization of property, plant and equipment 8,370 7,912
Reclamation 252 243
------- --------
62,137 56,259
------- --------

Earnings (loss) before interest and
minority interest (1,176) 12,143
------- --------
Interest expense, net 2,475 3,797
------- --------
Earnings (loss) before minority interest (3,651) 8,346
------- --------
Minority interest in earnings (loss) for
Ordinary Unitholders (913) 2,087
------- --------
Net earnings (loss) and comprehensive
income (loss) (2,738) 6,259
------- --------

Deficit beginning of period (52,091) (41,502)
------- --------
Distributions to Priority Unitholders (6,187) (9,562)
------- --------

Deficit end of period (61,016) (44,805)
------- --------

Net earnings (loss) per Priority Unit
(basic and diluted) $ (0.07) $ 0.17

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
---------------------
2009 2008
------- --------
Cash realized from (used for) operations:
Net earnings (loss) for the period (2,738) 6,259
Items not affecting cash:
Amortization of property, plant and equipment 8,370 7,912
Reclamation 252 243
Minority interest in earnings for
Ordinary Unitholders (913) 2,087
Mark-to-market loss (gain) on commodity
financial instruments 2,841 (2,902)
Change in fair value of embedded derivatives 3,934 (1,961)
Accretion on long-term debt 64 64
Loss from sale of property, plant and equipment 457 287
Site restoration expenditures (81) (154)
------- --------
12,186 11,835
------- --------

Net change in non-cash working capital items 3,486 (4,735)
------- --------
15,672 7,100
------- --------

Cash realized from (used for) investment
activities:
Purchases of property, plant and equipment (5,786) (3,157)
Proceeds on sales of property, plant and equipment - 75
------- --------
(5,786) (3,082)
------- --------

Cash realized from (used for) financing activities:

Distributions - Priority Unitholders (7,875) (9,562)
- Ordinary Unitholders (2,125) (3,188)
Long-term debt issued under the Revolving Facility 65,000 95,592
Long-term-debt repaid under the Revolving Facility (67,713) (90,000)
------- --------
(12,713) (7,158)
------- --------

Net change in cash and cash equivalents
during the period (2,827) (3,140)

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

Cash and cash equivalents, end of period 628 562
------- --------

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