NORANDA INCOME FUND

NORANDA INCOME FUND

July 31, 2006 15:04 ET

Noranda Income Fund Reports Second Quarter 2006 Net Earnings of $9.3 Million

VALLEYFIELD, QUEBEC--(Marketwire - July 31, 2006) -

Attention Business/Financial Editors:

The Noranda Income Fund (the "Fund") reported net earnings of $9.3 million for the second quarter of 2006, compared to $7.8 million for the second quarter a year ago. The $1.5 million increase was due to higher premiums and byproduct revenues, partially offset by a stronger Canadian dollar and higher interest expense.

"We had a strong second quarter which benefited from strengthening zinc premiums and byproduct revenues and we remain on track to meet our production and sales targets for 2006." said Mario Chapados, President and Chief Executive Officer of the Noranda Income Fund's Manager.

Net earnings of $13.6 million were reported for the first six months ending June 30, 2006 compared to $14.3 million in the first six months of 2005. The $0.7 million decrease was mainly due to higher production costs, lower zinc metal production, higher interest expense and a stronger Canadian dollar, partially offset by the impact of a higher processing fee, stronger premiums and improved byproduct revenues.

The outlook for 2006 and the estimate for production, premiums and byproduct revenues is subject to various risks and uncertainties. The assumptions can be found in the "Forward-Looking Statements" below.

Financial Results

This analysis of the financial position and results of operations of the Fund should be read in conjunction with the unaudited interim consolidated financial statements of the Fund for the three months and six months ended June 30, 2006 and with the audited consolidated financial statements of the Fund and the notes thereto for the period ended December 31, 2005. All dollar amounts are shown in Canadian dollars unless otherwise specified.

The analysis has been prepared as of July 31, 2006. Additional information relating to the Fund, including the Fund's annual information form is available on SEDAR at www.sedar.com.



Q2/2006 Highlights
------------------

Second Quarter Year
2006 2005 2006 2005
---- ---- ---- ----

Zinc metal production (tonnes) 69,098 68,692 130,782 135,543
Zinc metal sales (tonnes) 67,851 67,815 130,457 130,799
Zinc metal premiums (US$/pound) 0.071 0.051 0.70 0.054
Byproduct revenues ($ millions) 11.3 5.6 19.8 10.3
Average US/Cdn. exchange rate 1.122 1.240 1.139 1.236

- Realized premiums were higher - 7.1 cents US per pound in Q2/06 vs.
5.1 cents in the same quarter of 2005.
- Benefited from a doubling of byproduct revenues - $11.3 million in
Q2/06 compared to $5.6 million in Q2/05 as the result of strong
copper prices.
- Advanced projects, which are aimed at improving productivity and
increasing revenues.


RESULTS OF OPERATIONS

Consolidated Net Earnings (Second quarter 2006 compared to second quarter 2005)

Revenues less raw material purchase costs ("Net Revenues") in the second quarter of 2006 were $68.8 million compared to $67.3 million in the same period of 2005. The $1.5 million variance was due to higher premiums, byproduct revenues and processing fee, partially offset a stronger Canadian dollar. Each $C0.01 appreciation in the average Canadian/US exchange rate negatively impacts the Fund's annual net earnings by approximately $0.5 million.

Approximately 70% of Fund's Net Revenue in the second quarter of 2006 was realized from the processing fee on zinc concentrates. Another portion of the Fund's Net Revenue is derived from premiums realized on the sale of zinc metal and various value-added zinc products. These premiums have been steadily rising due to the increased tight supply of zinc metal in the North American market. The Fund also benefits from the sale of byproducts, such as copper, cadmium and sulphuric acid that are processed and extracted from the zinc concentrate.

The Fund makes a portion of its sales based on the average price from the previous month (month prior pricing). This form of pricing is often used for those customers where cash-in-advance terms have been negotiated as a way to manage the Fund's liquidity position and credit exposure. In a market where zinc prices are rising, a portion of the Fund's revenues will lag behind the higher zinc prices; while in a market where zinc prices are falling, a portion of the Fund's revenues will benefit from higher zinc prices from the month prior. Month prior pricing sales are closely monitored to ensure sales volumes do not vary significantly from month to month. During the second quarter, month prior pricing had a negative impact of approximately $4 million on the Fund's Net Revenues.

Production costs in the second quarter were slightly lower than a year ago at $41.6 million compared to $41.9 million. During the quarter, production costs were reduced by $0.6 million related to an insurance settlement from an incident that occurred in 2005.

Selling, general and administration costs for the second quarter of 2006 were $4.6 million, down from $5.2 million in the second quarter of 2005. Amortization and reclamation was $7.0 million in the second quarter of 2006, compared to $7.2 million for the second quarter of 2005.

In the second quarter of 2006, net interest expense was $4.3 million, compared to $2.8 million in the same quarter a year ago due to higher levels of debt that has resulted from the increase in the zinc price and the corresponding increase in working capital during 2006. Interest also increased on account of delayed zinc concentrate payments to Falconbridge that resulted in interest charges being applied.

Consolidated Net Earnings (Six months 2006 compared to six months 2005)

Net Revenues in the first six months of 2006 were $129.6 million compared to $126.8 million in the same period of 2005. The $2.8 million variance was due to higher premiums, byproduct revenues and processing fee, partially offset by a stronger Canadian dollar and higher transportation and distribution costs. During the first half of 2006, month prior pricing had a negative impact of approximately $5 million on the Fund's Net Revenues.

Production costs in the first six months were $81.1 million compared to $78.6 million in the first six months of 2005. The $2.5 million increase resulted from higher contractor, energy and reagent costs.

Selling, general and administration costs for the first half of 2006 were $9.4 million, compared to $9.9 million in the first half of 2005. Amortization and reclamation was $14.2 million in the first six months of 2006, compared to $13.9 million in the same period of 2005.

In the first half of 2006, net interest expense was $7.2 million, compared to $5.5 million in the same period a year ago due to higher levels of debt that has resulted from the increase in the zinc price and the corresponding increase in working capital during 2006.

PRODUCTION

Zinc metal production in the second quarter of 2006 of 69,098 tonnes, up from 68,692 tonnes in the second quarter of 2005. For the first six months of 2006, production totalled 130,782 tonnes compared to 135,543 tonnes in the same period a year ago. Year-to-date production in 2006 was negatively impacted by the production problem of the first quarter. For the year, the target of 273,000 tonnes remains unchanged.

For the second quarter of 2006, sales totalled 67,851 tonnes, substantially unchanged from the 67,815 tonnes sold in the second quarter of 2005. Zinc sales for the first half were 130,457 tonnes, unchanged from the level a year ago. The target for 2006 sales remains at 273,000 tonnes.

The preceding targets for production and sales are subject to various risks and uncertainties. The assumptions for them can be found in the "Forward-Looking Statements" below.

PREMIUMS AND BYPRODUCTS

Zinc fundamentals have strengthened during the first half of 2006, and LME stocks of zinc have actually fallen by 50% since December 2005. They are now at critically low levels, roughly four and one-half weeks of consumption. For the second quarter of 2006, premiums rose to 7.1 cents US per pound compared to 5.1 cents US a pound for the same period in 2005. For 2006, almost all of the Fund's zinc metal sales are on an annual contract basis.

Driven by strong copper prices, byproduct revenues in the second quarter of 2006 strengthened. Inventories of copper have remained at critically low levels since the beginning of the year, and prices during the second quarter of 2006 traded at more than twice the level of a year ago. Sulphuric acid netbacks weakened from a year ago. For the quarter, byproduct revenues totalled $11.3 million, double the $5.6 million in the same period a year ago.

CAPITAL EXPENDITURES

During the first half of 2006, the Fund initiated a number of capital projects that were aimed at improving productivity and increasing revenues over the next few years. To date, three of the revenue generating projects have been completed and are in the process of being commissioned. The remaining seven projects are expected to be completed during the balance of the year.

Capital spending during the second quarter and the first six months of 2006 totalled $7.0 and $10.2 million, respectively compared to $3.4 and $5.3 million, respectively for the same periods in 2005. The budget for the year remains at $21.5 million of which approximately $7 million represents investments in revenue generating projects and $14.5 million represents sustaining capital required to maintain the plant's current capacity

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

The Fund is participating in Hydro Quebec's "Industrial Initiatives Program - Major Customers" program. As a result, the Fund has recorded $1.3 million receivable related to expected incentives to be received. The incentives have been recorded as a reduction of property, plant and equipment as they relate to capital expenditures incurred to reduce electricity consumption.

Cash Flows, Liquidity and Capital Resources

Cash realized from operations, before changes in non-cash working capital for the second quarter of 2006 was $19.7 million compared to $18.7 million in the second quarter of 2005. During the quarter, non-cash working capital increased by $17.4 million, due to higher zinc prices. Zinc prices do not have a significant impact on the Fund's net earnings, but they do impact the value of in-process and finished product inventories. The average LME zinc price increased from $1.10 in March 2006 to $1.46 in June 2006; representing a 33% increase.

Capital expenditures in the second quarter were $7.0 million compared to $3.4 million in the second quarter of 2005.

Distributions paid to unitholders in the second quarter were $12.8 million, unchanged from the same period in 2005.

The Fund has a Revolving Facility in place that is used for general corporate purposes, including financing working capital. On June 30, 2006, the Revolving Facility was extended to May 3, 2008 and was increased from $65 million to $100 million to finance the higher working capital levels. The Revolving Facility was extended at essentially the same terms that were in place with the prior facility.

Fluctuations in working capital balances as a result of operations are generally funded by or used to repay the Revolving Facility. During the quarter, $81.4 million of debt was drawn and $64.1 million was repaid related to the fluctuations in working capital.

At June 30, 2006, the Fund's total debt was $205.7 million, up from $180.4 million at the end of December 2005.

Distribution Policy, Distributable Cash(1) and Operating Reserve

The Fund makes monthly distributions to its Unitholders based on the monthly Distributable Cash declarations. The Fund's goal is to provide stable monthly distributions and will seek to increase distributions through sustainable improvements, such as operating efficiencies and revenue enhancing opportunities.

In the second quarter of 2006, Cash Generated (Distributable Cash before changes in operating reserves) was $14.3 million and distributable cash to unitholders was $12.8 million: $9.6 million paid to Priority Unitholders and $3.2 million paid to Ordinary Unitholders.

In order to meet the Fund's goal to provide a stable monthly distribution the Fund utilizes a notional operating reserve. In a period during which Cash Generated is greater than the distribution declared, the operating reserve will increase. In a period during which Cash Generated is less than the distribution declared, the operating reserve will decrease. The 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.



(1) Distributable Cash is not a measure defined by generally accepted
accounting principles and is dependant upon the definition as
contained in the trust indentures establishing the Fund.
Distributable Cash under the Fund's indenture is based on 100% of
The net earnings adjusted to account for non-cash transactions such
As amortization, reclamation and minority interest, reduced by
Additions to capital assets, site restoration expenditures,
reasonable reserves and repayment of long-term debt. Fluctuations
in working capital balances as a result of operations are generally
funded by or used to repay the Revolving Facility.

Cash Generated is defined as Distributable Cash before changes in
operating reserves. Distributable Cash as calculated by the Fund
may not be comparable to similar measures presented by other
issuers. The Distributable Cash for the period is as follows:


Three Three Six Six
months months months months
ending ending ending ending
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
-----------------------------------------------------------------------
Net earnings $ 9,281 $ 7,799 $ 13,615 $ 14,310
Add:
Amortization, and
reclamation 7,005 7,187 14,170 13,894
Minority interest
in earnings 3,094 2,600 4,538 4,770
Loss from sale of assets 233 323 396 337
Proceeds from sales
of assets - - - 1

Less:
Additions to property,
plant and equipment (6,971) (3,423) (10,170) (5,332)
Hydro Quebec -
incentives 1,313 - 1,313 -
Site restoration
expenditures (20) - (29) -

Increase (decrease) in
capital and site
restoration reserve 393 (1,172) 1,174 (1,769)
-------------------------------------------
Cash Generated during
the period 14,328 13,314 25,007 26,211
-------------------------------------------
(Increase) decrease in
operating reserve (1,578) (564) 493 (711)
-------------------------------------------
Distributable Cash for
the period $ 12,750 $ 12,750 $ 25,500 $ 25,500
-------------------------------------------


During the second quarter of 2006, the operating reserve increased to $8.4 million from $6.8 million at the end of March 2006.

The schedule below sets out the history of the Fund's cash distributions for the past six months:



-----------------------------------------------------------------------
RECORD DATE PAYMENT DATE DISTRIBUTION PER UNIT
-----------------------------------------------------------------------
July 31, 2006 August 25, 2006 8.5 cents
June 30, 2006 July 25, 2006 8.5 cents
May 31, 2006 June 26, 2006 8.5 cents
April 30, 2006 May 25, 2006 8.5 cents
March 31, 2006 April 25, 2006 8.5 cents
February 28, 2006 March 27, 2006 8.5 cents
-----------------------------------------------------------------------


Revenue Recognition

The Fund recognizes revenue from the sale of refined metals and byproducts at the time of the sale, when the rights and obligations of ownership pass to the buyer. This generally occurs upon shipment. Prices for provisionally priced sales are based on market prices and exchange rates prevailing at the time of shipment and are adjusted based upon market prices and exchange rates until final settlement with customers, pursuant to the terms of sales contracts. Price changes for shipments awaiting final pricing at quarter-end could have a material effect on future revenues. As of June 30, 2006, there was $11.8 million in revenues awaiting final pricing.

Outlook

The Fund's goal for 2006 is to continue to provide stable monthly distributions of 8.5 cents per unit per month.



The 2006 targets for the key drivers of the Fund are:
Production: 273,000 tonnes
Sales: 273,000 tonnes
Processing fee: 36.5 cents per pound
Premium: 6.9 cents US/pound
Capital expenditures: $21.5 million


Forward-Looking Statements

This news release contains Forward-Looking Statements concerning the Noranda Income Fund's ("Fund") objectives and 2006 general business outlook, zinc metal production and sales targets, estimated processing fee, zinc premium target, capital expenditures forecast and cash flow projections. Forward-Looking Statements can be identified by the use of words, such as "are expected", "is forecast", approximately or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. Forward-Looking Statements involve 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 Statements.

Examples of such risks, uncertainties and other factors include, but are not limited to the following: (1) the Fund's ability to operate at normal production levels; (2) the dependence upon the continuing supply of zinc concentrates (terms of the Supply and Processing Agreement); (3) the demand for zinc metal, sulphuric acid, and copper cake; (4) changes to the supply and demand for specific zinc metal products and the impact on the Fund's realized premiums; (5) the ability of the Fund to continue to service customers in the same geographic region; (6) the sensitivity of the Fund's net revenues to reductions in realized zinc metal prices including premiums, copper prices, sulphuric acid prices; the strengthening of the Canadian dollar vis-à-vis the US dollar; and increasing transportation and distribution costs (7) 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; (8) changes in capital expenditure requirements; (9) the negotiation of collective agreement with its unionized employees; (10) general business and economic conditions; (11) transportation disruptions; (12) 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; (13) potential negative financial impact from regulatory investigations, claims, lawsuits and other proceedings; (14) loan default and (15) reliance on Falconbridge for the operation and maintenance of the Processing Facility. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied in the forward-looking statements contained herein.

These Forward-Looking Statements represent our views as of the date of this Report. The Fund anticipates that subsequent events and developments may cause the Fund's views to change. The Fund does not undertake to update any forward-looking statements, either written or oral, that may be made from time to time by or on behalf of the Fund subsequent to the date of this release.

Noranda Income Fund is an income trust whose units trade on the Toronto Stock Exchange under the symbol "NIF.UN". The Noranda Income Fund was created to acquire Falconbridge's CEZ processing facility and ancillary assets (the "CEZ processing facility") located in Salaberry-de-Valleyfield, Quebec. The CEZ 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 byproducts 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

CONSOLIDATED BALANCE SHEETS

(unaudited)

($ thousands)

June 30 Dec. 31

2006 2005

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

ASSETS

Current assets:
Cash and cash equivalents 1,009 175

Accounts receivable

Trade 140,214 72,022

Falconbridge Group 21,329 13,120

Inventories 132,551 60,519

Prepaids and other assets 3,593 3,133

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

298,696 148,969

Deferred financing fees 1,137 1,263

Property, plant and equipment 328,681 334,641

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

628,514 484,873

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

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued liabilities

Trade 15,606 16,155

Falconbridge Group 178,192 51,942

Distributions payable 4,250 4,250

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

198,048 72,347

Future site restoration and reclamation 15,910 15,924

Long-term debt 205,700 180,400

Interests of Ordinary Unitholders 52,214 54,050

Unitholders' Interest:

Unitholders' capital accounts 191,293 191,293

Deficit (34,651) (29,141)

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

156,642 162,152

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

628,514 484,873

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



NORANDA INCOME FUND

CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT

(unaudited)

($ thousands)

Three months Six months

ended June 30 ended June 30

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

2006 2005 2006 2005

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

Revenues

Sales 288,280 121,674 472,617 238,200

Transportation and distribution

costs (4,011) (3,332) (7,591) (6,636)

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

Net revenues 284,269 118,342 465,026 231,564

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

Raw material purchase costs 215,500 50,993 335,417 104,779

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

Net revenues less raw material

purchase costs 68,769 67,349 129,609 126,785

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

Other expenses

Production 41,568 41,856 81,149 78,638

Selling, general and

administration 4,608 5,153 9,389 9,932

Foreign exchange gain (1,132) (82) (486) (244)

Amortization and reclamation 7,005 7,187 14,170 13,894

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

52,049 54,114 104,222 102,220

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

Earnings before interest expense

and minority interest 16,720 13,235 25,387 24,565

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

Interest expense, net 4,345 2,836 7,234 5,485

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

Earnings before minority interest 12,375 10,399 18,153 19,080

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

Minority interest in earnings

for Ordinary Unitholders 3,094 2,600 4,538 4,770

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

Net earnings 9,281 7,799 13,615 14,310

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

Deficit, beginning of period (34,370) (26,752) (29,141) (23,700)

Distributions to Priority

Unitholders (9,562) (9,562) (19,125) (19,125)

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

Deficit, end of period (34,651) (28,515) (34,651) (28,515)

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

Net earnings per Priority Unit

(basic and diluted) $ 0.25 $ 0.21 $ 0.36 $ 0.38



NORANDA INCOME FUND

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

($ thousands)

Three months Six months

ended June 30 ended June 30

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

2006 2005 2006 2005

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

Cash realized from (used for)

operations:

Net earnings for the period 9,281 7,799 13,615 14,310

Items not affecting cash:

Amortization 7,289 6,889 14,154 13,297

Reclamation (284) 298 16 597

Minority Interest in earnings

for Ordinary Unitholders 3,094 2,600 4,538 4,770

Mark-to-market (gain)/loss on

derivative financial instruments - 753 - 381

Amortization of deferred

financing fees 64 63 126 140

Loss from sale of assets 233 323 396 337

Site restoration expenditures (20) - (29) -

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

19,657 18,725 32,816 33,832

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

Net change in non cash working

capital items (17,356) (6,889) (22,925) (28,404)

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

2,301 11,836 9,891 5,428

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

Cash realized from (used for)

investment activities:

Purchases of property,

plant and equipment (6,971) (3,423) (10,170) (5,332)

Hydro Quebec - incentives 1,313 - 1,313 -

Proceeds on sale of property,

plant and equipment - - - 1

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

(5,658) (3,423) (8,857) (5,331)

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

Cash realized from (used for)

financing activities:

Distributions - Priority

Unitholders (9,562) (9,562) (19,125) (19,125)

- Ordinary

Unitholders (3,188) (3,188) (6,375) (6,375)

Change in bank indebtedness (184) - - -

Long-term debt issued from

the Revolving Facility 81,400 70,000 202,100 87,600

Long-term debt repaid to

the Revolving Facility (64,100) (65,500) (176,800) (72,000)

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

4,366 (8,250) (200) (9,900)

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

Change in cash and cash equivalents

during the period 1,009 163 834 (9,803)

Cash and cash equivalents,

beginning of period - 1,034 175 11,000

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

Cash and cash equivalents,

end of period 1,009 1,197 1,009 1,197

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

Cash 1,009 1,197 1,009 1,197

Cash equivalents - - - -



NORANDA INCOME FUND

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

(UNAUDITED)

($ thousands except as otherwise indicated)


1. Nature and Description of the Noranda Income Fund The Noranda Income
Fund (the "Fund") was created in 2002, initially to acquire from Noranda
Inc. ("Noranda"), indirectly through the Noranda Operating Trust (the
"Operating Trust") and the Noranda Income Limited Partnership (the
"Partnership"), the CEZinc processing facility (the "Processing Facility")
in Salaberry-de-Valleyfield in Quebec. The Processing Facility produces
refined zinc metal and various by-products from zinc concentrates.

As of June 30, 2005, Noranda changed its name to Falconbridge Limited
("Falconbridge") pursuant to a corporate amalgamation.

Significant Agreements

Pursuant to a 15 year Supply and Processing Agreement signed on May 3,
2002, between Falconbridge and the Partnership, Falconbridge is obligated
to sell to the Processing Facility, except in certain circumstances, up to
550,000 tonnes of zinc concentrate annually at a concentrate price (based on
the price of zinc metal on the London Metal Exchange ("LME") for "Payable
zinc metal" contained in the concentrate less a processing fee initially set
at $0.352 per pound of that "Payable zinc metal". As of January 1, 2004, the
processing fee is the processing fee in the previous year 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. The processing fee for 2006 is $0.365 (2005 - $0.361) per
pound. "Payable zinc metal" in respect of a quantity of concentrate will be
equal to 96% of the assayed zinc metal content on that concentrate under the
Supply and Processing Agreement.


Under the Supply and Processing Agreement, Falconbridge acts as the
exclusive agent for the Partnership to arrange the sale of zinc metal and
by-products and related hedging arrangements.

Under the terms of an administration agreement between the Fund and the
management of Canadian Electrolytic Zinc Limited (the "Manager"), a
wholly owned subsidiary of Falconbridge, and a management services agreement
between the Operating Trust and the Manager, the Manager provides administrative
services to the Fund and management services to the Operating Trust, respectively.

Under the terms of an operating and management agreement between the
Manager and the Partnership, the Manager operates and maintains the
Processing Facility and provides management services to the Partnership.

Cash Distributions

The Fund determines distributable cash ("Distributable Cash") 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.

Cash distributions on Ordinary Units are subordinate to distributions on
Priority Units until 2017 except upon the occurrence of certain events.
Each Ordinary Unit is entitled to receive cash distributions on a monthly
basis in an amount that is equal to the monthly cash distributions paid
to each Priority Unit, provided each Priority Unit is first paid an
amount that is equal to the monthly cash distribution of not less than
$0.08333 per Priority Unit (the "Base Distribution") before any amount is
paid to holders of Ordinary Units. If, notwithstanding the subordination
of the Ordinary Units, Distributable Cash is not sufficient to make the
Base Distributions on Priority Units in a month, the amount of the
deficiency shall not accumulate and will not be paid to holders of
Priority Units. If Distributable Cash, in a month is not sufficient to
make a distribution on the Ordinary Units that is equal to the
distribution on the Priority Units, the amount of the deficiency will
accumulate and be paid to holders of the Ordinary Units from excess
Distributable Cash in a subsequent month. Any accumulated Distributable
Cash deficiency related to the Ordinary Units will not be accrued by the
Fund until such time excess Distributable Cash is available. As at June
30, 2006, there was no accumulated Distributable Cash deficiency.

2. Accounting Policies

These unaudited interim consolidated financial statements have been
prepared following the accounting policies as set out in the 2005 annual
consolidated financial statements, except as noted below. The unaudited
interim consolidated financial statements have been prepared using
disclosure standards appropriate for interim financial statements and do
not contain all the explanatory notes, descriptions of accounting
policies or other disclosures required by Canadian generally accepted
accounting principles for annual financial statements. Accordingly, these
unaudited financial statements should be read in conjunction with the
Fund's audited annual consolidated financial statements and the
accompanying notes included in the 2005 Annual Report.

Government assistance

Grant amounts resulting from government assistance programs are reflected
as reductions to the cost of the assets or to the expenses to which they
relate at the time at which the assistance becomes receivable, when there
is reasonable assurance that the assistance will be received.

3. Debt

The Fund has a Revolving Facility in place that is used for general
corporate purposes, including financing working capital. On June 30,
2006, the Revolving Facility was extended to May 3, 2008 and was
increased from $65 million to $100 million to finance the higher working
capital levels. The Revolving Facility was extended at essentially the
same terms that were in place with the prior facility.

4. Future Site Restoration and Reclamation


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

Future Site Restoration and Reclamation Continuity 2006 2005

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

Balance January 1 $ 15,924 $ 14,979

Accretion of reclamation expense 496 596

Site restoration and reclamation expenditures (29) -

Change in estimates (481) -

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

Balance June 30 $ 15,910 $ 15,575


5. Derivative Instruments and Financial Risk

Commodity Hedges

The Fund purchases metal in zinc concentrate to be processed eventually
into refined zinc metal for sale to customers. Due to the structure of
the Fund's sales and purchase contracts, hedging of zinc price exposure
other than that undertaken in response to customer requests for fixed
pricing is generally not required to any material extent. As agent of the
Fund, Falconbridge provides the hedging arrangements in the event that
the structure of the Fund's sales and purchase contracts do not minimize
exposure to changes in zinc prices.

Certain customers request a fixed sales price instead of the LME average
price in the month of shipment. Falconbridge enters into futures
contracts (fixed forward price hedges) on behalf of the Fund that will
allow the Fund to receive the LME average price in the month of shipment
while customers pay the agreed-upon fixed price. Falconbridge
accomplishes this by settling the futures contracts during the month of
shipment, which generally results in the realization of the LME average
prices. In the event that the futures contracts have to be terminated
early, due to the customer cancelling a fixed price order, Falconbridge
has the right to charge the customer with the cost of settling the LME
contract.

At June 30, 2006, Falconbridge had futures contracts (fixed forward price
hedges) hedging approximately 39 million pounds of zinc (June 30, 2005 -
28 million pounds) related to the Fund. At June 30, 2006, the mark-to-
market value of these positions, which had not been recorded in the
consolidated statement of earnings was an unrealized gain of $11,137
(June 30, 2005 unrealized gain of $1,028). The ultimate gain or loss from
the fixed forward price hedges will be realized over the next two years
as the sales of zinc occur.

The Processing Facility's commodity hedging program includes inventory
management hedges which hedge purchases and sales of zinc metal. These
contracts have the option to settle physically, therefore, they do not
fall within the definition of a derivative and the Processing Facility is
not required to mark them to market. At June 30, 2006, the Processing
Facility had sold forward approximately 7 million pounds of zinc (June
30, 2005 - sold forward 13 million pounds). At June 30, 2006, the mark to
market value of these positions was an unrealized loss of $122 (June 30,
2005 unrealized gain of $374).

Currency Risk

The company maintains cash and cash equivalents, accounts receivable, and
accounts payable in foreign currencies, and is therefore exposed to
currency risk on these funds.

6. Distributable Cash

Distributable Cash is not a measure defined by generally accepted
accounting principles and is dependant upon the definition as contained
in the trust indentures establishing the Fund. Distributable Cash under
the Fund's indenture is based on 100% of the net earnings adjusted to
account for non-cash transactions such as amortization, reclamation and
minority interest, reduced by additions to capital assets, site
restoration expenditures, reasonable reserves and repayment of long-term
debt. Fluctuations in working capital balances as a result of operations
are generally funded by or used to repay the Revolving Facility.

Cash Generated is defined as Distributable Cash before changes in
operating reserves. Distributable Cash as calculated by the Fund may not
be comparable to similar measures presented by other issuers. The

Distributable Cash for the period is as follows:


Three Three Six Six
months months months months
ending ending ending ending
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
-------------------------------------------------------------------------

Net earnings $9,281 $7,799 $13,615 $14,310
Add:
Amortization, and
reclamation 7,005 7,187 14,170 13,894
Minority interest
in earnings 3,094 2,600 4,538 4,770
Loss from sale of
assets 233 323 396 337
Proceeds from sales
of assets - - - 1

Less:
Additions to property,
plant and equipment (6,971) (3,423) (10,170) (5,332)
Hydro Quebec -
incentives 1,313 - 1,313 -
Site restoration
expenditures (20) - (29) -

Increase (decrease) in
capital and site
restoration reserve 393 (1,172) 1,174 (1,769)
------------------------------------------------

Cash Generated during
the period 14,328 13,314 25,007 26,211
------------------------------------------------

(Increase) decrease in
operating reserve (1,578) (564) 493 (711)
------------------------------------------------

Distributable Cash for
the period $12,750 $12,750 $25,500 $25,500
------------------------------------------------

Priority units issued 37,500,000 37,500,000 37,500,000 37,500,000
Ordinary units issued 12,500,000 12,500,000 12,500,000 12,500,000
Distributable Cash
attributable to
Priority Units $0.255 $0.255 $0.510 $0.510
Distributable Cash
attributable to
Ordinary Units $0.255 $0.255 $0.510 $0.510

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



In order to meet the Fund's goal to provide a stable monthly distribution
the Fund utilizes an operating reserve. In a period during which Cash
Generated is greater than the distribution declared, the operating
reserve will increase. In a period during which Cash Generated is less
than the distribution declared, the operating reserve will decrease. As
of June 30, 2006 the operating reserve was $8,391 (June 30, 2005 -
$4,802).

The Fund also utilizes a capital and site restoration reserve. As of June
30, 2006 the capital and site restoration reserve was $3,913 (June 30,
2005 - $4,884).

7. Related Party Transactions

As discussed in Note 1, the Fund has entered into significant agreements
with related parties.

As a result of the Supply and Processing Agreement, during the three-
month period ending June 30, 2006 Falconbridge has sold $262,295 of
concentrate (2005 - $113,499) and provided $696 of sales agency services
(2005 - $679). The sales agency services are provided on a cost recovery
basis. As of June 30, 2006 the Partnership has a payable of $167,794 to
Falconbridge (2005 - $17,938) related to the Supply and Processing
Agreement. This amount is included in accounts payable and accrued
liabilities. During the quarter, the Fund was delayed in making some
concentrate payments. As a result, an interest penalty was charged at
prime rate plus 2%.

As a result of the administration agreement between the Fund and the
Manager, the management agreement between the Operating Trust and the
Manager and an operating and management agreement between the Partnership
and the Manager, Falconbridge has provided the following administration,
management and operating services to the Fund:


-------------------------------------------------------------------------
Selling, general and administration
-------------------------------------------------------------------------
Six months ending June 30 2006 2005
-------------------------------------------------------------------------
Salary and benefits $ 3,604 $ 3,627
Support services 614 735
Research and technology costs 38 211
Operating and management agreement management fee 133 130
-------------------------------------------------------------------------
Total $ 4,389 $ 4,703


During the six month period ending June 30, 2006, the Fund's production
expenses included $32,429 (2005 - $32,339) of salary and benefits
provided by the Manager.

The administration, management and operating services are provided on a
cost recovery basis and an annual management fee of $265 in 2006 (2005 -
$260). The annual management fee is adjusted by 2% per annum at the
beginning of each calendar year.

As of June 30, 2006 the Fund, Operating Trust and the Partnership had a
payable of $9,673 (2005 - $10,453) related to the agreements. This amount
was included in accounts payable and accrued liabilities.

In addition to the related party transactions above, the Partnership
undertakes transactions with various other Falconbridge group companies
and divisions at terms that reflect market rates. The following table
summarizes the related party transactions for the period.


-------------------------------------------------------------------------
Period ended June 30 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales
Sales of zinc metal $ 17,984 $ 9,010
Sales of by-products 19,441 9,920
Expenses
Purchases of raw materials and operating supplies $ 2,627 $ 2,128
Interest expense $ 1,272 -


Included in the accounts receivable as at June 30, 2006 was $18,910 (2005
- $10,253) of amounts due from sales of zinc metal and by-products and
all other receivables was $2,419 (2005 - $1,261). Included in accounts
payable and accrued liabilities as at June 30, 2006 was $725 (2005 -
$155) of amounts due to related parties, excluding amounts due under
agreements identified above.

All amounts due to and from related parties are non-interest bearing and
are due in the ordinary course of business, except for delayed
concentrate payments. All transactions with Falconbridge and affiliated
companies are carried out in the normal course of operations, and are
recorded at an agreed upon exchange amount.

8. Economic Dependence

The Processing Facility is dependent on key customers. The loss of a
significant customer may have a material adverse effect on the Fund's
financial position and results of operations.

9. Comparative Amounts

Certain of the comparative figures have been reclassified to conform to
the current year's presentation.

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