NORANDA INCOME FUND

NORANDA INCOME FUND

November 05, 2007 13:11 ET

Noranda Income Fund Reports Third Quarter Financial Results

TORONTO, ONTARIO—-(Marketwire – Nov. 5, 2007) - The Noranda Income Fund (TSX:NIF.UN) -

Management's Discussion and Analysis

This discussion and analysis of the financial position and results of operations of the Noranda Income Fund (the "Fund") should be read in conjunction with the unaudited interim consolidated financial statements of the Fund for the three months and nine months ended September 30, 2007 and with the audited consolidated financial statements of the Fund and the notes thereto for the period ended December 31, 2006.

This discussion is based on various assumptions (see "forward-looking statements" below.) All dollar amounts are shown in Canadian dollars unless otherwise specified.

The management discussion and analysis has been prepared as of November 5, 2007. Additional information relating to the Fund, including the Fund's annual information form is available on SEDAR at www.sedar.com.

As further described under Summary of Quarterly Results, the Fund has determined that certain adjustments are required to restate the unaudited consolidated financial statements for the three months ended March 31, 2007 and the three and six months ended June 30, 2007. The Fund identified that it did not properly account for the embedded derivatives related to provisional pricing in its concentrate purchase contracts. Under the terms of this contract, fixed prices are set on a specified future date after shipment (the "quotational period") based on quoted market prices.

Third Quarter Results

The Fund reported net earnings of $6.4 million for the third quarter of 2007, compared to $15.6 million in the same quarter a year ago. The decrease was due to lower zinc recovery, a mark-to-market loss relating to financial instruments and hedges of $5.2 million, a lower volume of zinc metal sales and a stronger Canadian dollar offset by higher zinc metal premiums.

Net earnings of $13.7 million were reported for the first nine months ending September 30, 2007 compared to $29.2 million in the first nine months of 2006. The $15.5 million decrease was mainly due to the recognition of $14.6 million of future income tax expense recorded in the second quarter of 2007 resulting from the enactment of Bill C-52, lower zinc metal sales, lower zinc recovery and higher interest expense offset by higher premiums and lower amortization and reclamation costs.

The outlook for 2007 and the estimate for production, sales, premiums and byproduct revenue are subject to various risks and uncertainties. The assumptions can be found in the "forward-looking statements" below.



Q3 2007 Highlights

Third Quarter Year

2007 2006 2007 2006

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

Zinc metal production (tonnes) 69,242 67,498 195,436 198,280

Zinc metal sales (tonnes) 61,335 66,954 181,261 197,411

Zinc metal premiums (US$/pound) 0.121 0.073 0.113 0.071

Byproduct revenues ($ millions) 9.5 7.7 25.0 27.5

Average US/Cdn. exchange rate 1.045 1.120 1.105 1.133

- Production for the quarter was 69,242 tonnes, a 3% improvement over

2006

- Realized premiums for the quarter per pound were higher - 12.1 cents

US in 2007 vs. 7.3 cents US in 2006.

- All of the monthly distributions were paid at the 8.5 cents per unit

level.


RESULTS OF OPERATIONS

Consolidated Earnings (Third quarter 2007 compared to third quarter 2006)

Revenues less raw material purchases ("Net Revenues") for the third quarter of 2007 totalled $62.7 million, compared to $76.9 million in the same period of 2006. The $14.2 million decrease was due to lower zinc metal sales offset by higher premiums, byproduct revenue and processing fee. During 2007, Net Revenues were negatively impacted by the strengthening of the Canadian dollar (see foreign exchange gains below).

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 for whom cash-in-advance terms have been negotiated as a way to manage the Fund's liquidity position and credit exposure. In a market in which zinc prices are falling, a portion of the Fund's revenues will benefit from the higher zinc prices from the prior month. In a market where zinc prices are rising, a portion of the Fund's revenues will lag behind the higher zinc prices. In the third quarter of 2007, month prior pricing had a positive impact of approximately $3.2 million on the Fund's Net Revenues, as the average monthly zinc price decreased from US $1.63 per pound in June 2007 to US $1.31 per pound in September 2007.

Production costs in the third quarter of 2007 at $38.6 million were comparable to $38.9 million recorded in the same quarter a year ago.

SG&A costs for the third quarter of 2007 were $5.1 million compared to $4.5 million in the third quarter of 2006.

The foreign exchange gain in the third quarter of 2007 was $8.5 million. The $8.5 million increase was due to the impact of a strengthening Canadian dollar on the Fund's net monetary liability. The foreign exchange gain was partially offset by a decrease in the value of in-process and finished inventory. The decrease in the value of the inventory is realized in Net Revenues as the metal is sold to customers (see Net Revenues above). The Fund maintains cash and cash equivalents, accounts receivable and accounts payable in US dollars.

During the third quarter of 2007, the financial instruments loss was $5.2 million. Effective January 1, 2007, the Fund adopted new accounting policies relating to financial instruments and hedging. During the quarter, the change in the market value of the Fund's financial instruments resulted in the loss being recorded.

Amortization and reclamation costs in the quarter were $7.9 million, an increase of $0.4 million from the same period in 2006. The increase was due in part to higher capital spending over the last 12 months, which has resulted in higher amortization.

In the third quarter of 2007, net interest expense was $5.9 million compared to $5.3 million in the third quarter of 2006 due to an increase in interest rates and debt outstanding as a result of higher working capital requirements, and higher interest expense related to delayed concentrate payments.

Minority interest in earnings in the third quarter of 2007 was $2.1 million, down from $5.2 million in the third quarter of 2006 due to the lower net earnings of the Fund.

Consolidated Earnings (Nine months 2007 compared to nine months 2006)

Revenues less raw material purchases ("Net Revenues") for the first nine months of 2007 totalled $190.1 million, compared to $206.5 million in the same period of 2006. The $16.4 million decrease was due to lower sales, and lower byproduct revenue, offset by higher premiums and processing fee. During 2007, this number was also negatively impacted by the strengthening Canadian dollar.

Production costs in the first nine months of 2007 were $115.5 million, compared to $120.0 million in the same period a year ago. The decrease is due to the lower zinc metal sales and production.

SG&A costs for the first nine months of 2007 were $15.1 million compared to $13.9 million in the same period of 2006. During the first nine months of 2006, production costs were reduced by $0.6 million related to an insurance settlement.

The foreign exchange gain in the first nine months of 2007 of $17.7 million compared to a foreign exchange gain of $0.5 million for the same period in 2006. The $17.2 million increase was due to the impact of a strengthening Canadian dollar on the Fund's net monetary liability. The foreign exchange gain was partially offset by a decrease in the value of in-process and finished inventory. The decrease in the value of the inventory is realized in Net Revenues as the metal is sold to customers.

Amortization and reclamation costs in the first nine months of 2007 were $18.9 million, a decrease of $2.8 million from the same period in 2006. The decrease was due to a reduction in the expected future reclamation spending, which has resulted in a reduction in the present value of future site restoration and reclamation liabilities. During the first quarter of 2007, the Fund completed a review of the site restoration and reclamation expenditures including work performed by a third party engineering firm. The reduction in the present value resulted from the Fund identifying a source for one of the main reclamation materials on its property, thereby significantly reducing the cost of sourcing and transporting the material. In addition, the timing of some of the expenditures was deferred based on the current expectations relating to when the projects would be completed.

In the first nine months of 2007, net interest expense was $17.8 million compared to $12.5 million in the same period of 2006 due to an increase in interest rates and debt outstanding as a result of higher working capital requirements, and higher interest expense related to delayed concentrate payments.

On June 22, 2007, the Federal Government substantively enacted its tax legislation relating to the taxation of existing income and royalty trusts, at effective rates similar to Canadian corporations commencing in 2011. Prior to June 22, 2007, the Fund estimated the future income tax on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes at a nil effective tax rate. Under the legislation, the Fund now estimates the effective tax rate on post 2010 reversal of these temporary differences to be 31%. Temporary differences reversing before 2011 will still give rise to nil future income taxes. The Fund has estimated its future income taxes based on its best estimates of future results of operations, tax pool claims and cash distributions and assuming no material changes to the Fund's organizational structure. The Fund estimates that the unrecognized temporary differences outstanding as of September 30, 2007 that will remain outstanding as of January 1, 2011 are approximately $60 million. The recording of this future tax liability related to these temporary differences resulted in the Fund recording a non-cash future income tax expense and an increase in long-term future tax liabilities of $14.6 million during the second quarter of 2007, based on an effective tax rate of 31%. The Fund's estimate of its future income taxes will vary based on actual results of the factors described above, and such variations may be material (see also "Income Taxes").

Minority interest in earnings (loss) in the first nine months of 2007 was $9.5 million, down from $9.7 million in 2006 due to the lower earnings of the Fund.

PRODUCTION AND SALES

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

In the third quarter of 2007, zinc metal production was 69,242 tonnes, compared to 67,498 tonnes in the same period of 2006. Zinc metal production in the first nine months of 2007 was 1% lower than in the same period of the previous year at 195,436 tonnes compared to 198,280 tonnes.

Production recovered in the third quarter and work progressed in the quarter to address higher zinc dust consumption within the operation. Addressing this issue should help the Fund to improve its overall production. The revised 2007 production forecast is 264,000 tonnes, 1,000 tonnes lower than the previous forecast.

Zinc metal sales in the quarter and the nine month period of 2007 totalled 61,335 tonnes and 181,261 tonnes respectively, compared to 66,954 tonnes and 197,411 tonnes in the same periods in 2006.

Demand for zinc metal remained soft during the third quarter as North American sheet steel producers continue to experience weak order levels from housing, appliance and automotive markets in response to the credit driven constraint in US consumer spending. Non-residential construction demand for sheet steel for private and public construction remains steady and continues to show positive growth. Management believes that inventory adjustments by steel mills and their customers of sheet steel products have generally run their course which should result in improved zinc metal order volumes once consumer spending recovers.

During the third quarter, spot sales continued to be made to offset reduced contract orders from steel customers. A portion of these spot sales that were concluded in the third quarter will be shipped during the fourth quarter, as a result third quarter sales were less than third quarter production. The expected improvement in contract order volumes in the fourth quarter has not materialized; therefore, the target for 2007 sales has been revised to 260,000 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

--------

For the third quarter of 2007, premiums rose to 12.1 cents US per pound compared to 7.3 cents US per pound for the same period in 2006. The increase in realized premiums reflects a significant increase in 2007 contract premiums.

The target for 2007 premiums is 10 cents US per pound, reflecting the expected fourth quarter sales mix of contract sales and lower realization spot sales.

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

BYPRODUCTS

----------

Byproduct revenues in the third quarter of 2007 were $9.5 million, compared to $7.7 million in the third quarter of 2006. Both copper cake and sulphuric acid revenues were higher during the quarter than a year ago. The increase in copper cake revenues was in part due to higher shipments during the quarter. Sulphuric acid netbacks were US $22 per tonne in the third quarter of 2007, compared to US $14 per tonne in the third quarter of 2006.

CAPITAL EXPENDITURES

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

For 2007, capital spending is forecasted at $23.5 million; $17 million will be spent on sustaining capital and $6.5 million will be for revenue generating projects. The focus of these expenditures is to increase treatment of zinc concentrate towards the maximum available concentrate supply under the terms of the Supply and Processing Agreement with Xstrata Canada Corporation ("Xstrata Canada"). The Fund currently processes approximately 535,000 tonnes, which is 15,000 tonnes below the Supply and Processing Agreement's maximum level. Closing the gap to 550,000 tonnes will increase processing fees, and revenue from zinc premiums and byproducts. The extra capital expenditures will be allocated toward de-bottlenecking the plant to increase capacity, potentially generating an additional $4 million in incremental cash flow starting in 2008.

In the third quarter of 2007, $5.9 million was spent on plant and equipment, compared to $4.7 million in the third quarter of 2006.

The Fund has been participating in Hydro-Québec's "Industrial Initiatives Program for Major Customers". During the third quarter, the Fund received $0.1 million in the form of incentives. The incentives have been recorded as a reduction of property, plant and equipment as they relate to capital expenditures incurred to reduce electricity consumption. A total of $1.8 million has been received in 2007, and a further $0.2 million is expected in the fourth quarter.

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

Cash Flows, Liquidity and Capital Resources

For the third quarter of 2007, cash realized from operations, before changes in non-cash working capital was $21.7 million compared to $27.7 million for the same period in 2006. The $6.0 million decrease was due to a reduction in earnings for the quarter. During the quarter, non-cash working capital increased by $0.6 million.

Year-to-date cash realized from operations, before changes in non-cash working capital was $60.1 million compared to $60.6 million for the same period in 2006. Year-to-date non-cash working capital has increased by $21.3 million as the Fund used the cash realized from operations to reduce its accounts payable balances.

Year-to-date capital expenditures were $17.9 million compared to $14.8 million in the prior year.

Distributions paid to unitholders in the third quarter of 2007 were $12.8 million, and year-to-date was $38.2 million unchanged from the same period in 2006.

Fluctuations in working capital balances as a result of operations are generally funded by or used to repay the Revolving Facility. During the quarter, $164.4 million of debt was drawn and $166.6 million was repaid related to the fluctuations in working capital.

In October 2007, the Fund completed an amendment with a syndicate of Canadian chartered banks to its Revolving Facility. The amended Revolving Facility has been extended to May 1, 2009. The amount available to be drawn on the Revolving Facility will vary 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 amount available to be drawn based on the Fund's September 30, 2007 balance sheet is $160 million. Prior to the amendment, the Revolving Facility was $100 million. Borrowings under the Revolving Facility bear interest at rates that vary with the prime rate, the bankers' acceptance rate, or Libor rates plus applicable margins, and vary based on certain financial ratios of the Fund. The Fund has since drawn down on the amended Revolving Facility.

As of September 30, 2007 the amount of the delayed payments owed to Xstrata Canada was $44 million. With the completion of the amended Revolving Facility in October, the Fund paid off all of the delayed amounts owed to Xstrata Canada during the month of October.

At September 30, 2007, the Fund's total debt was $246.5 million (net of deferred financing fees of $0.8 million), up slightly from $244.5 million at the end of December 2006.

Distribution Policy

The Fund makes monthly distributions at the discretion of the Trustees, to its unitholders based on the monthly declarations of cash available for distribution. 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.

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



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RECORD DATE PAYMENT DATE DISTRIBUTION PER UNIT

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October 31, 2007 November 26, 2007 8.5 cents

September 30, 2007 October 25, 2007 8.5 cents

August 31, 2007 September 25, 2007 8.5 cents

July 31, 2007 August 27, 2007 8.5 cents

June 30, 2007 July 25, 2007 8.5 cents

May 31, 2007 June 25, 2007 8.5 cents

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Cash Available for Distribution

The computation and disclosure of cash available for distribution is, in all material respects, in accordance with the revised Staff Notice 52-306 issued by the Canadian Securities Administrators ("CSA") in August 2006. The CSA concluded that the most directly comparable measure calculated in accordance with generally accepted accounting principles ("GAAP") for cash available for distribution is cash flow from operating activities. We adopted their recommendations retroactive to January 1, 2005 and have presented in the table below a reconciliation of cash available for distribution to cash realized from operations.

On July 6, 2007, the CSA issued revised National Policy 41-201, Income Trusts and Other Indirect Offerings. We have adopted their recommendations in this third quarter press release.

During the third quarter, the Canadian Performance Reporting Board of the CICA also published an Interpretive Release titled Standardized Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure. The Fund is currently reviewing the document to determine the potential impact that the guidance may have on its disclosures.

Cash available for distribution is not a measure defined by GAAP and 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, cash available for distribution is a useful supplemental measure for evaluating the Fund's performance as it provides investors with an indication of cash available for distributions and working capital needs. Investors are cautioned, however, that cash available for distribution 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 cash available for distribution for the purposes of this interim report may differ from that used by other issuers and, accordingly, cash available for distribution in this press release may not be comparable to cash available for distribution used by others.

A reconciliation of cash realized from operations to cash available for distribution is provided below:



Three Three Nine Nine

months months months months

ending ending ending ending

Sept.30, Sept.30, Sept.30, Sept.30,

($ thousands) 2007 2006 2007 2006

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Cash realized from operations $ 21,051 $(18,036) $ 38,803 $ (8,145)

Capital adjustments:

Purchase of property plant

and equipment (5,909) (4,676) (17,925) (14,846)

Hydro-Quebec incentives 87 468 1,832 1,781

Proceeds on sale of assets 3 595 63 595

Amortization of deferred

financing fees (64) (64) (190) (190)

Other adjustments including

discretionary items:

Increase (decrease) in

non cash working capital 631 45,785 21,321 68,710

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Cash available for

distribution for the period 15,799 24,072 43,904 47,905

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Decrease in capital and

site restoration reserve - (1,087) - 87

(Increase) decrease in

operating reserve (3,050) (10,235) (5,656) (9,742)

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Distributions declared to

unitholders $ 12,749 $ 12,750 $ 38,248 $ 38,250

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Weighed average number of

units outstanding 49,997,975 50,000,000 49,997,975 50,000,000

Distributions declared per

unit $ 0.255 $ 0.255 $ 0.255 $ 0.255

Payout ratio 81% 53% 87% 80%

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In the third quarter of 2007, cash available for distribution was $15.8 million and distribution declared to unitholders was $12.8 million: $9.6 million paid to Priority Unitholders and $3.2 million paid to Ordinary Unitholders.

We periodically review cash distributions taking into account our current and prospective performance. Some of the factors considered in making decisions related to distributions include cash amounts to service debt obligations, maintenance capital expenditures, taxes, working capital requirements and other items considered to be prudent.

As we calculate the Fund's cash available for distribution, we take into consideration our debt management strategy and our productive capacity maintenance strategy. Cash available for distribution 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.

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 cash available for distribution is greater than the distributions declared, the notional reserve will increase. In a period in which cash available for distribution is less than the distributions declared, the notional 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 third quarter of 2007, the notional operating reserve increased by $3.1 million to $21.1 million (December 31, 2006 - $11.1 million).

While the operating reserve is now above the Fund's target three-month payout level, the Fund's financial flexibility has been reduced. The strengthening in the Canadian dollar and the continued softness for the demand for zinc in the North American markets may negatively impact the Fund's ability to generate cash in 2008. For these reasons, the Fund is not considering any increase in distributions or a special distribution at this time.

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 September 30, 2007, the capital and site restoration reserve was $5.0 million (December 31, 2006 - $5.0 million).

The following table provides an analysis of cash distributions to

unitholders in accordance with CSA National Policy 41-201:



Three Nine

months months Year Year

ending ending ending ending

Sept.30, Sept.30, Dec.31, Dec.31,

($ thousands) 2007 2007 2006 2005

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A. Cash realized from

operations $ 21,051 $ 38,803 $ 20,255 $ 50,592

B. Net earnings before

minority interest 8,548 23,167 44,253 43,745

C. Actual cash distributions

paid or payable 12,749 38,248 51,000 51,000

Excess (shortfalls) of

cash realized from

operations over cash

distributions 8,302 555 (30,745) (408)

Shortfalls of net

earnings over cash

distributions (4,201) (15,081) (6,747) (7,255)

D. Percentage of excess

(shortfall) of cash

realized from operations

over cash distributions 65% 1% (60%) -

E. Shortfall of net earnings

over cash distributions (33%) (39%) (13%) (14%)


SHORTFALLS OF CASH REALIZED FROM OPERATIONS OVER CASH DISTRIBUTIONS

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In the year ending December 31, 2006, cash distributions paid or payable were greater than cash realized from operations by $30.7 million. The main reason for this was the $52.9 million increase in non-cash working capital. The increase in working capital was mainly due to the significant increase in zinc prices (average monthly LME price rose from US$0.83 per pound in December 2005 to $2.00 per pound in December 2006). The Fund was able to finance the increase in working capital requirements by way of its Revolving Facility and by delaying payments to Xstrata Canada.

In the year ending December 31, 2005, cash distributions paid or payable were greater than cash realized from operations by $0.4 million. The main reason for this was the $24.0 million increase in non-cash working capital. The increase in working capital was mainly due to the significant increase in zinc prices (average monthly LME price rose from US$0.54 per pound in December 2004 to $0.83 per pound in December 2005). The Fund was able to finance the increase in working capital requirements from its own cash, and by way of its Revolving Facility.

For both years, the Fund believes that using its Revolving Facility to fund its working capital requirements did not represent an economic return of capital as both its trust indenture and debt agreements allowed for this funding to occur without limiting the Fund's ability to make distributions.

SHORTFALLS OF NET EARNINGS OVER CASH DISTRIBUTIONS

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

Throughout the four periods presented, the Fund's cash distributions paid or payable were in excess of the Fund's net earnings. This was as a result of the following items:



- Amortization and reclamation expenses have been higher than the

Fund's cash used for investment activities.

- In the three month period ending September 30, 2007 there was a

$5.1 million mark-to-market loss on Commodity financial instruments.

- In the nine month ending September 30, 2007 there was a $14.6 million

non-cash future income tax expense relating to the enactment of

Bill C-52.


The Fund does not use net earnings as a basis to calculate distributions. Other non-cash items, such as amortization and reclamation are items which will fluctuate from period to period depending upon various factors or are based on long-term assumptions and as such may not be indicative of the cash generation capacity of the Fund. In all periods, the Fund does not believe that it has provided an economic return of capital.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates remain substantially the same as reported in our Management's Discussion and Analysis for the year ended December 31, 2006, except as discussed in Changes in Accounting Policies and in Income Taxes.

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 waiting final pricing at quarter-end could have a material effect on future revenues. As of September 30, 2007, there was $9.7 million in revenues waiting final pricing.

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.

Income Taxes

The Fund follows the liability method of accounting for future income taxes. Under the liability method, future income tax assets and liabilities are determined based on differences between the accounting basis and the tax basis of the assets and liabilities, and are measured using the currently enacted tax rates and laws expected to apply when these differences reverse. The effect of a change in income tax rates on future tax liabilities and assets is recognized in income in the period in which the change occurs.

On June 22, 2007, the Federal Government enacted its tax legislation relating to the taxation of existing income and royalty trusts, at effective rates similar to Canadian corporations commencing in 2011. The Fund estimates that the unrecognized temporary differences outstanding as of September 30, 2007 that will remain outstanding as of January 1, 2011 are approximately $60 million. The recording of this future tax liability related to these temporary differences resulted in the Fund recording a future income tax expense and an increase in long-term future tax liabilities of $14.6 million during the second quarter of 2007, based on an effective tax rate of 31%.

Currently, the Fund does not pay income tax as long as distributions to Unitholders exceed the amount of the Fund's income that would otherwise be taxable. However Canadian Unitholders who receive the distributions personally (i.e., outside an RRSP or other tax deferred plan) are liable for income tax at full personal tax rates on the taxable portion of distributions. Bill C-52 will result in a two-tiered tax structure similar to that of corporations whereby the taxable portion of distributions will be subject to income tax payable by the Fund at a rate of 31% while taxable Canadian Unitholders will receive the favourable tax treatment on distributions currently applicable to qualifying dividends. As a result, there will be essentially no impact on taxable Canadian Unitholders arising from these changes, as the new tax payable by the Fund will be offset by the reduced rate of tax applicable to dividends.

At present, Canadian registered pension plans, RRSPs and RRIFs ("Canadian Tax Exempt Entities") are not subject to current income tax on distributions received from the Fund (their tax obligation is deferred). Under Bill C-52, Canadian Tax Exempt Entities would receive distributions after provision by the Fund for the new tax, as will investors located outside Canada.

The new tax legislation will apply to the Fund and its Priority Unitholders effective January 1, 2011. Cash distributions on Ordinary Units are subordinate to distributions on Priority Units until 2017, except on the occurrence of certain events. With respect to Bill C-52, the Fund expects that the subordination will remain unchanged.



SUMMARY OF QUARTERLY RESULTS

($ millions, except per-unit amounts and production amounts)

2007(1) (unaudited) Q1 Q2 Q3

Revenues 269.3 266.6 251.2

Net earnings (loss) 14.0 (6.7) 6.4

Net earnings (loss) per Priority Unit

(basic and diluted) 0.37 (0.18) 0.17

Production (tonnes) 62,947 63,247 69,242

2006 (unaudited) Q1 Q2 Q3 Q4

Revenues 180.8 284.2 266.4 307.8

Net earnings 4.3 9.3 15.6 4.0

Net earnings per Priority Unit

(basic and diluted) 0.12 0.25 0.41 0.11

Production (tonnes) 61,684 69,098 67,498 68,147

2005 (unaudited) Q1 Q2 Q3 Q4

Revenues 113.2 118.3 130.6 148.6

Net earnings 6.5 7.8 8.2 10.3

Net earnings per Priority Unit

(basic and diluted) 0.17 0.21 0.22 0.28

Production (tonnes) 66,851 68,692 67,873 69,002

(1) Q1 and Q2 2007 have been restated.


On January 1, 2007, the Fund was required to separate and record at fair value these embedded derivatives related to provisional pricing in concentrate purchase contract. The Company should have recorded the embedded derivatives in accounts payable for purchase concentrate contracts. In each period, the provisionally priced concentrates should have been marked-to-market based on the forward market price for the quotational period stipulated in the contract until the quotational period expired. The Fund should have recorded the mark-to-market adjustments (both gains and losses) in raw material purchase costs for purchase concentrate contract. Given that the impact of not properly accounting for the embedded derivatives were deemed to be material to the first and second quarter of 2007, the Fund is restating these unaudited consolidated financial statements.

Under the new accounting rule, net earnings in any particular period will have the potential to be negatively impacted by rising zinc prices or positively impacted by falling zinc prices. This is a result of the accounts payable being revalued, while the inventory remains at its historical cost. This impact will be reversed in a subsequent period when the inventory is sold.



Outstanding Unit Data As at November 5, 2007

Priority Units 37,497,975

Ordinary Units 12,500,000


RELATED PARTY TRANSACTIONS

As a result of the Supply and Processing Agreement, during the nine-month period ending September 30, 2007 Xstrata Canada has sold $524.0 million of concentrate (2006 - $599.0 million) and provided $1.1 million of sales agency services (2006 - $1.0 million). The sales agency services are provided on a cost recovery basis. As of September 30, 2007 the Partnership has a payable of $65.6 million to Xstrata Canada (2006 - $112.1 million) related to the Supply and Processing Agreement. This amount is included in accounts payable and accrued liabilities.

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, Xstrata Canada has provided the following administration, management and operating services to the Fund:



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Selling, general and administration

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Nine months ending September 30 (000's) 2007 2006

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Salary and benefits $5,693 $5,296

Support services 855 921

Research and technology costs 180 38

Operating and management agreement management fee 203 199

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Total $6,931 $6,454


During the nine month period ending September 30, 2007, the Fund's production expenses included $46.4 million (2006 - $47.0 million) 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 $0.3 million in 2007 (2006 - $0.3 million). The annual management fee is adjusted by 2% per annum at the beginning of each calendar year.

As of September 30, 2007 the Fund, Operating Trust and the Partnership had a payable of $10.6 million (2006 - $9.0 million) 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 Xstrata Canada group companies and divisions at terms that reflect market rates. The following table summarizes the related party transactions for the period.



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

Period ended September 30 2007 2006

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

(000's)

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

Sales

Sales of zinc metal $114,556 $ 33,060

Sales of byproducts 25,204 27,062

Expenses

Purchases of raw materials and operating supplies $ 19,908 $ 5,211

Interest expense $ 5,455 $ 2,546


Included in the accounts receivable as at September 30, 2007 was $26.8 million (2006 - $15.1 million) of amounts due from sales of zinc metal and by-products and all other receivables was $5.7 million (2006 - $0.6 million). Included in accounts payable and accrued liabilities as at September 30, 2007 was $8.2 million (2006 - $1.7 million) 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, except for the delayed concentrate payments, and are due in the ordinary course of business. All transactions with Xstrata Canada and affiliated companies are carried out in the normal course of operations, and are recorded at an agreed upon exchange amount.

CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2007, the Fund adopted section 3855, Financial Instruments - Recognition and Measurement, section 3865, Hedges and section 1530, Comprehensive Income. Section 3855 contains comprehensive requirements for recognition and measurement of financial instruments. Section 3865 introduces new requirements for hedge accounting. Section 1530 describes how to report and disclose comprehensive income and its components.

The Fund periodically uses forward contracts to hedge the effect of price changes relating to its firm commitments on the commodities it sells. Hedge accounting is used when there is a high degree of correlation between price movements in the derivative instrument and the item designated as being hedged. As of December 31, 2006, the hedge was effective at 99.4%. The initial measurement of these contracts and the Fund's firm commitments resulted in an unrealized gain of $21.2 million and an unrealized loss of $21.1 million, respectively. As set out in the transitional provisions of the section, the initial measurement of these contracts and the Fund's firm commitments resulted in a reduction in the deficit by $100,000 and an increase in interests of Ordinary Unitholders of $34,000.

The Fund's commodity hedging program includes inventory management, which hedges the purchases and sales of zinc metal. The Fund has determined that these financial instruments do not meet the requirements for hedge accounting under the new requirements. The fair market value of these positions was an unrealized gain of $321,000, which pursuant to the transitional provisions of the section, is reported as a reduction in the deficit by $241,000 and an increase in interests in Ordinary Unitholders of $80,000. These contracts are classified as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

The Fund has separated and recorded at fair value embedded derivatives related to provisional pricing feature in the Supply and Processing Agreement. Under the terms of this agreement, prices are set on a specified future date after shipment based on quoted market prices ("quotational pricing"). Each period, the provisionally priced metals are marked-to-market based on the forward market price for the quotational period stipulated in the agreement until the quotational period expires.

The Fund records these mark-to-market adjustments (both gains and losses) in raw material purchases costs. The initial measurement of the embedded derivatives in quotational pricing using forward market zinc prices resulted in a reduction in the accounts payable and accrued liabilities of $4.3 million, an increase in the interests of Ordinary Unitholders of $1.1 million and a decrease in the opening deficit of $3.2 million.

In accordance with the new sections the Fund reclassified its $1.0 million deferred financing fees from long-term assets to long-term debt as of January 1, 2007.

OTHER DEVELOPMENTS

The Fund is negotiating a new labour contract with the United Steel Workers of America, Local 6486 this fall. The current contract expired October 31, 2007. Negotiations are continuing and management is expecting a conclusion during the month of November. The plant continues to operate under normal conditions.

OUTLOOK

The Fund's primary goal is to continue to provide stable monthly distributions.



The 2007 targets for the key drivers of the Fund are:

Zinc metal production: 264,000 tonnes

Zinc metal sales: 260,000 tonnes

Processing fee: 37 cents per pound

Zinc metal premiums: 10 cents US/pound

Capital expenditures: $23.5 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 that can be found in the "forward-looking statements" below.

Forward-Looking Statements

This interim report contains Forward-Looking Statements concerning the Noranda Income Fund's ("Fund") objectives and 2007 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 impact of new tax legislation; (4) the demand for zinc metal, sulphuric acid and copper cake; (5) changes to the supply and demand for specific zinc metal products and the impact on the Fund's realized premiums; (6) the impact of month prior pricing; (7) the ability of the Fund to continue to service customers in the same geographic region; (8) the sensitivity of the Fund's Net Revenues to reductions in realized zinc metal prices including premiums, copper prices, sulphuric acid prices; the strengthening of the Canadian dollar vis-à-vis the US dollar; and increasing transportation and distribution costs; (9) the sensitivity of the Fund's production costs to increases in electricity rates, other energy costs, labour costs and operating supplies used in its operations, the sensitivity of the Fund's interest expense to increases in interest rates; (10) changes in recoveries and capital expenditure requirements; (11) the negotiation of collective agreements with its unionized employees; (12) general business and economic conditions; (13) transportation disruptions; (14) the legislation governing air emissions, discharges into water, waste, hazardous materials and workers' health and safety, as well as the impact of future legislation and regulations on expenses, capital expenditures, taxation and restrictions on the operation of the Processing Facility; (15) potential negative financial impact from regulatory investigations, claims, lawsuits and other proceedings; (16) loan default and the ability to refinance its existing debt obligations; and (17) reliance on Xstrata Canada for the operation, maintenance and short-term financing 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 report.

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)

Sept. 30 Dec. 31

2007 2006

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

ASSETS

Current assets:

Cash and cash equivalents 1,036 13,712

Accounts receivable

Trade 81,327 143,438

Xstrata Canada 32,502 35,817

Firm commitments 2,415 -

Inventories 148,271 188,161

Prepaids and other assets 2,202 3,566

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

267,753 384,694

Deferred financing fees - 1,009

Property, plant and equipment 315,696 324,063

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

583,449 709,766

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued liabilities

Trade 17,901 17,596

Xstrata Canada 84,392 218,780

Commodity financial instruments 4,784 -

Distributions payable 4,250 4,250

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

111,327 240,626

Future tax liability 14,636 -

Future site restoration and reclamation 11,881 15,205

Long-term debt 246,481 244,500

Interests of Ordinary Unitholders 53,445 52,363

Unitholders' Interest:

Unitholders' equity 191,273 191,273

Deficit (45,594) (34,201)

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

145,679 157,072

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

583,449 709,766

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



NORANDA INCOME FUND

INTERIM CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT

AND COMPREHENSIVE INCOME

(unaudited)

($ thousands)

Three months Nine months

ended September 30 ended September 30

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

2007 2006 2007 2006

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

Revenues

Sales 255,290 270,681 798,323 743,298

Transportation and

distribution costs (4,053) (4,253) (11,234) (11,844)

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

251,237 266,428 787,089 731,454

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

Raw material purchase

costs 188,579 189,578 596,949 524,995

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

Revenues less raw

material purchase

costs 62,658 76,850 190,140 206,459

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

Other expenses

Production 38,554 38,891 115,519 120,040

Selling, general and

administration 5,108 4,493 15,048 13,882

Foreign exchange gain (8,452) (31) (17,724) (517)

Commodity financial

instruments loss 5,187 - 2,713 -

Commodity hedging

loss (gain) (41) - 112 -

Amortization and

reclamation 7,897 7,504 18,886 21,674

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

48,253 50,857 134,554 155,079

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

Earnings before

interest, minority

interest and income

tax 14,405 25,993 55,586 51,380

Interest expense, net 5,857 5,246 17,783 12,480

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

Earnings before

minority interest

and income tax 8,548 20,747 37,803 38,900

Minority interest in

earnings for Ordinary

Unitholders 2,137 5,187 9,451 9,725

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

Earning before income

tax 6,411 15,560 28,352 29,175

Income tax expense - - 14,636 -

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

Net earnings and

comprehensive income 6,411 15,560 13,716 29,175

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

Deficit as originally

reported beginning

of period (42,443) (34,651) (34,201) (29,141)

Adjustment for

derivatives (Note 3) - - 3,236 -

Adjustment for

financial instruments

(Note 3) - - 341 -

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

Deficit after

adjustment beginning

of period (42,443) (34,651) (30,624) (29,141)

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

Distributions to

Priority Unitholders (9,562) (9,562) (28,686) (28,687)

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

Deficit end of period (45,594) (28,653) (45,594) (28,653)

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

Net earnings (loss)

per Priority Unit

(basic and diluted) $ 0.17 $ 0.41 $ 0.37 $ 0.78

Weighted average

Priority Units

outstanding 37,497,975 37,500,000 37,497,975 37,500,000



NORANDA INCOME FUND

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

($ thousands)

Three months Nine months

ended September 30 ended September 30

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

2007 2006 2007 2006

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

Cash realized from

(used for)

operations:

Net earnings for the

period 6,411 15,560 13,716 29,175

Items not affecting

cash:

Amortization 7,583 7,265 22,102 21,419

Reclamation 314 239 (3,216) 255

Minority interest 2,137 5,187 9,451 9,725

Mark-to-market loss

on commodity

financial

instruments 5,146 - 2,825 -

Future income tax

expense - - 14,636 -

Amortization of

deferred financing

fees 64 64 190 190

Loss from sale of

assets 81 (152) 528 244

Site restoration

expenditures (54) (414) (108) (443)

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

21,682 27,749 60,124 60,565

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

Net change in non

cash working capital

items (631) (45,785) (21,321) (68,710)

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

21,051 (18,036) 38,803 (8,145)

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

Cash realized from

(used for) investment

activities:

Purchases of property,

plant and equipment (5,909) (4,676) (17,925) (14,846)

Proceeds from Hydro

Quebec - incentives 87 468 1,832 1,781

Proceeds on sales of

property, plant and

equipment 3 595 63 595

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

(5,819) (3,613) (16,030) (12,470)

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

Cash realized from

(used for) financing

activities:

Distributions

- Priority

Unitholders (9,562) (9,562) (28,686) (28,687)

- Ordinary

Unitholders (3,188) (3,188) (9,563) (9,563)

Long-term debt issued

under the Revolving

Facility 164,400 198,000 467,500 400,100

Long-term-debt repaid

under the Revolving

Facility (166,600) (154,400) (464,700) (331,200)

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

(14,950) 30,850 (35,449) 30,650

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

Change in cash and

cash equivalents

during the period 282 9,201 (12,676) 10,035

Cash and cash

equivalents,

beginning of

period 754 1,009 13,712 175

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

Cash and cash

equivalents, end

of period 1,036 10,210 1,036 10,210

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



NORANDA INCOME FUND

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(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 September 30, 2005, Noranda changed its name to Falconbridge

Limited ("Falconbridge") pursuant to a corporate amalgamation.

Falconbridge was subsequently acquired by Xstrata plc ("Xstrata"), a

major global diversified mining group, listed on the London and Swiss

stock exchanges. The final share acquisition was completed on

November 1, 2006 and Falconbridge is now a wholly-owned subsidiary of

Xstrata. In October 2007, Falconbridge changed its name to Xstrata Canada

Corporation ("Xstrata Canada").

Significant Agreements

Pursuant to a 15 year Supply and Processing Agreement signed on

May 3, 2002, between Xstrata Canada and the Partnership, Xstrata Canada

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 2007 is $0.37 (2006 - $0.365) 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, Xstrata Canada 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 Xstrata Canada, 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. The initial terms of these agreements

ends on May 2, 2017 and will automatically renew thereafter for a five

year term, unless terminated in accordance with the terms.

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.

The initial terms of these agreements ends on May 2, 2017 and will

automatically renew thereafter for a five year term, unless terminated in

accordance with the terms. Upon the termination of the operating and

management agreement, the Partnership will acquire the Manager from

Xstrata Canada.

Cash Distributions

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 working capital 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.

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, the cash available for distribution 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 the cash available for distribution, 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 cash available for distribution in a subsequent month. Any

accumulated distributions deficiency related to the Ordinary Units will

not be accrued by the Fund until such time excess cash available for

distribution is available.

2. Accounting Policies

These unaudited interim consolidated financial statements have been

prepared following the accounting policies as set out in the 2006 annual

consolidated financial statements, except as set out in Note 3. 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 2006 Annual Report.

3. Changes in Accounting Policies

Effective January 1, 2007, the Fund adopted section 3855, Financial

Instruments - Recognition and Measurement, Section 3865, Hedges and

section 1530, Comprehensive Income. Section 3855 contains comprehensive

requirements for recognition and measurement of financial instruments. An

entity should recognize a financial asset or financial liability only

when the entity becomes a party to the contractual provisions of the

financial instrument. Financial assets and liabilities should, with

certain exceptions, be initially measured at fair value. For financial

assets and liabilities not classified as held for trading, the initial

value recorded should include transaction costs that are directly

attributable to the acquisition or issuance of the financial asset or

liability. After initial recognition, the measurement of each financial

instrument will vary depending on their classification: financial assets

and financial liabilities held for trading, available-for sale financial

assets, held-to maturity investments, loans and receivables, and other

financial liabilities.

The Fund has separated and recorded at fair value embedded derivatives

related to provisional pricing in the Supply and Processing Agreement.

Under the terms of this agreement, prices are set on a specified future

date after shipment based on quoted market prices ("quotational

pricing"). The Fund records the fair value embedded derivatives in

accounts payable for the Supply and Processing Agreement. Each period,

the provisionally priced metals are marked to market based on the forward

market price for the quotational period stipulated in the agreement until

the quotational period expires.

The Fund records these mark-to-market adjustments (both gains and losses)

in raw material purchases costs. The initial measurement of the embedded

derivatives in quotational pricing using forward market zinc prices

resulted in a reduction in the accounts payable and accrued liabilities

of $4,315, an increase in the interests of Ordinary Unitholders of $1,079

and a decrease in the opening deficit of $3,236.

Section 3865 introduces new requirements for hedge accounting.

Requirements for identifying hedging relationships, previously included

in CICA Accounting Guideline 13 Hedging Relationships ("AcG 13"), are now

incorporated into this new standard. However, certain hedging

relationships will no longer qualify for hedge accounting under these new

rules, despite their qualification under AcG 13. The Fund has determined

that the derivatives it has contracted in connection with its inventory

management hedging program do not meet the new requirements. As a result,

these financial instruments have been recognized on the balance sheet as

either financial asset or financial liability with the change in their

fair value at each reporting period recognized as a gain or a loss.

The Fund has classified its cash and cash equivalents as held for trading

and its accounts receivable as loans and receivables. Accounts payable,

distributions payable and long-term debt are classified as other

financial liabilities. The fair value of cash and cash equivalents,

accounts receivable, accounts payable and distributions payable

approximates their carrying values due to their short-term nature.

The CICA has also issued Section 1530, Comprehensive Income. The section

is effective for fiscal years beginning on or after October 1, 2006 and

it describes how to report and disclose comprehensive income and its

components. Comprehensive income is the change in a company's net assets

that results from transaction, events and circumstances from sources

other than the company's shareholders. It includes items that would not

normally be included in net earnings such as: unrealized gains or losses

on available for sale investments; and gains and losses on derivatives

designated as cash flow hedges.

The Fund periodically uses forward exchange contracts and forward

contracts to hedge the effect of price changes relating to its firm

commitments on the commodities it sells. Hedge accounting is used when

there is a high degree of correlation between price movements in the

derivative instrument and the item designated as being hedged. As at

December 31, 2006, the hedge was effective at 99.4%. The initial

measurement of these contracts and the Company's firm commitments

resulted in an unrealized gain of $21,229 and an unrealized loss of

$21,095, respectively. As set out in the transitional provisions of the

section, the net gain of $100 is reported in the opening deficit and

$34 as an adjustment to the interests of Ordinary Unitholders.

The Processing Facility's commodity hedging program includes inventory

management hedges which hedge purchases and sales of zinc metal. At

December 31, 2006, the Processing Facility had sold forward approximately

three million pounds of zinc. The fair market value of these positions

was an unrealized gain of $241 which pursuant to the transitional

provisions of the section, is reported as an adjustment to the opening

deficit and $80 to the interests of Ordinary Unitholders. These contracts

are classified as financial assets when the fair value is positive and as

financial liabilities when the fair value is negative.

In accordance with Section 3855, the Fund has accounted for transaction

costs related to the issuance of financial instruments as a reduction of

the related financial instruments. As a result, deferred financing in the

amount of $819 are now presented as a reduction of the long-term debt

balance.

FUTURE CHANGES IN ACCOUNTING POLICIES

Capital Disclosures

The CICA issued a new accounting standard, Section 1535 Capital

Disclosures, which requires the disclosure of both qualitative and

quantitative information that provides users of financial statements with

information to evaluate the entity's objectives, policies and processes

for managing capital. This new section is effective for the Fund

beginning January 1, 2008.

Financial Instruments - Disclosure and Financial Instruments -

Presentation

Two new accounting standards were issued by the CICA, Section 3862

Financial Instruments - Disclosures, and Section 3863 Financial

Instruments -, Presentation. These sections will replace Section 3861

Financial Instruments - Disclosure and Presentation once adopted. The

objective of Section 3862 is to provide users with information to

evaluate the significance of the financial instruments on the entity's

financial position and performance, the nature and extent of risks

arising from financial instruments, and how the entity manages those

risks, The provisions of Section 3863 deal with the classification of

financial instruments, related interest, dividends, losses and gains, and

the circumstances in which financial assets and financial liabilities are

offset. These new sections are effective for the Fund beginning January

1, 2008.

Inventories

In June 2007, the CICA issued a new accounting standard - Section 3031

Inventories, which replaces the existing standard for inventories,

Section 3030. The main features of the new Section are as follows:

- Measurement of inventories at the lower of cost and net realizable

value

- Consistent use of either first-in, first-out or a weighted average

cost formula to measure cost

- Reversal of previous write-downs to net realizable value when there

is a subsequent increase to the value of inventories.

The new Section is effective for the Fund beginning January 1, 2008. The

Fund is currently assessing the impact on the financial statements.

4. Long-Term Debt

On October 5, 2007, the Noranda Operating Trust, a subsidiary of the

Fund, completed an amendment with a syndicate of Canadian chartered banks

to its secured revolving operating line of credit (the "Revolving

Facility"). The amended Revolving Facility has been extended to

May 1, 2009. The amount available to be drawn on the Revolving Facility

will vary on a quarterly basis and will be based on 65% of the Fund's

eligible inventory and 80% of the Fund's eligible accounts receivable

from the previous quarter-end. The maximum available to be drawn at any

time is $200 million and the minimum available to be drawn is

$55 million. The amount available to be drawn based on the Fund's

September 30, 2007 balance sheet is $160 million. Prior to the amendment,

the Revolving Facility was $100 million. Borrowings under the Revolving

Facility bear interest at rates that vary with the prime rate, the

bankers' acceptance rate, or Libor rates plus applicable margins, and

vary based on certain financial ratios of the Fund. The Fund has since

drawn down on the amended Revolving Facility.

The Revolving Facility continues to be secured by all the assets of the

Partnership and the Operating Trust, and continues to have covenants that

are required to be complied with.

5. Future Site Restoration and Reclamation

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

Future Site Restoration and Three Three Nine Nine

Reclamation Continuity Months Months Months Months

ended ended ended ended

Sept.30, Sept.30, Sept.30, Sept.30,

2007 2006 2007 2006

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

Opening balance $11,621 $15,924 $15,205 $15,924

Accretion of reclamation expense 271 240 846 736

Site restoration and reclamation

expenditures (54) (414) (108) (443)

Change in estimates 43 - (4,062) (481)

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

Closing balance $11,881 $15,736 $11,881 $15,736

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

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

The majority of the estimated future site restoration and reclamation

expenditures currently recorded relate to the reclamation of residue

ponds at the Processing Facility. The estimated future site restoration

and reclamation expenditures may vary based on changes in operations, and

cost of restoration and reclamation and regulatory requirements. Although

the ultimate amount to be incurred is uncertain, the liability for future

site restoration on an undiscounted basis is estimated to be

approximately $41 million. The cash flows required to settle the

liability are expected to be incurred from now until 2045.

6. 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, Xstrata Canada 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. Xstrata Canada 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. Xstrata Canada

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, Xstrata Canada

has the right to charge the customer with the cost of settling the LME

contract.

At September 30, 2007, Xstrata Canada had futures contracts (fixed

forward price hedges) hedging approximately 30 million pounds of zinc

(2006 - 34 million pounds) to be sold pursuant to firm commitments at

fixed prices and delivery dates related to the Fund. The change in fair

value of these net positions representing the ineffective portion of the

hedge position for the three-months ending September 30, 2007, was an

unrealized gain of $41 which was recognized in the consolidated statement

of earnings and comprehensive income in commodity hedging gain

(2006 - mark-to-market value of the fixed forward prices hedges was an

unrealized gain of $12,738 which was not recognized in the consolidated

statement of earnings and comprehensive income).

At September 30, 2007, the Processing Facility had sold forward

approximately 30 million pounds of zinc (2006 - sold forward 4 million

pounds). The change in fair value of these positions for the three months

ending September 30, 2007 was an unrealized loss of $5,187 which was

recognized in the consolidated statement of earnings and comprehensive

income in commodity financial instruments loss (2006 - unrealized gain of

$91 which was not recognized in the consolidated statement of earnings

and comprehensive income).

Currency Risk

The Fund maintains cash and cash equivalents, accounts receivable, and

accounts payable in foreign currencies, and is therefore exposed to

currency risk on these funds.

7. Income Taxes

The Fund follows the liability method of accounting for future income

taxes. Under the liability method, future income tax assets and

liabilities are determined based on differences between the accounting

basis and the tax basis of the assets and liabilities, and are measured

using the currently enacted tax rates and laws expected to apply when

these differences reverse. The effect of a change in income tax rates on

future tax liabilities and assets is recognized in income in the period

in which the change occurs.

On June 22, 2007, the Federal Government substantively enacted its tax

legislation relating to the taxation of existing income and royalty

trusts, at effective rates similar to Canadian corporations commencing in

2011. Prior to June 22, 2007, the Fund estimated the future income tax on

certain temporary differences between amounts recorded on its balance

sheet for book and tax purposes at a nil effective tax rate. Under the

legislation, the Fund now estimates the effective tax rate on post 2010

reversal of these temporary differences to be 31%. Temporary differences

reversing before 2011 will still give rise to nil future income taxes.

The Fund has estimated its future income taxes based on its best

estimates of future results of operations, tax pool claims and cash

distributions and assuming no material changes to the Fund's

organizational structure. The Fund estimates that the unrecognized

temporary differences outstanding as of September 30, 2007 that will

remain outstanding as of January 1, 2011 is approximately $60 million.

The recording of this future tax liability related to these temporary

differences resulted in the Fund recording a non-cash charge to future

income tax expense and an increase in long-term future tax liabilities of

$14,636 during the second quarter of 2007, based on an effective tax rate

of 31%. The Fund's estimate of its future income taxes will vary based on

actual results of the factors described above, and such variations may be

material.

8. 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 nine-month

period ending September 30, 2007 Xstrata has sold $523,996 of concentrate

(2006 - $598,977) and provided $1,065 of sales agency services

(2006 - $1,030). The sales agency services are provided on a cost

recovery basis. As of September 30, 2007 the Partnership has a payable of

$65,575 to Xstrata Canada (2006 - $112,062) related to the Supply and

Processing Agreement. This amount is included in accounts payable and

accrued liabilities.

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, Xstrata Canada has provided the following

administration, management and operating services to the Fund:

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Selling, general and administration

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Nine months ending September 30 2007 2006

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Salary and benefits $5,693 $5,296

Support services 855 921

Research and technology costs 180 38

Operating and management agreement management fee 203 199

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Total $6,931 $6,454

During the nine-month period ending September 30, 2007, the Fund's

production expenses included $46,402 (2006 - $46,950) 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 $270 in 2007

(2006 - $265). The annual management fee is adjusted by 2% per annum at

the beginning of each calendar year.

As of September 30, 2007 the Fund, Operating Trust and the Partnership

had a payable of $10,584 (2006 - $8,953) 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 Xstrata Canada group companies

and divisions at terms that reflect market rates.

The following table summarizes the related party transactions for the

period.

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Period ended September 30 2007 2006

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Sales

Sales of zinc metal $114,556 $33,060

Sales of byproducts 25,204 27,062

Expenses

Purchases of raw materials and operating supplies $19,908 $5,211

Interest expense $5,455 $2,546

Included in the accounts receivable as at September 30, 2007 was $26,800

(2006 - $15,121) of amounts due from sales of zinc metal and by-products

and all other receivables was $5,701 (2006 - $639). Included in accounts

payable and accrued liabilities as at September 30, 2007 was $8,232

(2006 - $1,716) 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,

except for the delayed concentrate payments, and are due in the ordinary

course of business. All transactions with Xstrata Canada and affiliated

companies are carried out in the normal course of operations, and are

recorded at an agreed upon exchange amount.

9. 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.


Contact Information

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