Xstrata Zinc

Xstrata Zinc

June 16, 2011 07:45 ET

Xstrata Zinc Responds to Noranda Income Fund Unitholders' Questions

TORONTO, ONTARIO--(Marketwire - June 16, 2011) - At the annual general meeting of unitholders of Noranda Income Fund (the "Fund"), held on June 14 in Toronto, a number of questions were raised relating to Xstrata's intentions in respect of the Fund. The following announcement sets out Xstrata's response for the benefit of all unitholders in the Fund.

Expiry of Xstrata supply contract

Xstrata has no current intention to continue to supply the Processing Facility beyond the expiry of the Supply and Processing Agreement (the "Supply Agreement") on May 3, 2017.

The fundamentals of the zinc concentrate market have changed significantly since the Supply Agreement was entered into. Today, substantial processing capacity exists and continues to be constructed in China. The introduction of lower cost competition has resulted in overcapacity in global smelting and refining and depressed treatment charges. Market rates for treatment charges have remained well below the charges earned by the Fund under the Supply Agreement for the last several years. Analysis undertaken by independent industry analysts and by Xstrata indicates that treatment charges will remain at low levels due to increased competition for a declining supply of zinc concentrates.

The continued operation of the Processing Facility following the expiry of the Xstrata supply arrangement will require that the Fund secure alternative sources of zinc concentrate in a potentially highly competitive and more costly environment. This is likely to result in a significant reduction in the Fund's profitability.

Potential alternative sources of supply

Xstrata Zinc's recent agreement to acquire the Hackett River and Wishbone exploration properties in Nunavut from Sabina Gold and Silver Corporation is unrelated to its interest in the Fund. Xstrata did not acquire these properties with an intent to supply the Processing Facility. Any zinc production from these properties is expected to be directed to purchasers that will provide Xstrata with the most competitive prices for such supply.

Closure provisioning and debt amortisation

The expiration of the Supply Agreement in 2017 and the possibility that the Fund may not be able to secure alternative sources of zinc concentrate on profitable terms present a risk that the Processing Facility may have to cease operations. On closure, the Fund would face significant liabilities relating to decommissioning, land reclamation and rehabilitation, and employee severance and pension costs, without an ongoing business which could fund these costs.

Given the above, it is Xstrata's view that the refinancing of the Fund's debt should provide for substantial debt amortization prior to 2017. While such amortization would have a significant impact on the Fund's distributions to unitholders, Xstrata believes that appropriate reduction of outstanding debt by 2017 is important in order to ensure that the Fund's obligations to all stakeholders are met.

Xstrata remains committed to the sound management of the Fund and looks forward to working with the independent trustees to best position the Fund to confront the challenges it faces.

Neither the content of the company's website nor the content of any other website accessible from hyperlinks on the company's website is incorporated into, or forms part of, this announcement.

ABOUT XSTRATA ZINC

Headquartered in Madrid, Spain, Xstrata Zinc is one of the world's largest producers of zinc and one of the commodity business units within the major global diversified mining group Xstrata plc. Xstrata's zinc and lead operations and exploration projects are located in Australia, Canada, Germany, Peru, Spain and the United Kingdom.

Xstrata Zinc's operations in Spain comprise the San Juan de Nieva zinc smelter and the Arnao zinc semis plant in Asturias, and the Hinojedo roasting plant in Cantabria.

In Australia, operations comprise: the Mount Isa, George Fisher underground, Handlebar Hill open cut and Black Star open cut zinc-lead mines, zinc-lead concentrator, lead smelter and Bowen Coke Works in north Queensland; and the McArthur River open pit zinc-lead mine, processing and loading facility in the Northern Territory.

In Canada, operations and exploration projects include the Brunswick zinc-lead mine, and the Brunswick Lead smelter and recycling facilities in New Brunswick; the Perseverance zinc mine and the Bracemac McLeod mine development in Quebec and the General Smelting facilities and 25% of the CEZ zinc smelter near Montreal.

Xstrata Zinc also operates the Nordenham zinc smelter in northern Germany; the Northfleet lead refinery in the United Kingdom; and owns 33.75% of the Antamina mine in Peru.

Around half of all zinc currently consumed is used for galvanizing steel, which is an environmentally friendly method of protecting steel against corrosion. Zinc also finds application in the manufacture of die-cast alloys, brass and the production of zinc oxides and chemicals.

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