DBRS Confirms Noranda Income Fund at STA-2 (middle)

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating of Noranda Income Fund (the “Fund”) at STA-2 (middle).

The performance of the Fund has remained on track as steady financial and operating results continue to meet DBRS’s expectations. The Fund’s stable performance, along with support offered by its concentrate supply contract and governance arrangements with Falconbridge Limited (“Falconbridge”), allow the Fund to achieve one of the highest stability ratings in Canada for a commodity-influenced Fund.

DBRS notes that Falconbridge is currently the target of a friendly takeover bid by Inco Limited. If the transaction is completed there will be no change in any of the current arrangements with Falconbridge. The secured supply contract with Falconbridge for zinc concentrate feed and minimal exposure to volatile commodity and currency rates allows the Fund to achieve an above-average business profile. There would be no change in the Fund’s stability rating if the takeover is completed. The Fund’s STA-2 (middle) rating remains constrained by its reliance on one plant [the Canadian Electrolytic Zinc (“CEZinc”) processing facility] and essentially one product (zinc) for its distributable cash flow. With the facility operating near capacity, meaningful growth is also limited.

DBRS expects the Fund to continue generating cash flows that cover its annual distribution of Cdn$1.02 per unit. This is driven by the stable operating performance of the CEZinc processing facility and moderate spending for sustaining capital. Major spending on capital and environmental upgrades in the late 1990s limits ongoing spending and allows the Fund to distribute the bulk of cash flows to unitholders. Over time, the Fund has distributed a prudent and manageable percentage of cash available for distribution, with 2003 being the only year when the payout ratio was above 100%. The Fund maintains a moderate financial profile with leverage and coverage metrics remaining stable from year to year. Flexibility is also provided by an operating reserve account for distributions and a capital reserve account for unforeseen expenditures.