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

DBRS has today confirmed the stability rating of Noranda Income Fund (the Fund) at STA-2 (middle). This resolves the Under Review with Developing Implications status that the Fund’s rating was placed under on November 1, 2006.

The confirmation of the Fund’s rating follows DBRS’s expectations of minimal changes to the Fund’s business strategy and financial plans over the near term, despite the recent announcement of proposed changes in legislation to tax income funds beginning in 2011.

DBRS notes that the Fund’s ability to maintain its payout ratio at current levels could be impacted in the future by the change in tax legislation. As DBRS stated in its November 1, 2006, press release, the reduction in future payouts will be viewed as a one-time event and DBRS’s analytical focus would then be on the stability and sustainability of distributions following the adjustments.

DBRS acknowledges that, while the Fund continues to review its strategic options in order to determine the most appropriate and efficient structures going forward, any material change will be considered event-driven and is expected to have a limited impact on the stability rating in the near term.

The Fund’s stable performance, along with support offered by its concentrate supply contract and governance arrangements with Xstrata plc (Xstrata, which acquired Falconbridge Limited in 2006), allow the Fund to achieve one of the highest stability ratings in Canada for a commodity-influenced Fund.

The secured supply contract with Xstrata for zinc concentrate feed and minimal exposure to volatile commodity and currency rates allows the Fund to achieve an above-average business profile. 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 $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. For the last five years the payout ratio averaged 91%. The Fund maintains a moderate financial profile with leverage and coverage metrics remaining stable from year to year. Higher debt levels resulted from the increase in zinc prices and a corresponding increase in working capital during 2006.
Additional flexibility is provided by an operating reserve account for distributions and a capital reserve account for unforeseen expenditures.

Note:
All figures are in Canadian dollars unless otherwise noted.