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

DBRS has today confirmed the Stability Rating of Noranda Income Fund (the Fund) at STA-2 (middle) as the Fund operations continue to run smoothly. The Fund’s rating continues to remain supported by Xstrata plc (Xstrata; rated A (low)) due to the 15-year agreement with Xstrata (expiring May 2017) for the provision of zinc concentrates to the Fund’s Canadian Electrolytic Zinc (CEZinc) processing facility in Valleyfield, Québec. This tolling arrangement guarantees payments of processing fees that represent approximately 70% of the Fund’s net revenues. This secured supply and the tolling nature of the zinc supply contract help ensure stable financial performance from year to year, as was the case in 2007.

The main drivers of the Fund’s performance are the volume of finished zinc output from the plant and premiums received for value-added products, which together total approximately 70% of net revenues. Maximizing throughput is essential to maximizing the Fund’s profitability.

Xstrata has good flexibility from current mines and future development projects to keep the CEZinc facility running at capacity. Third-party feed, which Xstrata also arranges, picks up the slack. Going forward, the CEZinc facility is projected to operate close to capacity (as was the case again in 2007).

Unlike other refiners, the Fund has not been severely impacted by higher energy costs as it has limited natural gas exposure (over 85% of power needs are supplied by hydro). The main power contract for the CEZinc facility is with Hydro-Québec, with rates reset annually. There is also protection in the processing fee contract with Xstrata to partly compensate for higher electricity prices. The stronger Canadian dollar is also manageable as the processing fee from Xstrata (the majority of net revenues, around 70%) is paid in Canadian dollars, with only the balance sensitive to the U.S. dollar.

The Fund’s balance sheet is expected to move sideways for the foreseeable future. Variations in debt levels from year to year are due to working capital funding (as was the case in 2006 due to higher zinc prices). Annual capital needs for the CEZinc facility, in the $25 million range ($19.5 million maintenance capex and $6.5 million for revenue generating capex in 2007), are easily managed with internal cash generation, and major expansions/upgrades are not currently expected.

DBRS expects minimal changes to the Fund’s business strategy and financial plans over the near term (despite the November 2006 announcement of proposed changes in legislation to tax income trusts beginning in 2011). DBRS acknowledges that while the Fund continues to review its strategic options in order to determine the most appropriate and efficient structures, any material change will be considered event-driven and is expected to have a limited impact on the stability rating in the near term.

At December 31, 2007, the Fund’s total debt was $240 million, down from $245 million at the end of December 2006. The Fund’s $153.5 million in Senior Secured Notes are due on December 20, 2010.

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