DBRS Places Noranda Income Fund and Operating Trust Under Review with Developing Implications

DBRS has today placed the Stability Rating of Noranda Income Fund (the Fund) rated STA-2 (middle), and the rating of the Senior Secured Notes of its wholly-owned Noranda Operating Trust (the Trust) rated BBB (high) Under Review with Developing Implications.

This rating action follows the Fund’s announcement that a dramatic reduction in byproduct sulphuric acid sales since the beginning of 2009 has the potential to force a temporary reduction or cessation of zinc refining activities at the Fund’s CEZinc processing facilities at Salaberry-de-Valleyfield, Québec due to a lack of storage capacity available for unsold sulphuric acid. DBRS views the build-up of excess sulphuric acid as a resolvable issue, but currently of unknown scale or duration.

The Fund and the Trust derive the bulk of their revenue from a long-term contract with Xstrata Canada Corporation (Xstrata Canada) to process zinc concentrates at the Fund’s refinery for a prescribed fee. This tolling arrangement provides payments of processing fees that represent approximately 70% of the Fund’s net revenues. In addition, the Fund receives a portion (generally less than 10%) of its revenue from byproduct sales, which includes the sale of sulphuric acid recovered in concentrate processing.

The recent economic slowdown has resulted in a significant drop in demand for sulphuric acid, particularly in the agricultural sector where fertilizer sales have slumped. The lack of sales of sulphuric acid by the refinery is now putting a strain on acid storage capacity to a point where the refinery will have to reduce metal refining in order to control excess acid supplies if new acid sales can’t be made or alternate storage facilities found. DBRS understands Xstrata Canada, the marketing agent for the sulphuric acid, is actively seeking additional customers or alternate storage facilities for the excess acid.

DBRS believes that if zinc refining operations are cut back or shut down for a short period of time, the Fund has adequate liquidity to meet its financial commitments. DBRS notes the Trust’s debt rating is also supported by the linkage to Xstrata Canada. The Fund’s refinery operations are an integral part of Xstrata Canada’s zinc business and Xstrata Canada, as a unitholder of the Fund and key business partner, has a strong vested interest in pursuing the resolution of the backup in sulphuric acid inventories and maintaining the continuity of zinc refining operations. DBRS considers it likely that Xstrata would provide financial assistance in the event the Fund could no longer meet its financing requirements.

DBRS believes that the sulphuric acid sales and storage problem is an anomalous situation as a result of rapidly changing markets in a severe economic downturn and should be resolvable without a significant long-term impact on the Fund’s operations or distributions. However, an extended reduction or cessation of zinc refining would negatively impact the cash available for distribution by the Fund and would negatively impact on the Fund’s ability to meet its financing needs, possibly leading to a negative rating action.

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

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.