DBRS Comments on Noranda Income Fund Production Cut

DBRS has today noted Noranda Income Fund’s recent announcement that March 2009 production of zinc will be reduced by approximately 20% in response to the continuing inability to find sales and/or additional storage for byproduct sulphuric acid in sufficient quantities to allow full production. DBRS believes that the production curtailment should be of short duration and has maintained the STA-3 (high) rating of Noranda Income Fund (the Fund) and the BBB (high) rating of the Senior Secured Notes of its wholly-owned Noranda Operating Trust (the Trust) Under Review with Negative Implications.

Today’s announcement follows previous announcements made by the Fund that zinc metal sales were being negatively affected by poor economic conditions and that the Fund had been unable to ship excess zinc inventory to LME-type commodity markets. Also, poor sulphuric acid sales had resulted in a strain on existing sulphuric acid storage capacity to the point where zinc processing capabilities could be impacted and it was announced that the February 2009 distribution of the Fund for priority units would be reduced to $0.04 per unit, down from the $0.085 per unit and to nil for ordinary units from $0.085 per Unit. DBRS is of the view that an extended and/or deeper reduction of zinc processing, a continuing inability to liquidate zinc inventories and reduced income from byproduct sales could lead to a further reduction in distributions by the Fund, as well as reduced profitability and increased working capital requirements. This could trigger deteriorating credit metrics, resulting in further stability rating downgrades and negative rating actions taken on the Senior Secured Notes of the Trust.

The Fund has indicated that it is unable to predict with any certainty the expected duration of weak demand for sulphuric acid and that onsite storage capacity for acid is nearly exhausted. The Fund’s sales agent for the acid, Xstrata Canada Corporation (Xstrata Canada), has been unable to sell excess acid or find additional storage, resulting in its plan to reduce March zinc production by 20% (4,800 metric tonnes), which will reduce byproduct sulphuric acid production by approximately 8,000 metric tons. DBRS believes that both the Fund and Xstrata Canada are actively pursuing alternatives to increase acid sales or storage capacity; hence we feel that the production curtailment should be of short duration.
However, an extended or deeper reduction of zinc refining would have a negative impact on operating earnings and on the Fund’s financial risk profile, as well as on cash available for distribution, possibly leading to further stability rating downgrades and negative rating action taken on the Senior Secured Notes of the Trust.

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.