DBRS Downgrades Noranda Income Fund and Noranda Operating Trust Ratings and Maintains Under Review - Negative

DBRS has today downgraded the Stability Rating of Noranda Income Fund (the Fund) to STA-3 (low) from STA-3 (high) and the Senior Secured Notes rating of Noranda Operating Trust (the Trust) from BBB (high) to BBB. The downgrades follow the Fund’s announcement today of the suspension of monthly cash distributions to its priority unitholders and the increased business risk of the Trust, highlighted by the ongoing reduction in zinc concentrate processing. Both ratings remain Under Review with Negative Implications, where they were placed on February 18, 2009, pending the resolution of sulphuric acid sale/storage issues and the restoration of full production at the Trust’s CEZinc processing facility at Salaberry-de-Valleyfield, Québec (the CEZinc facility). An extended suspension of distributions to priority unitholders of the Fund, indications of a permanent impairment of the CEZinc facility’s ability to access or process concentrates at close to capacity, or a deterioration of the Trust’s financial metrics, could lead to further negative rating actions.

The Fund announced today that its Board of Trustees had decided to stop paying monthly cash distributions to priority unitholders beginning in July 2009 and until there is an overall improvement in the economic outlook for the Fund. The Fund, through the Trust, has been operating the CEZinc facility at about 80% of 2008 processing levels since February 2009 due to (1) a reduction of by-product sulphuric acid sales brought on by the economic downturn and (2) a lack of available acid storage capacity for unsold acid. The Fund did not state its expectations regarding the duration of weak market conditions, including the demand for sulphuric acid, which have led to the suspension of distributions. Distributions by the Trust to its ordinary unitholders have been suspended since February 2009.

The CEZinc facility has taken a number of actions to mitigate weak market conditions for its products. Prices for by-products (sulphuric acid, copper cake, etc.) and zinc price premiums over London Metal Exchange prices are expected to remain low until at least next year, but processing fees will largely remain a function of processing volumes. In response, the CEZinc facility has installed a second zinc slab processing line, which is expected to increase the marketability of zinc produced beginning in the second half of 2009 and which should allow for better control of metal inventories. Adjustments to the workforce and other measures have been undertaken to help control costs.

Xstrata Canada Corporation (Xstrata) remains a 25% owner of the Trust through its holding of the ordinary units in the Trust. Xstrata and its affiliates are also the primary suppliers of zinc concentrates processed by the CEZinc facility and the contracted marketers of its by-products, including sulphuric acid. DRBS views the CEZinc facility as important to Xstrata’s zinc mining operations in Canada, providing incentive for the facility’s successful operation. DBRS also believes that the underlying fundamentals of the CEZinc processing business remain in place, but considers that they have been shaken by the significant impact that the inability to sell sulphuric acid has had on zinc processing capability.

Accordingly, if zinc processing at the CEZinc facility can be restored to full capacity and if the establishment of a second slab casting line resolves any build-up in zinc inventories, DBRS expects that the ability of the Fund to generate distributable cash will be restored – albeit at lower levels due to lower non-processing revenues – justifying the Fund’s STA-3 (low) rating. As well, DBRS expects that the restoration of more normal operations at the CEZinc facility will support the Trust’s BBB rating, which reflects the risk of a more volatile earnings stream. The Under Review with Negative Implications status of the ratings should be resolved once the outcome of these developments is known. Alternatively, if the ability to restore the CEZinc facility back to more normal operating levels is not realized, or if there is a deterioration of the financial metrics of the Trust, negative rating actions may follow.

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.

This is a Corporate rating.

For further details, see press releases dated February 9, 18, and 23, 2009 and rating reports of March 31, 2009.