DBRS Comments on Noranda Operating Trust Increased 2013 Capital Expenditures

DBRS notes that Noranda Income Fund (the Fund) has today announced that its subsidiary Noranda Operating Trust (the Trust; rated BB (high), Stable trend) has approved a 2013 operating plan that anticipates that capital expenditures at the Trust’s zinc processing facility at Salaberry-de-Valleyfield, Québec (CEZinc) will include approximately $20 million to increase the facility’s capabilities for removing silica from the zinc concentrate it processes. These expenditures are being made in anticipation of an expected change in source of the zinc concentrates the facility will have available to process and are in addition to the normal level of expected annual capital expenditures at CEZinc of about $26 million. DBRS views that the added expenditures relating to silica removal are within the Trust’s financial capabilities. They are also seen as increasing the flexibility of the facility’s operations in advance of the end of the initial term of its current concentrate processing contract with Xstrata Canada Corporation (Xstrata Canada) in May 2017.

Zinc refining markets remain highly competitive and the economic viability of the CEZinc facility post-May 2017 remains uncertain. In light of this, the enhancement of silica removal at CEZinc is not expected to affect the rating of the Trust’s Senior Secured Notes.

Xstrata Canada is responsible for supplying zinc concentrates to be processed by CEZinc under their concentrate supply and processing agreement. The sources of concentrate supply have been changing and can be expected to change again, as end-of-life closure of Xstrata’s Brunswick Mine draws near. It is expected that replacement concentrate supplies for Brunswick Mine and other concentrates may contain higher levels of silica and other impurities than the concentrates currently being processed by CEZinc. The $20 million investment to increase capabilities for silica removal will enhance CEZinc’s ability to process a broader variety of zinc concentrates. The bulk of the investment in silica removal enhancement expenditures is expected to occur in 2013, with project completion scheduled for mid-2014.

In July 2011, the Trust established new revolving credit facilities and amortizing term debt facilities to finance its activities. Since the new facilities have been put in place, the Trust’s net debt (after cash balances) has been reduced by approximately $79 million. At September 30, 2012, the Trust’s revolving credit facilities had approximately $84 million in unutilized credit capacity. Combined with solid operating cash generation under normal operating conditions, DBRS believes that the Trust has sufficient financial resources to accommodate the expenditures budgeted for silica removal enhancement at CEZinc.

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

The applicable methodology is Rating Companies in the Mining Industry (June 2011), which can be found on our website under Methodologies.