NIF.UN Noranda Income Fund Annual Report MAR

Transcription

1 NIF.UN Noranda Income Fund Annual Report 2011

2 Noranda Income Fund is an income trust whose units trade on the Toronto Stock Exchange under the symbol NIF.UN. The Noranda Income Fund owns the processing facility and ancillary assets (the Processing Facility ) which are located in Salaberry-de-Valleyfield, Québec. It is the second largest zinc processing facility in North America and the largest zinc processing facility in eastern North America, where the majority of its zinc customers are located. It produces refined zinc metal and various by-products from zinc concentrate purchased from mining operations. The Processing Facility is operated and managed by Canadian Electrolytic Zinc Limited. Contents Highlights 2 Letters to Unitholders 3 Management s Discussion and Analysis 29 Management s Statement of Responsibility 30 Independent Auditors Report 31 Consolidated Statements of Financial Position 35 Notes to the Consolidated Financial Position * All dollar amounts are in Canadian dollars, unless otherwise stated. IBC Corporate Information

3 2011 Highlights Financial Highlights Net Revenues were 12% higher at $303.8 million Adjusted EBIDTA was $97.6 million compared to $81.4 million A long-term refinancing was completed Monthly cash distributions of $ per unit were recommenced in September Debt was reduced by 49% to $98.7 million Operational Highlights The employees of the Processing Facility ratified a new, three-year collective agreement Reduced inventory levels contributed to the $55.3 million decrease in working capital Capital spending to sustain the Processing Facility in good running order totalled $27.3 million Net Revenues $M $303.8m 2010 $271.4 m Adjusted EBITDA* $M $97.6m 2010 $81.4 m $350 $300 $250 $200 $150 $100 $50 $ % $ % $80.0 $60.0 $40.0 $20.0 $- $ * Adjusted Earnings before Distributions to Unitholders, Finance Costs, Income Taxes, Depreciation and Amortization Debt $M $98.7m 2010 $194.7 m Monthly Cash Distributions Re-started September 2011 $ per Priority Unit per month 2010 Nil paid $250 $0.05 $200 $150 49% $0.04 $0.03 $100 $50 $ $0.02 $0.01 $- Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 13MAR Nov-11 ANNUAL REPORT 2011 NORANDA INCOME FUND 1

4 Letters to Unitholders Dear Unitholders, Dear Unitholders, Achievements Achievements I am very pleased to report on the achievements of the Noranda The financial results of 2011 were supported by a strong Income Fund in Our long-term debt was refinanced until operational performance, healthy premiums and strong 2016, and we approved a monthly cash distribution commencing by-product revenues. in September We signed a new, three-year collective agreement with the The Board, under the guidance of the Independent employees at the Processing Facility. This is the ninth Committee, commenced a process to develop a long-term consecutive collective agreement signed without a strike. Good strategy for the Fund beyond the expiry of the Supply and labour relations are fundamental to the Fund s ongoing success. Processing Agreement in A review was undertaken by a During the year, zinc metal and copper in cake inventories highly regarded international consulting Firm to help the Board were lowered which resulted in a reduction in our working capital. assess the ability of the Fund to obtain zinc concentrate in the Zinc refining is capital intensive and we have to invest in the market post In December 2011, the Independent Committee received a preliminary report from the international Processing Facility to keep it in good running order. In 2011, consulting group. capital expenditures totalled $27.3 million, of which $3.2 million The preliminary report indicated that subject to certain major was spent on the cell house rehabilitation project and assumptions, the Processing Facility could operate profitably if $9.2 million on anode replacement. the Fund is able to secure zinc concentrate in the market post The report identified sources of zinc concentrate that Looking Forward would be available post The Board will be utilizing the We are encouraged by the improving economic indicators in our Consultant s findings to determine the best course of action. major market, the United States. Automotive sales continue to The Supply and Processing Agreement expires in May look healthy. However, residential and non-residential Xstrata Canada is required to advise the Partnership of its construction continues to be weak. decision with respect to an extension, if any, beyond 2017 by In spite of slow construction activity, zinc demand is November The Board has taken a prudent approach with expected to steadily build during the first half of 2012 as respect to potential closure costs at the Processing Facility and customers experience better order levels and rebuild their has decided to begin accumulating reserves that would be inventories as the general economic outlook improves. required to pay for such costs, should the Fund be unable to secure concentrate post Our Appreciation and Thanks Notwithstanding the foregoing, and assuming no major sudden changes in the zinc and related by-products markets, I Mario Chapados, the former President and Chief Executive am pleased to report that the Board has determined that the Officer of the Fund s Manager retired in January Under his current level of distributions can be sustained for the present leadership, Mario s focus on continuous improvement generated time while the reserves, mentioned above, are being substantial improvements at the Processing Facility, particularly accumulated. in the areas of productivity, health and safety. We would like to thank him for his strong commitment and dedication to the Fund. The Year Ahead In conclusion, I would like to thank our employees who have During 2012, the Board plans to make a decision on whether or remained focussed on delivering results. I would like to thank all not to recommend conversion to a corporation and will make of our Trustees, for the guidance and support they have provided. further progress on the long-term strategy. A conversion must be And on behalf of the entire management team at Canadian completed by December 31, 2012 to obtain certain tax benefits Electrolytic Zinc Limited, I would like to thank you, our for the Unitholders. Unitholders, for your continued support. In conclusion, I would like to thank our management and employees on delivering strong operating results. I would also like to thank my fellow Trustees for their hard work which has enabled the Fund to achieve some significant milestones. Finally, 22FEB our thanks to you, our Unitholders, for your patience and support. Manuel Álvarez Dávila Chief Executive Officer Canadian Electrolytic Zinc Limited Noranda Income Fund s Manager 22FEB John J. Swidler Chairman of the Board 2 ANNUAL REPORT 2011 NORANDA INCOME FUND

5 Management s Discussion and Analysis This Management s Discussion and Analysis 2011 HIGHLIGHTS ( MD&A ) of the financial position and results of Earnings before finance costs and income taxes were operations of Noranda Income Fund (TSX: NIF.UN) $59.9 million compared to $47.7 million in is the responsibility of management and has been Cash provided by operating activities before non-cash working capital items was $71.5 million compared to $69.6 million a prepared as at February 14, The board of year ago. trustees of Noranda Operating Trust carries out its Zinc premiums were 34% or $7.6 million higher than in responsibility by reviewing this disclosure By-product revenues were 46% or $15.9 million higher than principally through its audit committee and it in approves this disclosure prior to its publication. Debt (before deferred financing fees) was reduced by $96.0 million to $98.7 million. This MD&A provides a review of the consolidated financial The Fund completed a long-term financing. position, results of operations and performance of Noranda The Fund issued a cash distribution of $ per unit to Income Fund (the Fund ), Noranda Operating Trust Priority Unitholders in each of September, October, November (the Operating Trust ) and the Noranda Income Limited and December. Partnership (the Partnership ), and the subsidiaries of the The employees of the Processing Facility ratified a new, foregoing for the years ended December 31, 2011 and three-year collective agreement. December 31, It should be read in conjunction with the Fund s audited consolidated financial statements and notes to OVERVIEW those statements. The Fund is an unincorporated open-ended trust, established The Fund has prepared its consolidated financial statements for under the laws of Ontario, whose priority units (the Priority the year ended December 31, 2011 in accordance with Units ) trade on the Toronto Stock Exchange ( TSX ) under the International Financial Reporting Standards ( IFRS ). For all symbol NIF.UN. The Fund was created to acquire periods up to and including the year ended December 31, 2010, Noranda Inc. s CEZinc electrolytic zinc plant and processing the Fund prepared its consolidated financial statements in facility (together with the associated roasters, acid plants, accordance with the previously-applicable Canadian generally remediation facilities, settling ponds, wastewater treatment accepted accounting principles ( Canadian GAAP ). Upon plants and related assets and equipment) (the Processing transition to IFRS, the Fund s December 31, 2010 consolidated Facility ), located in Salaberry-de-Valleyfield, Québec, in financial statements have been restated to IFRS. All amounts are Canadian Electrolytic Zinc Limited (the Administrator and expressed in Canadian dollars, the Fund s reporting currency, alternatively, the Manager ), a wholly-owned subsidiary of except where indicated. Xstrata Canada Corporation ( Xstrata Canada ) (through its Xstrata Zinc Canada division), operates and manages the Additional information regarding the Fund, including the Fund s Operating Trust and the Partnership and administers the Fund. Annual Information Form, is available on SEDAR at Concurrently with the creation of the Fund and the acquisition of the Processing Facility by the Partnership from Noranda Inc. in 2002, the Administrator entered into various agreements with This MD&A contains forward-looking information and forward- the Fund and/or the Operating Trust relating to the management, looking statements within the meaning of applicable securities administration and operation of the Fund, the Operating Trust, laws. See Forward Looking Information below. the Partnership and the Processing Facility. In August 2006, Xstrata Canada acquired Falconbridge Limited, the successor corporation to Noranda Inc., and subsequently became Xstrata Canada Corporation. Xstrata Canada is a wholly-owned subsidiary of Xstrata plc. The Processing Facility, which the Fund indirectly owns through the Partnership, produces refined zinc metal and various by-products from zinc concentrate purchased from mining operations and sells refined zinc products to customers in the open market. The Fund earns a processing fee for transforming ANNUAL REPORT 2011 NORANDA INCOME FUND 3

6 Management s Discussion and Analysis zinc concentrate into zinc metal and it earns additional revenue from premiums, by-product revenues and metal gains. The Processing Facility is favourably located along major transportation networks which connect it to its principal markets in the United States and Canada. Zinc is central to our daily lives. Its main use is to galvanize steel for the construction and automotive industries. Zinc is also used in the production of die-castings and brass. Zinc powders, oxide and dust are used in the manufacture of batteries, rubber tires, pigments and various creams. The board of trustees of the Operating Trust (the Board or the Trustees ), the majority of whom are independent from Xstrata Canada, oversees the Fund. The Fund is in turn the sole unitholder of the Operating Trust. Pursuant to an administration agreement dated April 18, 2002 between the Fund and the Administrator (the Administration Agreement ), Computershare Trust Company of Canada, the sole trustee of the Fund (the Sole Trustee ), has delegated all of its power and authority to the Administrator, and the Administrator provides administrative and support services to the Fund. Pursuant to a management services agreement dated April 18, 2002 between the Operating Trust and the Manager (the Management Services Agreement ), the Manager provides management services to the Operating Trust. Pursuant to an operating and management agreement dated May 3, 2002 between the Manager and the Partnership (the O&M Agreement ), the Manager operates and maintains on an ongoing basis, the Processing Facility owned by the Partnership and provides management services to the Partnership. In addition, Xstrata Canada and the Partnership are parties to a supply and processing agreement dated May 3, 2002 (the Supply and Processing Agreement ), pursuant to which Xstrata Canada is obligated, except in certain circumstances, to sell to the Partnership until 2017 all of its zinc concentrate requirements up to 550,000 tonnes of zinc concentrate per year at a concentrate price based on the price of zinc metal on the London Metal Exchange ( LME ) for the payable zinc metal contained in the concentrate, less a fixed, escalating processing fee (calculated in Canadian dollars). Pursuant to the Supply and Processing Agreement, Xstrata Canada acts as exclusive agent for the Partnership to arrange for purchases of any additional zinc concentrate in excess of the 550,000 tonne amount described above, and for sales of zinc metal and by-products and related hedging and derivative arrangements. Further details concerning these arrangements relating to the management, administration and operation of the Fund, its subsidiaries and the Processing Facility are described under Transactions with Related Parties below. Long-Term Strategy The Board is charged with evaluating the Fund s long-term strategy, and for evaluating and supervising the formulation and execution of the Fund s business and operating plans, which the Manager prepares. As announced in the Press Release dated November 11, 2011, the Board undertook, under the guidance of its Independent Committee, a review to determine the availability of funds for future distributions. Progress has been made and the Board has received a preliminary report from the international consulting group it had retained. The preliminary report indicates, without concluding and subject to certain major assumptions, that if the Fund is able to secure zinc concentrate in the market post-2017, and if the Supply and Processing Agreement between the Partnership and Xstrata Canada is not renewed, it could operate profitably. In the circumstances, it would be prudent for the Board, through its Independent Committee, to identify possible alternative sources of zinc concentrate post-2017 and the Partnership may be required to commit funds to assure the continued supply of concentrate. There can be no assurance that alternative sources of zinc concentrate will be available or, if available, would be available in sufficient quantities and on terms and conditions, including pricing, that will allow the processing facility to continue production and operations at profitable levels. The Supply and Processing Agreement with Xstrata Canada is automatically renewed for successive periods of five years unless Xstrata Canada provides the Partnership with written notice to the contrary at least 180 days prior to the expiry of the applicable term. The current term expires in May Xstrata Canada is required to advise the Partnership by November 2016 of its decision with respect to an extension, if any, beyond Due to the uncertainty of supply of concentrate post-2017, the Board has determined in its business judgment, as it did when it agreed to allow for the full amortization of the Fund s long-term debt concurrently to the end of fiscal 2016, that it would be wise and prudent, based on the preliminary information available at this time, to begin accumulating reserves that are expected to be required to pay for the closure costs of the facility at Salaberry-de-Valleyfield. The costs include severance payments, pension and retirement benefit plans and site rehabilitation costs. The amounts required to fund such reserves have been established by third-party independent professionals based on certain assumptions. Should these assumptions need to be modified due to changing circumstances, the amount of the necessary reserves may increase or decrease, with a corresponding effect on any cash available for distributions. Notwithstanding the foregoing, and assuming no major sudden changes in the zinc and related by-products markets, while the reserves mentioned above are being accumulated, the 4 ANNUAL REPORT 2011 NORANDA INCOME FUND

7 Under the terms of the Fund s trust indenture, as amended and restated (the Trust Indenture ), the Fund is required on December 31 st of each year to distribute to its unitholders an amount equal to the Fund s taxable income and net capital gains for the year, to the extent that such amount has not already been distributed in the year, so as, to the extent possible, minimize its liability for tax under the Tax Act in the year. Such distributions are to be made in cash, unless the Fund is restricted from distributing cash or sufficient cash it not available, in which case such distributions are required to be satisfied in whole or in part in-kind by the issuance of additional Priority Units having a value equal to the amount of cash which is unavailable for distribution (which units are then automatically consolidated such that the number of Priority Units held by a Canadian resident Unitholder after the distribution of additional units and the consolidation is the same number of units held immediately prior to the distribution of additional units). In December 2011, the Fund amended its Trust Indenture to mitigate the tax consequences for taxable Unitholders. Specifically, in light of the changes in tax laws discussed above, effective December 12, 2011, the Board amended the Fund s Trust Indenture, which used to require that the Fund distribute 100% of its taxable income to Unitholders and would, absent such amendment, have resulted in the Fund making a larger in-kind distribution in 2011 than was necessary. As amended, the Fund s Trust Indenture now requires that the Fund distribute a specified percentage (approximately 71.6% in 2011) of its income attributable to its NPE Earnings. This amendment was made to reflect the fact that the Fund is now subject to entity- level tax on its NPE Earnings. The amendment was adopted in accordance with the provisions of the Fund s Trust Indenture and a copy of the Trust Indenture is available on SEDAR at In accordance with the terms of the Trust Indenture, as so amended and restated, the Board approved in December 2011 an in-kind distribution (an In-Kind Distribution ) of $0.58 per Priority Unit payable on December 31, 2011 to holders of Priority Units of record on December 31, This was the second such In-Kind Distribution by the Fund, the first of which was made in December There were two changes in the 2011 In-Kind Distribution which improved the tax consequences for investors holding units in a taxable investment account, compared to the Fund s 2010 In-Kind Distribution: The Fund expected that substantially all of the 2011 In-Kind Distribution would be attributable to NPE Earnings. Accordingly, for Canadian tax purposes, the 2011 In-Kind Distribution is expected to receive the favourable treatment as a taxable dividend from a Canadian corporation while the 2010 In-Kind Distribution was treated as taxable income for Unitholders. Board has determined that the current level of distributions can be sustained for the present time. There is no assurance that monthly distributions will continue in the future; nor is there any assurance that, if they do continue, the level or frequency of such monthly distributions will not vary from the level of the most recent monthly cash distribution. See Liquidity and Capital Resources and Risks and Uncertainties below. Cash Distributions With the long-term refinancing completed in July 2011 and the resulting elimination of the prohibition on cash distributions to unitholders of the Fund (the Unitholders ) that existed under the Operating Trust s prior bridge facility and preceding revolving credit facility, the Board declared a cash distribution to Priority Unitholders of $ per unit for each of the months of September, October, November and December of And subsequently, on January 20, 2012 and February 14, 2012, the Fund announced that the Board had approved a distribution for the months of January and February 2012 of $ per Priority Unit. There is no assurance that monthly distributions will continue in the future; nor is there any assurance that, if they do continue, the level or frequency of such monthly distributions will not vary from the level of the most recent monthly cash distribution. The Fund s distribution policy and practices are impacted by various risks, uncertainties and other factors, which are discussed in greater detail in this section and in the sections entitled Liquidity and Capital Resources, Distribution Policy and Forward-Looking Information below. Taxation, Structure and Conversion of the Fund The Independent Committee of the Board, together with the Board, are currently considering the impact of taxation and other consequences should the Fund decide to convert to a corporation, while also considering the impact to the Fund and its Unitholders of remaining as a trust. Taxation 2011 and Beyond On January 1, 2011, the specified investment flow-through rules came into effect under the Income Tax Act (Canada) (the Tax Act ) for publicly-traded income trusts, such as the Fund and, as a consequence, the Fund is now taxable. In particular, the Fund will be subject to tax on its non-portfolio earnings (as defined in the Tax Act) (the NPE Earnings ) at the same rate as a Canadian corporation provided it distributes a sufficient portion of such earnings to Unitholders. Otherwise, the Fund would be subject to a tax on such earnings at the higher personal income tax rate applicable to individuals. As a result, the Fund can no longer make distributions to Unitholders without the imposition of entity level taxation. ANNUAL REPORT 2011 NORANDA INCOME FUND 5

8 Management s Discussion and Analysis The amended Trust Indenture now requires that the Fund January 1, For more information, readers should refer to distribute a specified percentage (71.6% in 2011) of its the Fund s consolidated financial statements as at and for the income attributable to NPE Earnings to reflect the fact that year ended December 31, Copies are available on SEDAR the Fund is now subject to entity-level tax on its NPE Earnings at and this, in turn, has lowered the overall tax liability to Unitholders as a result of the lower In-Kind Distribution in Other Developments in In 2010, the Trust Indenture required that the Fund In December 2011, Canadian Electrolytic Zinc Limited, the distribute 100% of its taxable income to Unitholders. Fund s Administrator and Manager, informed the Fund that For further details concerning the Fund s distribution policy, Mr. Mario Chapados would retire as Chief Executive Officer please see Distribution Policy below. ( CEO ) and General Manager of the Manager, effective January 31, Mario has held this position since Structure and Conversion October With the long-term refinancing now in place, the Independent During his distinguished 32-year career with Noranda Inc., Committee and the Board are focused on reviewing the structure Falconbridge Limited and Xstrata Zinc, Mario held several of the Fund; that is, the possible conversion to a corporate positions of increasing responsibilities, before ultimately being structure and the implications thereof for the Fund and its appointed as the Manager s CEO and General Manager. Over the Unitholders. Regardless of the course that the Board past few years, Mario s commitment to continuous improvement recommends, it is expected that the conversion of the Fund to a has been significant, generating a substantial improvement at corporation, if pursued, would require the approval of the Fund s the Processing Facility, particularly with regards to productivity, Unitholders and Xstrata Canada. There is no assurance that the health and safety. Unitholders or Xstrata Canada will provide their approval, Effective February 1, 2012, Ms. Eva Carissimi assumed the if requested. position of Vice-President, Operations and General Manager of the Manager. Eva Carissimi holds a Bachelor of Science in RESULTS OF OPERATIONS Metallurgical Engineering from McGill University. She started her career at Xstrata Copper s Horne Smelter in 1989, where she Adoption of International Financial Reporting Standards was appointed Smelter Manager in She transferred to ( IFRS ) Xstrata Nickel s Sudbury Operations in 2005 where she held The Fund prepared its consolidated financial statements for the various managerial positions such as Operations Manager, Mine year ended December 31, 2011 in accordance with IFRS. For all Manager for Craig Mine and, more recently, Smelter Director. In periods up to and including the year ended December 31, 2010, 2011, Eva was selected as one of Canada s Most Powerful the Fund prepared its consolidated financial statements in Women: Top 100 Award Winners in the Trailblazers and accordance with the previously-applicable Canadian GAAP. The Trendsetters category from the Women s Executive Network. Fund adopted IFRS in accordance with IFRS 1, First-time Going forward, Mr. Manuel Álvarez Dávila will assume the role Adoption of International Financial Reporting Standards. The first of CEO for the Manager. Manuel Álvarez Dávila is currently a date at which IFRS was applied was January 1, 2010 Trustee on the Board and is Chief Operating Officer of Xstrata (the Transition Date ). Upon transition to IFRS, the Fund s Zinc Canada. December 31, 2010 consolidated financial statements have From September to December 2011, the Fund negotiated a been restated to IFRS. In accordance with IFRS, the Fund has: new labour contract with the United Steel Workers of America, provided comparative financial information; Local 6486, as the prior collective agreement was due to expire applied the same accounting policies throughout all periods on October 31, On December 22, 2011, the Fund presented; and announced that the unionized employees at its Processing applied certain optional exemptions and mandatory Facility voted in favour of a new collective agreement. Effective exceptions as applicable for first time IFRS adopters. November 1, 2011, the new three-year collective agreement Note 20 of the consolidated financial statements as at and provides for annual wage increases and improvements to the for the year ended December 31, 2011 describes in detail the applicable benefits and retirement programs. initial exemptions and transitional adjustments under IFRS as at 6 ANNUAL REPORT 2011 NORANDA INCOME FUND

9 Selected Financial Highlights by-product revenues and premiums, partially offset by the impact of a stronger Canadian dollar. ($ millions, except per-unit amounts) (IFRS) (IFRS) Production costs in 2011 were $181.2 million, compared to Sales $ $ $ $173.3 million recorded in The increase in costs in 2011 Revenues less raw material was mostly due to a non-recurring $6.4 million cost increase for purchase costs additional pension benefits and early retirement provisions for Earnings (loss) before the new three-year collective agreement, higher operating income taxes (3.3) supplies and higher contractor costs, partially offset by lower Increase in net assets energy costs. attributable to Unitholders Net earnings (loss) (3.3) Production Cost Breakdown Total assets Increase/ Bank and other loans ($ millions) (decrease) Cash distributions declared Labour $ 62.9 $ 56.3 $ 6.6 per Priority Unit Energy (1.2) In-Kind Distributions declared Operating supplies per Priority Unit Other Distributions declared Production cost before per Ordinary Unit $ $ $ change in inventory Canadian GAAP Change in inventory (1.4) $ $ $ 7.9 Sales in 2011 were $663.0 million, compared to $659.1 million in The 1% increase in sales was primarily the result of Selling and administration costs in 2011 were $20.1 million, higher by-product revenue and premiums, partially offset by a compared to $21.6 million in Selling and administration lower volume of zinc metal sales. By-product revenues from costs were lower in 2011 in part due to the absence of some sulphuric acid and copper in cake increased to $50.4 million in one-time 2010 charges which related to the change in the 2011 from $34.5 million in The increase was mainly due composition of the Independent Trustees on the Board and to a higher sulphuric acid netback and copper price, and higher preparation work for a special Unitholder meeting that was copper sales. These results were partially offset by lower zinc requisitioned by certain Unitholders, but ultimately successfully sales volumes. resolved without the need to hold such a meeting. This was In 2011, the Fund realized a zinc premium of US$0.059 per partially offset by $0.7 million charge in 2011 related to the new pound, up from US$0.044 per pound in The increase in collective agreement. realized 2011 zinc premiums compared to 2010 reflected the The foreign currency loss in 2011 was $0.9 million, compared impact of improved annual contract premiums and an increase in to a gain of $1.2 million in The foreign currency gains and the level of spot premiums in North America. losses are primarily a result of the impact of the Canadian/US Transportation and distribution costs in 2011 of $18.7 million exchange rate on the Fund s net US monetary liabilities. The were higher than the $16.1 million recorded in The Fund s main US denominated balances are comprised of cash increase was because the copper in cake transportation cost to and cash equivalents, accounts receivable, accounts payable Europe is higher than it was to the Kidd Metallurgical Facility in and a portion of its debt. Timmins, Ontario where the copper in cake was previously In 2011, the loss on the derivative financial instruments was treated. $3.5 million. In 2010, the gain on the derivative financial Raw material purchase costs in 2011 were $340.4 million instruments was $5.4 million. During these periods, the change compared to $371.6 million in The decrease was mainly in the market value of the Fund s financial instruments resulted due to lower volumes of zinc metal sales, a stronger Canadian in these amounts being recorded. dollar and the impact of the embedded derivative on the Fund s In 2011, depreciation was $34.1 million, compared to the concentrate payable which decreased raw material purchase $33.7 million recorded in costs in 2011 and increased raw material purchase costs In 2011, the rehabilitation expense was $4.1 million, in compared to $1.8 million in The $2.3 million increase Revenues less raw material purchase costs ( Net Revenues ) was mostly due to the larger decline in the risk-free interest rate in 2011 were $303.8 million, compared to $271.4 million in used to discount the liability in 2011, as compared to 2010, The $32.4 million increase was mainly due to higher ANNUAL REPORT 2011 NORANDA INCOME FUND 7

10 Management s Discussion and Analysis resulting in a larger increase in the liability being recorded in the taxable entity effective January 1, The Fund is required to statement of comprehensive income in record a tax expense using the undistributed rate for both its In 2011, net finance costs were $16.1 million compared to current and deferred taxes, set at the highest marginal personal $14.4 million in The increase was largely due to an tax rate of approximately 48%. Upon the distribution of taxable increase in the amortization of deferred financing fees in 2011 income, the income tax provision is adjusted on the distribution relating to the Operating Trust s prior Bridge Facility and its ABL to a tax rate of 28.4%. In 2011, the impact of this adjustment Facility and Notes, as defined and described below, partially was $7.8 million which was primarily recorded in the fourth offset by lower average debt outstanding during the period. quarter in connection with the September through The current income tax expense was $19.0 million in 2011, December 2011 monthly cash distributions and the 2011 compared to $0.1 million in 2010, due to the Fund becoming a In-Kind Distribution. Summary of Quarterly Results The following table provides a summary of quarterly results for the past two years ended December 31, 2011 and December 31, 2010, respectively: Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Revenues $ $ $ $ $ $ $ $ Increase (decrease) in net assets attributable to Unitholders $ (14.2) $ 9.3 $ 6.0 $ 10.7 $ (12.5) $ 1.7 $ 11.3 $ 8.7 Production (tonnes) 67,504 63,923 67,906 63,953 69,113 66,605 65,144 64,466 * 1 tonne = 2, pounds Fourth-Quarter 2011 Results The Fund reported earnings before finance costs and income taxes of $2.4 million in the fourth quarter of 2011, compared to $11.1 million in the same quarter a year ago. The $8.7 million decrease was mainly due to lower zinc metal sales and a non-recurring $7.1 million cost increase for additional pension benefits and early retirement provisions for the new three-year collective agreement. This decrease was partially offset by higher zinc metal premiums. Revenues in the fourth quarter of 2011 were $137.8 million, down from the $168.7 million recorded in the same quarter of Much of this decrease was due to lower zinc and copper prices, partially offset by higher sulphuric acid netbacks. Q Q Zinc metal production (tonnes) 67,504 69,113 Zinc metal sales (tonnes) 63,655 65,716 Zinc metal premium (US$/pound) Byproduct revenues ($ millions) Copper in cake production (tonnes) Copper in cake sales (tonnes) Sulphuric acid production (tonnes) 104, ,701 Sulphuric acid sales (tonnes) 100,541 97,290 Average LME copper price (US$/pound) Sulphuric acid netback (US$/tonne) * 1 tonne = 2, pounds In the fourth quarter of 2011, zinc metal production was 67,504 tonnes, compared to 69,113 tonnes in the same quarter of Zinc recoveries in the fourth quarter of 2011 were 96.6%, compared to 97.0% in the fourth quarter of Stronger zinc metal orders were realized from the galvanizing and the die cast alloy sectors, which were supported by improved demand from the automotive and general manufacturing end user markets.fourth quarter 2011 sales were 63,655 tonnes versus 65,716 tonnes in the fourth quarter of Zinc metal premiums were US$0.058 per pound in the fourth quarter of 2011, compared to US$0.047 per pound in the same quarter of 2010, primarily due to higher premiums realized on contract sales. In the fourth quarter of 2011, the Fund generated $11.2 million in revenue from the sale of its copper in cake and sulphuric acid, compared to $12.5 million achieved in the fourth quarter of Revenues from the sale of sulphuric acid were $7.5 million in the fourth quarter of 2011, up from $5.0 million in the fourth quarter of 2010, as a result of higher netbacks and sales volumes. Sulphuric acid sales totalled 100,541 tonnes in the fourth quarter of 2011, compared to 97,290 tonnes in the fourth quarter of Copper in cake revenues were $3.7 million in the fourth quarter of 2011, compared to $7.2 million in the fourth quarter of 2010, as a result of lower copper prices and the impact of negative provisional pricing settlements in 2011 and positive provisional pricing adjustments in Copper in cake sales volumes in the fourth quarter of 2011 totalled 585 tonnes compared to 780 tonnes in the corresponding period of ANNUAL REPORT 2011 NORANDA INCOME FUND

11 Cash provided from operating activities, before net changes in non-cash working capital items in the fourth quarter of 2011, was $18.0 million compared to $17.0 million in the fourth quarter of During the fourth quarter of 2011, non-cash working capital decreased by $28.2 million. The decrease in working capital primarily resulted from a decrease in accounts receivable and an increase in accounts payable and accrued liabilities. The decrease in accounts receivable resulted, in part, from the decrease in the monthly average price of zinc from September to December. The increase in the accounts payable and accrued liabilities was mainly due to the increase in the volume of concentrate received in December compared to September, as well as the impact of declining zinc prices in the third quarter which resulted in lower accounts payable and accrued liabilities at the end of September due to the provisional price adjustments. Capital expenditures in the fourth quarter of 2011 were $9.1 million, compared to $7.9 million in the fourth quarter of Sustaining capital accounted for almost all of the expenditures in the last quarter of Cash distributions paid to Priority Unitholders during the fourth quarter of 2011 totalled $4.7 million compared to $1.6 million in the third quarter. KEY PERFORMANCE DRIVERS The principal factor affecting the Fund s performance is the processing of zinc concentrates into zinc metal. This activity results in the Fund earning a processing fee. In 2011, the processing fee accounted for 77% of the Fund s Net Revenues ( %). A second key factor affecting the performance of the Fund is the premiums that are realized on the sale of zinc products to customers. Zinc metal is sold to customers on the basis of an LME zinc price plus a premium that is negotiated between the buyer and seller. Premiums can vary according to various factors including product form, quantity, quality and payment terms. In 2011, product premiums accounted for 6% of the Fund s Net Revenues (2010 5%). The sale of by-product (copper in cake and sulphuric acid) and zinc metal recovery gains generated 15% and 2%, respectively, of the Fund s Net Revenues in 2010 ( % and 3%). The Canada/US exchange rate also impacts the Fund s performance through premiums, by-product revenues and zinc recovery gains which, collectively, represented 23% of the Net Revenues in 2011 ( %). As the processing fee is earned in Canadian dollars, 77% of the Fund s Net Revenues are not exposed to currency risk. Two other performance drivers that impact the Fund are managing costs and a disciplined use of capital. The Fund provides annual guidance for a number of its key performance drivers, including production, sales, processing fee, and capital expenditures. Guidance for 2012 key drivers can be found in Outlook below. The following table provides a summary of the performance of these key drivers for the years ended December 31, 2011 and December 31, 2010, respectively. The discussion of key performance drivers that follows is subject to various risks and uncertainties, some of which are discussed under Risks and Uncertainties and Forward-Looking Information below, which investors are encouraged to read carefully. Year Zinc concentrate processed (tonnes) 504, ,376 Zinc grade (%) Zinc recovery (%) Zinc metal production (tonnes) 263, ,328 Zinc metal sales (tonnes) 266, ,114 Processing fee (cents/pound) Zinc metal premium (US$/pound) Byproduct revenues ($ millions) Copper in cake production (tonnes) 2,604 2,537 Copper in cake sales (tonnes) 3,396 2,257 Sulphuric acid production (tonnes) 419, ,779 Sulphuric acid sales (tonnes) 414, ,220 Average LME copper price (US$/pound) Sulphuric acid netback (US$/tonne) Average LME zinc price (US$/pound) Average US/Cdn. exchange rate * 1 tonne = 2, pounds Zinc Metal Production Capacity The amount of zinc metal produced in a year is a function of four main factors: (1) the volume of zinc concentrate processed; (2) the grade of the zinc concentrate processed; (3) the zinc recoveries; and (4) changes to work-in-process inventory levels. In 2011, 504,851 tonnes of zinc concentrate were processed, compared to 482,376 tonnes in In 2011, the average concentrate grade was 54.1% and zinc recovery was 96.8% compared to 54.2% and 97.4%, respectively, in Work-in-process inventory levels increased in 2011, while in 2010, work-in-process inventory levels were drawn down. As a result, production in 2011 was 263,286 tonnes compared to 267,328 tonnes in 2010, as a lower zinc recovery and the increase in work-in-process inventory levels more than offset the higher quantity of zinc concentrate being processed. The Fund pays for 96% of the zinc in the concentrate it purchases; therefore, any recovery over 96% results in additional revenue for the Fund. In 2011, the bulk of the zinc concentrate came from five mines: Brunswick, Antamina, Perseverance, Kidd Creek and ANNUAL REPORT 2011 NORANDA INCOME FUND 9

12 Management s Discussion and Analysis Duck Pond. Four of the five mines are owned or partly-owned by $4.00 per pound, compared to $3.42 per pound in entities within the Xstrata Zinc group. Copper in cake sales volumes in 2011 totalled 3,396 tonnes, The annual zinc metal production capacity of the Processing compared to 2,257 tonnes in the prior year. Facility, under normal operating conditions, is 270,000 tonnes of During 2009 and 2010, copper in cake inventories increased zinc. The Fund continues to believe that the Supply and as Xstrata Canada sought an alternative treatment facility to the Processing Agreement will provide sufficient concentrate to run Kidd copper metallurgical site that closed in May Two the Processing Facility at its productive capacity until its smelters in Europe were identified and tested, and by the end of anticipated expiry in the third quarter of 2011, copper cake inventories had returned In 2010, the Processing Facility began a three-to-four year to their normal level, of approximately one to two months rehabilitation project to replace the liners protecting the concrete of inventory. walls in the cell house. The project is expected to be completed by mid The project requires two cells to be off-line at any Sulphuric Acid time, thereby reducing availability by approximately 2%. As a Revenues from the sale of sulphuric acid rose to $29.5 million in result, effective annual zinc metal production capacity has been 2011 from $17.5 million in Sulphuric acid netbacks in reduced from 270,000 tonnes to 265,000 tonnes of zinc metal. 2011, which were supported by higher spot and contract pricing, The target for productive capacity is subject to various risks rose to US$72 per tonne from US$41 per tonne in Sales and uncertainties, some of which are set out under Risks and volumes were also higher in 2011 at 414,010 tonnes compared Uncertainties and Forward-Looking Information below. to 411,220 tonnes a year ago. Sulphuric acid market fundamentals remained favourable Sales throughout Industrial demand growth slowed somewhat Zinc metal is used in a wide range of industries. Its major use is as a result of the economic uncertainty in the US, however it still in the production of galvanized steel. Sales in 2011 were maintained a slightly positive trend. Stable pricing for sulphur in 266,814 tonnes compared to 269,114 tonnes in Steady the US Gulf region continued to support sulphuric acid pricing. customer orders allowed the Fund to reduce metal inventories by 3,500 tonnes during Exchange Rate The stronger Canadian dollar has had a negative impact on the Processing Fee Fund s financial results. In 2011, a one-cent Canadian In 2011, the processing fee was $0.389 per pound ($858 per strengthening in the average Canadian/US exchange rate would tonne), compared to $0.385 per pound ($849 per tonne) in have negatively impacted the Fund s annual cash available for The processing fee is adjusted annually: (i) upward by 1% distribution by approximately $0.7 million. In 2011, the and (ii) upward or downward by 10% of the year-over-year Canadian dollar strengthened to an annual average of $0.99 per percentage change in the average cost of electricity per US dollar from an annual average $1.030 per US dollar in megawatt hour for the Processing Facility. Based on the annual See also Financial Instruments and Other Instruments below. 1% increase and the average increase in electricity costs, the processing fee for 2012 is expected to be $0.392 per pound. Costs Production costs include labour, energy, supplies and other costs Premiums directly associated with the production process, plus or minus Zinc metal premiums averaged US$0.059 per pound in 2011 changes in inventory levels. Production costs in 2011 were compared to US$0.044 per pound in The increase in $181.2 million, compared to $173.3 million in The realized premiums compared to last year reflected the impact of increase in costs in 2011 is mostly due to an increase in the cost improved annual contract and spot premiums in North America. of labour due to the pension benefits and early retirement provisions provided under the new collective agreement, higher By-products operating supplies and higher contractor costs, partially offset by The Fund produces copper in cake and sulphuric acid as lower energy costs. by-product from refining zinc concentrates. In 2011, the Fund generated $50.4 million in revenue from the sale of its copper in Capital Expenditures cake and sulphuric acid, compared to $34.5 million in Capital spending was $27.3 million in 2011, compared to $24.2 million in Most of the annual 2011 capital Copper in Cake spending of $27.3 million was spent on sustaining the Fund s Copper in cake revenues in 2011 were $20.4 million compared operations, including $3.2 million on the cell house rehabilitation to $16.0 million in In 2011, copper prices averaged 10 ANNUAL REPORT 2011 NORANDA INCOME FUND

13 project and $9.2 million on replacement anodes for the cell house. Adjusted Earnings before Distributions to Unitholders, Finance Costs, Income Taxes, Depreciation and Amortization ( Adjusted EBITDA ) Adjusted EBITDA is used by the Fund as an indication of cash generated from operations. Adjusted EBITDA is not a recognized measure under IFRS and therefore the Fund s method of calculating Adjusted EBITDA is unlikely to be comparable to methods used by other entities. The Fund s Adjusted EBITDA is calculated by earnings before finance costs and income taxes and adjusting for all of the non-cash items such as depreciation, rehabilitation expense, net change in employee benefits, changes in fair value of embedded derivatives and non-cash gains/(losses) on derivative financial instruments. The Fund s Adjusted EBITDA is currently supported by the stability provided by way of the Supply and Processing Agreement. It may be subject to more variability once this agreement expires in A reconciliation of Adjusted EBITDA in 2011 and 2010 is provided below: Adjusted EBITDA ($ thousands) Earnings before finance costs and income taxes $ 59,860 $ 47,748 Depreciation of property, plant and equipment 34,126 33,709 Net change in rehabiliation liability 4,111 1,560 Loss on derivative financial instruments 3,757 (2,165) Change in fair value of embedded derivatives (11,254) 2,501 Write-down of inventory 1,144 Loss on sale of assets 746 1,385 Net change in employee benefits 6,245 (4,472) $ 97,591 $ 81,410 OPERATING CASH FLOWS Distribution Policy When not restricted and when possible, and as may be considered appropriate by the Board, the Fund s policy is to make distributions at sustainable levels to Unitholders equal to distributable cash flows from operations (as discussed below). The Fund determines the cash available for distribution, if any, on a monthly basis for the Unitholders of record of the Fund on the last business day of each calendar month and these distributions are to be paid on or about 25 days thereafter. The Fund is required by its Trust Indenture to distribute on December 31 st of each year amounts equal to its taxable income and net capital gains for the year, so as, to the extent possible, minimize its liability for tax under the Tax Act for the year. Such distributions are to be made in cash, unless the Fund is restricted from distributing cash or sufficient cash is not available, in which case such distributions are required to be satisfied in whole or in part by the in-kind issuance of additional Priority Units having a value equal to the amount of cash which is unavailable for distribution. Immediately following such an In-Kind Distribution, the Priority Units are automatically consolidated such the number of outstanding Priority Units immediately prior to the In-Kind Distribution is the same as the number of Priority Units outstanding immediately after the distribution and the consolidation. As a result, a Canadian resident Unitholder will hold after the distribution and automatic consolidation the same number of Priority Units held by such Unitholder immediately prior to the In-Kind Distribution. The consequences for non-resident Unitholders may, however, be different, as previously disclosed by the Fund. In December 2011, the Fund amended its Trust Indenture to mitigate the tax consequences for taxable Unitholders. Specifically, in light of the changes in tax laws discussed above, effective December 12, 2011, the Board amended the Fund s Trust Indenture, which used to require that the Fund distribute 100% of its taxable income to Unitholders and would, absent such amendment, have resulted in the Fund making a larger in-kind distribution in 2011 than was necessary. As amended, the Fund s Trust Indenture now requires that the Fund distribute a specified percentage (approximately 71.6% in 2011) of its income attributable to its NPE Earnings. This amendment was made to reflect the fact that the Fund is now subject to entity- level tax on its NPE Earnings. The amendment was adopted in Cash provided by operating activities in 2011, before net changes in non-cash working capital items, was $71.5 million compared to $69.6 million in During 2011, non-cash working capital decreased by $55.3 million due to a decrease in accounts receivable and inventories and an increase in the income taxes payable. In 2010, non-cash working capital increased by $26.0 million due to an increase in accounts receivable and a decrease in accounts payable and accrued liabilities, partially offset by a decrease in inventory. Since 2011 is the first year that the Fund has been taxed at the entity level, it will be required to pay its 2011 income taxes in the first quarter of 2012, as well as begin making quarterly instalment payments for This is expected to result in a lower operating cash flow as the income tax payable balance is reduced. DISTRIBUTION POLICY ANNUAL REPORT 2011 NORANDA INCOME FUND 11

14 Management s Discussion and Analysis accordance with the provisions of the Fund s Trust Indenture and Base Distribution and a cash distribution is approved by the a copy of the Trust Indenture is available on SEDAR at Board. If at any time there is an accumulated Deficiency Amount owing on the Ordinary Units, any distribution on the Ordinary The Fund did not pay any cash distributions to Priority Units must be declared on the last business day of the month on Unitholders or Ordinary Unitholders in 2010 because the Fund which the Partnership has distributable cash flow in that month was renegotiating its debt, and consistent with the terms of the in excess of any amount required to be paid by the Partnership to extension of the then-outstanding revolving facility and the the holders of the Ordinary Units so as to ensure the declaration subsequent Bridge Facility (discussed below), it was not of the Base Distribution by the Fund to the holders of Priority permitted to make any cash distributions to the Unitholders Units for that month together with a declaration of an amount during such period. equal to the Base Distribution by the Partnership to the holders With the long-term financing completed in July 2011 and the of Ordinary Units for that month, until the Deficiency Amount is resulting elimination of the prohibition on cash distributions to paid in full. Unitholders that existed under the prior Bridge Facility, the Board In the event of an exchange of Ordinary Units on a one-for-one declared a cash distribution to Priority Unitholders of $ basis for Priority Units on or after May 2, 2017, or earlier upon per unit for each of the months of September, October, the occurrence of an early exchange event, any accumulated November and December of 2011, and in January and February Deficiency Amount related to the Ordinary Units prior to the of exchange is not accrued by the Fund until such time as excess In addition, in both 2010 and 2011, the Fund declared a cash is available for distribution above the Base Distribution, and year-end In-Kind Distribution to the holders of the Priority Units, a cash distribution is approved by the Board. Upon the exchange, in accordance with the terms of its Trust Indenture. See the holder of Ordinary Units has the right to receive any Overview Cash Distributions and Overview Taxation, distribution declared but not paid on the Ordinary Units as at that Conversion and Structure of the Fund above for further details. time and a promissory note in the amount of the outstanding In light of the changes to tax laws described above, taxable accumulated Deficiency Amount. Subsequent to an exchange, income that is distributed to Unitholders is expected to be taxed there is no further accumulation of the Deficiency Amount. The at the corporate tax rate (28.4% in 2011; estimated to be accumulated distribution Deficiency Amount was $4.6 million as 26.9% in 2012 and beyond) and the amount, if any, distributed at December 31, 2011 and $5.1 million as at February 14, to Unitholders is expected to be treated as a dividend from a For further details, reference should be made to the taxable Canadian corporation. Partnership s limited partnership agreement dated May 1, 2002, Cash distributions on Ordinary Units of the Partnership held a copy of which is available on SEDAR at indirectly by Xstrata Canada are subordinated to distributions on The Fund s distribution policy and practices are impacted by Priority Units of the Fund until May 2017, except upon the various risks, uncertainties and other factors, which are occurrence of certain events. Each Ordinary Unit is entitled to discussed in greater detail in this section and in the sections receive a cash distribution on a monthly basis in an amount entitled Liquidity and Capital Resources and Forward-Looking equal to the monthly cash distribution paid on each Priority Unit, Information below. if any, provided each Priority Unit is first paid an amount that is equal to the monthly cash distribution of not less than $ Distributable Cash per Priority Unit (the Base Distribution ) before any amount is The Fund s objective is to maximize unitholder value and, when paid to the holder of the Ordinary Units. If, notwithstanding the possible, make a sustainable level of distributions to Unitholders. subordination of the Ordinary Units, the cash available for Distributable cash is used by the Fund as an indication of distribution is not sufficient to make the Base Distribution on the cash generated from operations that is available for distribution Priority Units in a month, the amount of the deficiency does not to Unitholders. Distributable cash is not a recognized measure accumulate and is not paid to holders of the Priority Units. under IFRS and therefore the Fund s method of calculating However, if the cash available for distribution in a month is not distributable cash is unlikely to be comparable to methods used sufficient to make a distribution on the Ordinary Units that is by other entities. Distributable cash is calculated by taking cash equal to the distribution on the Priority Units, the amount of the provided by (used in) operating activities before distributions to deficiency does accumulate and is to be paid to the holder of the Unitholders and changes in non-cash working capital, and by Ordinary Units if and when there is excess cash available for subtracting purchases of equipment, debt financing cost and distribution, above the Base Distribution amount, in a permanent debt repayments, cash provided by the Manager s subsequent month (the Deficiency Amount ). Any accumulated operating activities and amounts retained for reserves. Amounts Deficiency Amount related to the Ordinary Units is not accrued by retained for reserves reflect amounts to fund future capital the Fund until excess cash is available for distribution above the requirements, rehabilitation liabilities and other amounts as 12 ANNUAL REPORT 2011 NORANDA INCOME FUND

15 considered necessary by the Board. Distributable cash per Priority Unit and Ordinary Unit is calculated as distributable cash divided by the number of Priority and Ordinary Units outstanding, respectively at the end of the year. As a result of the completion of the refinancing, the limitation on cash distributions that was in effect with the Bridge Facility (discussed below) was removed as at July 1, The Fund is now subject to the Operating Trust maintaining a minimum excess availability of cash per the ABL Facility and other customary restrictions pursuant to the terms of both its ABL Facility and the Notes (as discussed below under Liquidity and Capital Resources ). A reconciliation of cash provided by operations to distributable cash for the period July 1, 2011 to December 31, 2011 is provided below: ($ thousands) July 1, 2011 to December 31, 2011 Cash provided by operating activities $ 68,387 Capital adjustments: Purchase of property, plant and equipment (14,303) Debt financing costs (5,088) Total capital adjustments (19,391) Other adjustments: Distributions declared to Priority Unitholders 6,249 Scheduled debt repayment (7,500) Increase/(decrease) in non-cash working capital (31,510) Elimination of the Manager s cash provided by operating activities (99) Total other adjustments $ (32,860) Distributable Cash before reserve $ 16,136 Decrease/(increase) in reserve (9,887) Distributable Cash $ 6,249 Weighted average number of Priority Units outstanding (basic and diluted) 37,497,975 Distributable cash per Priority Unit $ Distributions declared per Priority Unit $ Weighted average number of Ordinary Units outstanding (basic and diluted) 12,500,000 Distributions declared per Ordinary Unit $ In 2011, distributable cash and distributions declared to Priority Unitholders was $6.2 million and reserves established during the period were $9.9 million. Tax Pools The Fund has certain tax pools available to shelter taxable income. The largest of these tax pools are capital cost allowance ( CCA ) deductions. These pools are available to the Unitholders in proportion to their respective interest in the Partnership. As at the end of December 31, 2011, the CCA tax pools available were as follows: ($ thousands) Class Federal Québec Rate 1 $ 8,880 $ 8,902 4% 1 7,558 7,586 6% % % % % % % % , ,568 25% Total $ 136,134 $ 146,055 LIQUIDITY AND CAPITAL RESOURCES As at December 31, 2011, the Fund s debt was $94.2 million (net of deferred financing fees), down from $190.3 million at the end of December The Fund s cash and cash equivalents as at December 31, 2011 totalled $1.5 million. Long-Term Refinancing Notes On July 28, 2011, the Operating Trust closed its private placement of senior secured notes (the Notes ), for an aggregate principal amount of $90 million, bearing interest at 6.875%. Commencing on December 28, 2011, the Notes began to amortize by an amount of $7.5 million and will continue to amortize on a semi-annual basis on June 28 and December 28 of each year prior to December 28, The $15 million remaining principal balance will be repayable at maturity on December 28, Under the Notes governing trust indenture, the Fund is permitted to distribute excess cash flows to its Unitholders subject to compliance with certain financial covenants and other customary restrictions. The excess cash flow is calculated based on quarterly periods beginning July 1, At any time prior to December 28, 2013, the Operating Trust may redeem all or part of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus a make-whole premium, and accrued and unpaid interest. The Notes are redeemable at the option of the Operating Trust in whole or in part, at any time on or after: December 28, 2013 at % of the principal amount; December 28, 2014 at % of the principal amount; December 28, 2015 and thereafter at 100% of the principal amount; plus, in each case, accrued and unpaid interest to the redemption date. ANNUAL REPORT 2011 NORANDA INCOME FUND 13

16 Management s Discussion and Analysis The Notes trust indenture lists events that constitute an event of default, should they occur. They include the non-payment by the Operating Trust of principal, interest or other obligations of the Operating Trust in respect of the Notes and a breach of any covenant pursuant to the ABL Facility credit agreement (discussed below), subject to customary cure periods where applicable. If any event of default occurs under the Notes trust indenture, the holders of the Notes may require the Operating Trust to repay any outstanding obligations pursuant to the Notes trust indenture, which would, among other things negatively impact the Operating Trust s ability to make cash distributions. ABL Facility Concurrently with the closing of the Notes offering, the Operating Trust entered into a 5-year secured asset-based revolving credit facility (the ABL Facility ) providing availability of up to $150 million. Under the credit agreement entered into in connection with the ABL Facility, the Fund is permitted to distribute excess cash flows to its Unitholders subject to maintaining a minimum excess availability and other customary restrictions. The ABL Facility is an asset-based credit facility and the loans thereunder will be made available to the Operating Trust based on a borrowing base test with the maximum amount available thereunder to be the lesser of (a) $150 million and (b) the aggregate of (i) 85% of eligible accounts receivable (90% in the case of insured accounts receivable or that are owed by qualified investment grade account debtors) plus (ii) the lesser of (A) 70% of the lower of cost or fair market value of eligible inventory, and (B) 85% of the appraised net orderly liquidation value of eligible inventory, with availability from inventory subject to a cap of 100% of availability under clause (i), minus customary priority payables and reserves. The borrowing base is tested on a monthly basis so long as excess availability is equal to or greater than $15 million and on a weekly basis if excess availability over the most recent 45-day period is less than $15 million. As at December 31, 2011, the borrowing base on the ABL Facility based on the Fund s working capital position was $83.1 million and $16.2 million was drawn down, leaving an excess availability of $66.9 million. The maturity of the ABL Facility is July 28, The credit agreement entered into in connection with the ABL Facility contains covenants that restrict the Operating Trust (and the Fund, the Manager, the Partnership and its general partner, NILP General Partner Ltd., as guarantors) in several respects, including their ability to make distributions or repurchase the Notes. The ABL Facility also contains customary representations, warranties and covenants and conditions to funding. The Fund s inability to meet these representations, warranties, covenants and conditions may require it to seek additional funding sources and may, among other things, adversely impact upon the Fund s ability to make cash distributions. The ABL Facility credit agreement does not contain financial covenants, provided the Fund s average excess availability over the most recent 45-day period is equal to or greater than $15 million. In the event that the Fund s average excess availability is less than $15 million for any 45-day period, the Fund will be required to maintain (i) adjusted tangible net worth of the Fund and its subsidiaries at a level prescribed in the credit agreement and (ii) annual capital expenditures at a level not to exceed 120% of budgeted annual capital expenditures. The ABL Facility credit agreement lists events that constitute an event of default, should they occur. They include the non-payment by the Fund of principal, interest or other obligations of the Fund in respect of the ABL Facility credit agreement, a default under the Notes trust indenture that permits, or has resulted in, the acceleration of the obligations owing to the holders of Notes, and a breach of any covenant pursuant to the ABL Facility credit agreement, subject to customary cure periods where applicable. If any event of default occurs under the ABL Facility credit agreement, the ABL Facility lenders will be under no further obligation to make advances to the Fund and may require the Fund to repay any outstanding obligations pursuant to the ABL Facility credit agreement, which would, among other things negatively impact the Fund s ability to make cash distributions. The Notes and the ABL Facility are fully and unconditionally guaranteed, on a senior secured basis (subject to the terms of an intercreditor agreement with the lenders under the ABL Facility), by the Fund, the Manager, the Partnership and NILP General Partner Ltd., the Partnership s general partner. The proceeds of the ABL Facility were used for working capital and other general corporate purposes, and, together with the net proceeds of the Notes offering, were used in part to repay all amounts outstanding in respect of the Operating Trust s prior Bridge Facility (described below). 14 ANNUAL REPORT 2011 NORANDA INCOME FUND

17 Bridge Facility 2. it will require that the Fund provide this financial security over On December 2, 2010, the Operating Trust obtained a bridge a three-year period (compared to a 15-year period under the facility (the Bridge Facility ) for an amount of $250,000 from a current regime). syndicate of lenders, comprised of a $130,000 term loan It is expected that there would be a three year transition tranche ( Term Loan Tranche ) and a $120,000 operating line of period after the date of Bill 14 coming into force, however, the credit ( Revolving Facility Tranche ). The Bridge Facility was final details on the transition will not be known until the bill is obtained in order to refinance the then-outstanding revolving enacted into law. The financial security is expected to be in the credit facility of the Fund and the Operating Trust that matured on form of cash, letter of credit, or another acceptable form. December 3, 2010, and to finance general corporate purposes Under the current Mining Act, the Fund expects to post including working capital and to repay the then-remaining financial security, in the form of letters of credit, starting with amounts outstanding on the Operating Trust s previously $0.1 million in This is expected to increase over the next outstanding senior secured notes that matured on several years until it reaches a cumulative total of $11.7 million December 20, 2010, and to enable the Fund to pursue a in long-term debt financing, all as described further below. Any financial security that is posted under the current Effective June 3, 2011, the Bridge Facility was extended to legislation or the proposed Bill 14 is expected to reduce the December 1, 2011 for a total of $220,000 comprised of excess availability on the ABL Facility, and may negatively impact $120,000 under the Term Loan Tranche and $100,000 under distributable cash, if any, available to Unitholders. the Revolving Facility Tranche. The credit agreement governing It is not certain when, or if, Bill 14 will achieve formal passage the Bridge Facility contained covenants that restricted the Fund and be given assent to become law. in several respects, including its ability to make cash distributions The Fund has provided certain forward-looking information or redeem or repurchase units. On July 28, 2011, the Bridge regarding the Notes, the ABL Facility and financial security under Facility was fully repaid using proceeds from the Notes and the the Mining Act, which are subject to various risks and ABL Facility described above. uncertainties. Some of the risks, uncertainties and assumptions The Term Loan Tranche was used to partly repay all of the underlying this information can be found in the section entitled previously-outstanding senior secured notes in the amount of Forward-Looking Information below. $153.5 million that matured on December 20, The Revolving Facility Tranche was used to refinance the OUTSTANDING UNITS Operating Trust s prior revolving facility that matured on December 3, 2010, to finance general corporate purposes Outstanding Unit Data As at February 14, 2012 including working capital and to repay the remaining Priority Units 37,497,975 $23.5 million of the previously-outstanding senior secured notes Ordinary Units and Special Fund Units 12,500,000 mentioned above. The terms of the Revolving Facility Tranche were substantially the same as the terms of the Operating Trust s As noted above, a wholly-owned subsidiary of Xstrata Canada previous revolving facility. holds 12,500,000 Ordinary Units of the Partnership, which represent all of the outstanding Ordinary Units of the Partnership, Financial Security and which are exchangeable for Priority Units on a one-for-one In May 2011, the Québec government introduced Bill 14 which, basis on or after May 2, 2017, or earlier upon the occurrence of if enacted, would amend the Mining Act. It has been passed in the Québec National Assembly and is now going through various certain events. The 12,500,000 outstanding special voting units stages as a public bill before potentially becoming law in of the Fund listed above (the Special Fund Units ) provide It is expected that Bill 14 would have an impact on the voting rights in respect of the Fund to the holder of Ordinary financial guarantee to be provided by the Fund as required under Units. Further details concerning the rights, privileges and the Mining Act with respect to its residue ponds which are on site restrictions attached to the Fund s outstanding Priority Units and at the Processing Facility. Special Fund Units and the outstanding Ordinary Units of the If passed in its current form, Bill 14 is expected to have the Partnership, are contained in the Fund s 2010 Annual following impact on the Fund: Information Form under the section entitled General Description 1. it will require that the Fund provide financial security covering of the Capital Structure. A copy is available on SEDAR at 100% of the anticipated costs of rehabilitating and restoring the residue ponds (under the current Mining Act, the Fund is required to provide 70% of the anticipated costs to rehabilitate and restore of the accumulation areas ( residue ponds )); and ANNUAL REPORT 2011 NORANDA INCOME FUND 15

18 Management s Discussion and Analysis CONTRACTUAL OBLIGATIONS The following table shows the Fund s contractual obligations schedule for the years 2012 to 2016: (millions of Canadian dollars) Payments due by period 2016 Contractual Obligations Total and beyond Bank and other loans $ 98.7 $ 15.0 $ 15.0 $ 15.0 $ 15.0 $ 38.7 Operating leases Purchase commitments Rehabilitation liability Total $ $ 29.0 $ 16.4 $ 16.7 $ 16.1 $ 73.1 TRANSACTIONS WITH RELATED PARTIES In addition to those arrangements described elsewhere in the MD&A, the Fund entered into the following transactions with related parties. Pursuant to the O&M Agreement dated May 3, 2002 between the Partnership and the Manager, a wholly-owned subsidiary of Xstrata Canada, the Manager is responsible for the ongoing operation and management of the Processing Facility and provides management services to the Partnership in exchange for a management fee and reimbursement of certain specified costs incurred by the Manager in the course of performing its duties. These services include, among other things, preparing annual operating and maintenance plans and capital improvement plans for approval by the directors of the general partner of the Partnership, reporting to the general partner of the Partnership on the operation of the Processing Facility and the business of the Partnership, providing accounting and record keeping services including coordination and management of accounting, cash management, treasury and other systems and preparing financial statements and other reports on operations. Pursuant to the Supply and Processing Agreement dated May 3, 2002 between Xstrata Canada and the Partnership, which expires on May 3, 2017, unless extended, Xstrata Canada is obligated, except in certain circumstances, to sell to the Partnership a maximum of up to 550,000 tonnes of zinc concentrate per year at a concentrate price based on the zinc metal price on the LME for the payable zinc metal contained in the concentrate, less a fixed, escalating processing fee ($0.389 per payable zinc metal in 2011). Additionally, the Supply and Processing Agreement provides that Xstrata Canada will act as exclusive agent for the Partnership to arrange for purchases of any additional zinc concentrate in excess of the 550,000 tonnes described above, and for sales of zinc metal and by-products, and related hedging and derivative arrangements. The expiry of the Supply and Processing Agreement will result in a concurrent termination of the O&M Agreement. If the Supply and Processing Agreement terminates and is not replaced with a similar agreement providing for a known supply source of zinc concentrate, the Partnership will need to seek out alternative zinc concentrate supply relationships. As discussed above, in November 2011, the Board advised that it had undertaken a review of the availability of funds for future distributions through its Independent Committee. The focus of the review by the Independent Committee was, among other things, to examine, using independent expertise, the future operations of the Fund upon the expiry of the Supply and Processing Agreement in In the event that the Independent Committee determines that the supply of zinc concentrate beyond 2017 is not sufficient to keep the Processing Facility running at full capacity, it may be necessary to establish significant cash reserves to cover closure costs of the Processing Facility. See also Overview Long-Term Strategy above. Under the terms of an Administration Agreement dated April 18, 2002 between the Fund and the Administrator, the Administrator provides administrative services to the Fund and management services to the Operating Trust. Pursuant to the Administration Agreement, Computershare Trust Company of Canada, the sole trustee of the Fund, has delegated all of its power and authority to the Administrator and the Administrator provides certain administrative and support services to the Fund, including to: (i) ensure compliance by the Fund with continuous disclosure obligations under applicable securities legislation; (ii) provide investor relations services; (iii) provide or cause to be provided to Unitholders all information to which Unitholders are entitled under the Fund s Trust Indenture including relevant information with respect to income taxes; (iv) call, hold and distribute materials, including notices of meetings and information circulars, in respect of all meeting of Unitholders; (v) compute, determine and make distributions to Unitholders; (vi) determine the amount of cash flow of the Fund, distributable cash flow, income, net realized capital gains, redemption income and redemption gains pursuant to the Fund s Trust Indenture; (vii) attend to all administrative and other matters arising in connection with any redemption of units; and (viii) ensure compliance with the Fund s limitations on non-resident 16 ANNUAL REPORT 2011 NORANDA INCOME FUND

19 ownership; and (ix) undertake all matters required by the Fund s Trust Indenture to be performed by the sole trustee. All costs connection with providing credit support in respect of the Operating Trust s existing ABL Facility. relating thereto are for the account of the Fund. During the twelve month period ended December 31, 2011, Pursuant to the Management Services Agreement dated Xstrata Canada sold to the Partnership $319.4 million of zinc April 18, 2002 between the Operating Trust and the Manager, concentrate (2010 $335.9 million) and provided $1.2 million the Manager provides management services to the Operating in sales agency services (2010 $1.2 million). The sales agency Trust. These services include assisting the Operating Trust in: services are provided on a cost recovery basis. (i) developing, implementing and monitoring a strategic plan; The administration, management and operating services (ii) developing an annual business plan which may include provided by the Manager are provided on a cost recovery basis operational and capital expenditures budgets when appropriate; and for a management fee of $0.3 million per annum, adjusted (iii) developing acquisition strategies, investigating potential upward annually by 2%. As a result of the Administration acquisitions and analyzing the feasibility of potential acquisitions; Agreement between the Fund and the Administrator, the (iv) carrying out acquisitions or dispositions and related Management Services Agreement between the Operating Trust financings required for such transactions; (v) assisting in and the Manager and the O&M Agreement between the connection with any financing of the Operating Trust or the Fund; Partnership and the Manager, the Manager has been paid the (vi) computing, determining and making distributions to following amounts for administration, management and unitholders of distributions properly payable by the Operating operating services in respect of the Fund and its subsidiaries and Trust; (vii) providing technical and evaluation services on assets for the years ended December 31, 2011 and equipment, processes and techniques relating to the operations December 31, 2010, respectively. of the business; (viii) supervising the operation of the Operating Trust s business; and (ix) preparing, planning and co-ordinating Services provided by Xstrata Canada ($ millions) management and Trustees meetings. In consideration for Salary and benefits 1 $ 64.9 $ 67.5 providing the services under the Management Services Support services 1.2 $ 1.2 Agreement, the Manager is entitled to reimbursement of its O&M Agreement management fee 0.3 $ 0.3 direct and indirect costs and expenses incurred in connection Total $ 66.4 $ 69.0 with its duties under the Management Services Agreement. 1 This represents all amounts paid in respect of salaries and benefits for all of the For further details concerning the above agreements, reference is made to the Management Information Circular of the Fund dated May 4, 2011, the Fund s 2010 Annual Information Form dated March 22, 2011 (under the headings Xstrata Canada Corporation Major Agreements and The Administrator and Manager ), and the notes to the Audited employees of the Manager in connection with the operation of the Processing Facility and the services provided to the Fund, the Operating Trust and the Partnership. In addition, the Fund undertakes other transactions with Xstrata Canada and affiliated companies, at terms that reflect market rates. The table below summarizes sales and purchases that were transacted with Xstrata Canada and affiliated companies for 2011 and 2010, respectively: Consolidated Financial Statements of the Fund for the year ended December 31, Copies are available on SEDAR at Sales and Purchases ($ millions) Sales Any agreements entered into by Xstrata Canada as agent on Sales of zinc metal $ 34.0 $ 72.1 behalf of the Partnership with any party related to Xstrata Sales of byproducts Canada, and which are material to the Partnership, must be on Purchases terms that are, collectively, no less favourable to the Partnership Purchases of raw materials and than those available at the time from a reputable, non-related operating supplies party. These agreements must be reviewed and approved by the Credit support from Xstrata Canada $ 0.0 $ 0.4 Audit Committee of the Operating Trust, all of the members of which are unrelated to Xstrata Canada. In addition, Xstrata Canada and the Manager have entered into various agreements and provided certain consents in ANNUAL REPORT 2011 NORANDA INCOME FUND 17

20 Management s Discussion and Analysis FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS December 31, 2011 was recognized as a derivative financial liability of $5.8 million and a long-term derivative financial Due to the structure of the Processing Facility s purchase and liability of $0.3 million on the Fund s consolidated statements of sale contracts, the Fund has the ability to manage some of its financial position. exposure to fluctuations in zinc market prices. Zinc metal The Fund has applied hedge accounting to its fixed forward products are generally sold approximately two months after the sales contracts, and as such, in addition to recording the fair concentrate from which they are made is delivered. As a result, value of the fixed forward contract, the fair value of the related by pricing the payable zinc metal contained in zinc concentrate fixed sales commitment has also been recognized as a firm at the LME zinc reference price in the second month following its commitment asset of $5.9 million and a long term-firm delivery, and by pricing the processing fee in Canadian dollars, commitment asset of $0.3 million. Any net difference in the the Supply and Processing Agreement seeks to limit the change in the fair value of both items between reporting dates exposure to zinc metal price fluctuations during the period in represents the ineffective portion of the hedge, and is recorded which the concentrate is transformed into zinc metal. This results as a commodity hedging gain or loss. in matching the timing of pricing of the purchase of zinc The Fund does not enter into any hedging contracts for the concentrate with the expected timing of sales of the refined zinc purposes of speculation. metal produced from that concentrate. The Fund, through The Fund has separated and recorded at fair value, Xstrata Canada, enters into hedges ( inventory management embedded derivatives resulting from the provisional pricing program ) to the extent that the natural hedge does not fully feature in the Supply and Processing Agreement. Under the minimize exposure to fluctuations in zinc prices. As at terms of this agreement, final prices for purchases of December 31, 2011, the Fund had bought forward concentrate ( quotational pricing ) are based on the LME price approximately 26 million pounds of zinc, related to the inventory prevailing on a specified future date after shipment ( quotational management program hedges. The fair value of these positions period ). The Fund accounts for changes in the fair value of as at December 31, 2011 was a loss of $1.4 million and is unsettled concentrate payable amounts resulting from recognized as a derivative financial liability on the Fund s quotational pricing with reference to forward LME rates for the consolidated statements of financial position. remaining quotational period through gains or losses recorded in In addition, some customers request a fixed sales price raw material purchases costs and corresponding adjustments in (instead of the LME average price in the month of shipment) in accounts payable and accrued liabilities. During the twelve order to lock in the price of their zinc purchases for a future month periods ended December 31, 2011, the Fund recorded a period of time, generally not exceeding one year. These decrease of raw material purchase costs of $11.3 million related arrangements, referred to as fixed forward sales contracts, are to the change in fair value of the embedded derivatives resulting generally made available to customers who request them and from the quotational pricing feature of its zinc concentrate who meet the Fund s credit criteria for such contracts. When payables (2010 an increase of $2.5 million). entering into a fixed forward sales contract, the Fund, through its The Fund has exposure to the US dollar for its cash, accounts sales agent, Xstrata Canada, offsets this price risk by hedging receivable, inventory, accounts payable and accrued liabilities with appropriate futures contracts with maturities and quantities and bank debt. The Fund attempts to manage the overall which will match those which the customer has contracted to economic exposure to the US dollar by matching US dollar assets purchase the metal. These futures contracts typically allow the to US dollar liabilities. This currency exposure is managed in part Fund to receive the LME average price plus a premium in the through US dollar overnight transactions. As at December 31, month of shipment, while customers pay the agreed-upon price 2011, the Fund had bought forward US dollars with a notional plus a premium. In the event that the futures contracts have to amount of US$66.2 million and sold forward dollars with a be terminated early, due to the customer cancelling a fixed price notional amount of $67.5 million. An unrealized gain of order, Xstrata Canada, on behalf of the Fund has the right to $0.2 million related to these open positions was recorded as at charge the customer with the cost of settling the LME contract. December 31, The fair value of these open futures contracts as at 18 ANNUAL REPORT 2011 NORANDA INCOME FUND

21 CRITICAL ACCOUNTING ESTIMATES AND CHANGES IN ACCOUNTING POLICY Reference should be made to the Fund s Audited Consolidated Financial Statements and the notes thereto for the year ended December 31, A copy is available on SEDAR at changes in operations, costs of restoration and reclamation activities, and regulatory requirements. The estimated future site restoration and reclamation expenditures currently recorded relate solely to the reclamation of residue ponds at the Processing Facility. Although the ultimate amount to be incurred is uncertain, the liability for future site restoration and reclamation on an undiscounted basis is estimated to be approximately $37.8 million. The cash flows required to settle the liability are expected to be incurred from now until The estimated future site restoration and reclamation expenditures may vary based on changes in operations, cost of restoration and reclamation activities and regulatory requirements. The estimate for future site restoration and reclamation impacts upon the amount of reclamation expense that is incurred on the statement of net earnings, and the balance of the future site restoration and reclamation found in the long-term liabilities section of the balance sheet. Actual site restoration and reclamation expenditures reduce the Fund s cash provided by operations. Transition to IFRS A number of significant changes were made to the Fund s financial statements as a result of the transition to IFRS. They included: Under Canadian GAAP, deferred income tax balances were recognized at the Specified Investment Flow-Through ( SIFT ) taxation rate, which was substantially equivalent to the general corporate income tax rate if the Fund was able to demonstrate its intent and ability to distribute earnings. Under IFRS, in the comparative period, the deferred income taxes have to be recognized at the undistributed rate applicable to trusts until distributions are made. This undistributed rate is equivalent to the highest marginal personal tax rate. Current income taxes must also be recognized at the higher Revenue Recognition undistributed rate until such time as a distribution The Fund recognizes revenue from the sale of refined metals and is declared. by-products at the time of the sale, when the rights and The Fund s Priority and Ordinary Units do not meet the obligations of ownership pass to the buyer. This generally occurs definition of equity under IAS 32 Financial Instruments: upon shipment. Prices for provisionally priced sales are based on Presentation. Therefore, they are recorded under Net Assets expected market prices and exchange rates prevailing at the time attributable to Unitholders. This classification is a result of of shipment and are adjusted based upon market prices and the Priority Units being puttable instruments as the holder has exchange rates until final settlement with customers, pursuant to an option to redeem units and the Fund has a contractual the terms of sales contracts. Price changes for shipments obligation requiring the delivery of taxable income to the awaiting final pricing at the end of a reporting period could have a Unitholders. As for the Ordinary Units, this is because these material effect on future revenues. As at December 31, 2011, units are convertible into Priority Units at a later date. $7.7 million in revenues were awaiting final pricing. The following IFRS requires that the Fund use an appropriate current table provides an analysis of the revenues awaiting final pricing: market-based pre-tax discount rate in calculating the rehabilitation liability. This is a lower rate than what was used Accountable Average to calculate the liability under Canadian GAAP, resulting in a Metal Content Provisional Price (tonnes) (U.S.$/pound) higher liability being recognized under IFRS. Zinc metal 2,040 $ 0.95 IFRS requires that Special Purpose Entities ( SPE ) be Copper in cake 538 $ 3.45 consolidated when the entity has de facto control or when the activities of the SPE are being conducted on behalf of the The Fund makes a portion of its sales based on the average reporting entity. As a result, the Fund is required to price from the previous month (month prior pricing). In a market consolidate the Fund s Manager, Canadian Electrolytic Zinc in which zinc prices are rising, a portion of the Fund s revenues Limited, under IFRS which primarily resulted in recording the will lag behind the higher zinc prices; while in a market in which accrued benefit obligation of the Manager s pension plans zinc prices are falling, a portion of the Fund s revenues will and post retirement benefit plans. benefit from higher zinc prices from the month prior. Future Site Restoration and Reclamation Estimated future site restoration and reclamation costs included within future site restoration and reclamation may vary based on Income Taxes The Fund follows the liability method of accounting for future income taxes. Under the liability method, future income tax ANNUAL REPORT 2011 NORANDA INCOME FUND 19

22 Management s Discussion and Analysis assets and liabilities are determined based on differences between the accounting basis and the tax basis of the assets and liabilities, and are measured using the currently substantively enacted tax rates and laws expected to apply when these differences reverse. The effect of a change in income tax rates on future tax liabilities and assets is recognized in income in the period in which the change occurs. Taxable income and net taxable capital gains for the year that are not distributed to Unitholders in cash or in units are generally taxed in the Fund at the highest federal and provincial tax rates that is applicable to individuals at a combined rate of approximately 48%. Effective as at January 1, 2011, distributions of taxable income are taxed at the Specified Investment Flow-Through Entity rate. This results in a two-tiered tax structure similar to that of corporations whereby the taxable portion of distributions will be subject to income tax payable by the Fund at a rate of 28.4% in 2011 and 26.9% in 2012 and beyond, while taxable Canadian Unitholders will receive the favourable tax treatment on distributions currently applicable to qualifying dividends by a Canadian corporation. The Fund estimates that the unrecognized temporary differences outstanding as at December 31, 2011 were approximately $33 million, which is based on the undistributed rate, being the highest marginal personal tax rate of approximately 48%. The future tax liability related to the Partnership is only recognized for the portion of the Partnership that is owned by the Priority Unitholders. Property, Plant and Equipment Included in the $448.1 million of assets as at December 31, recoverable. Impairment is assessed by comparing the carrying amount of an asset to be held and used with the sum of the undiscounted cash flows expected from its use and disposal. If such assets are considered impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value, generally determined on a discounted cash flow basis. Any impairment results in a write-down of the asset and a charge to net earnings during the year. Inventories As at December 31 st, zinc and by-product related inventories at the end of 2011 and 2010 included the following balances: ($ millions) Raw materials $ 18.2 $ 18.2 Work-in-process Finished products $ 51.4 $ 69.8 These inventories are valued at the lower of average cost or net realizable value. Based on the estimated volumes, the Fund has estimated the net realizable value of raw materials and work-in-process. Costs represent the average cost and include raw material purchase costs, labour, energy, supplies and amortization of certain plant equipment. Realizable value includes metal prices, net of the costs required to complete the production of zinc metal. As at December 31, 2011 and December 31, 2010, all of the above inventories were recorded at cost ($493.1 million as at December 31, 2010) were property, plant and equipment with a carrying value of $277.1 million Supplies Inventory (2010 $285.7 million). This amount represents 62% (2010 As at December 31, 2011, the supplies inventory balance was 58%) of the book value of the asset base. As such, the estimates $9.6 million (December 31, 2010 $8.8 million). The Fund used in accounting for property, plant and equipment and the uses the accounting principle of the lower of average cost and related amortization charges are critical and have a material net realizable value. If a portion of the supplies inventory became impact on the Fund s financial condition and earnings. Property, obsolete, the Fund would be required to write off the difference plant and equipment are recorded at cost and the amortization is between the salvage value and the book value of the obsolete based on estimated service lives of the assets, calculated on a inventory. straight line basis. Assets under construction are not amortized If a supplies inventory write-off were required, net earnings for until put into use. that year would be reduced and the balance in the inventories Property, plant and equipment are regularly reviewed for account would have to be lowered. There would be no net impact impairment whenever events or changes in circumstances on the Fund s cash realized from operations. indicate that the carrying amount of an asset may not be 20 ANNUAL REPORT 2011 NORANDA INCOME FUND

23 COMMITMENTS AND CONTINGENCIES motion to institute a class action has been heard by the Québec Superior Court and the case has been taken under advisement. Manager s Pension Plan The Manager continues to maintain that the class action suit Upon the termination of the O&M Agreement, the Partnership will is unfounded. acquire the Manager from Xstrata Canada. If this occurs, the Partnership is required to establish a pension plan for the Appropriation of Land employees of the Manager. Pension plan assets and liabilities will The Fund is currently in discussions with Québec s Ministry of be transferred into the newly-established pension plan, subject Transportation regarding land that the Fund is currently using. to obtaining regulatory approvals. This land was appropriated by the provincial government a As at December 31, 2011, the estimated liability of the number of years ago. The Fund s cash payment, if any, cannot Manager s share of the pension plan was $61.9 million (2010 be determined. $44.4 million). There is currently $50.0 million of assets within the Manager s share of the pension plan (2010 $49.4 million). Guarantees The estimated liability of the pension plans covering the Some of the Fund s inceptive agreements, specifically those pension obligation of the Manager s employees prior to May 2, related to the acquisition of the Processing Facility and the debt, 2002 was approximately $88.9 million as at December 31, include an indemnification provision where the Fund may be 2011 (December 31, 2010: $80.1 million). There was required to make payments to Xstrata Canada or lenders for approximately $74.7 million of assets within the pension plan as breach of fundamental representations and warranty terms in the at December 31, 2011 (December 31, 2010: $67.1 million). applicable agreement. As at December 31, 2011, the Fund does The benefit obligation and plan assets for pre-may 2002 would not believe these indemnification provisions would require any only revert to the Fund upon the termination of the material cash payment by the Fund. Administration Agreement between the Manager and the Fund The Fund indemnifies its Trustees and officers against claims and establishment of a pension plan by the Manager. reasonably incurred and resulting from the performance of their The cost of providing benefits through defined benefit pension services to the Fund and the Operating Trust, and maintains plans and post-retirement benefit plans is determined by an liability insurance for its Trustees and officers. actuarial calculation. Cost and obligation estimates depend upon management s assumptions about future events, which are used EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES by actuaries in calculating such amounts. These assumptions include discount rates, the expected return of plan assets and As at December 31, 2011, an evaluation of the effectiveness of future compensation increases. In addition, actuarial consultants the issuer s disclosure controls and procedures (as such term is utilize subjective factors, such as withdrawal and mortality rates. defined under the rules adopted by the Canadian securities Actual results may differ materially from those estimates based regulatory authorities) was carried out by management, under on these assumptions. the supervision of, and with the participation of, the Manager s The Manager s funding policy is to contribute amounts CEO and chief financial officer ( CFO ). sufficient to meet minimum funding requirements as set forth by Based upon that evaluation, the CEO and CFO concluded that the Pension and Benefits Agreement with Xstrata Canada plus as at such date, the Fund s disclosure controls and procedures such additional amounts as the Manager may determine to be were appropriately designed and were operating effectively such appropriate. The Manager s share of plan assets is estimated that information relating to the Fund required to be disclosed by based on the Manager s defined benefit obligation and any the Fund in the reports which the Fund files or submits to such adjustments for historical contributions by the Manager. regulatory authorities, (a) is recorded, processed, summarized and reported within the time periods specified under applicable Litigation securities laws, and (b) is accumulated and communicated to In August 2004, the Processing Facility was served with a motion the Fund s management, including the CEO and CFO, to allow to form a class action before the Québec Superior Court, timely decisions regarding disclosure. Although the Fund s following an accidental discharge of sulphur trioxide. In disclosure controls and procedures were operating effectively as June 2008, the Québec Superior Court dismissed the motion to at December 31, 2011, there can be no assurance that the institute a class action. The plaintiff appealed the decision. In Fund s disclosure controls and procedures will detect or uncover August 2009, the Québec Court of Appeal dismissed the motion. all failures of persons within the Fund and its subsidiaries to In December 2009, the Processing Facility was served with a disclosure material information otherwise required to be set forth new motion for leave to institute a class action. The second in the annual regulatory filings. ANNUAL REPORT 2011 NORANDA INCOME FUND 21

24 Management s Discussion and Analysis INTERNAL CONTROLS OVER FINANCIAL REPORTING may decline, which could in turn have a material adverse effect on the Fund s business, cash flows and results of operations. During 2011, the Fund assessed the design and effectiveness of The current economic conditions facing the Fund s markets, its internal controls over financial reporting. The design of internal the credit environment and changes in laws applicable to income controls over financial reporting was evaluated as defined in funds present the Fund with some potential challenges. In 2011, Multilateral Instrument Certification of Disclosure on the Fund secured stable financing until 2016; management and Issuers Annual and Interim Filings. Based on the results of this the Board of Trustees are now addressing the challenges that evaluation, the CEO and CFO concluded that as at December 31, face the Fund with the expiration of the Supply and Processing 2011, the internal controls over financial reporting were Agreement in The Trustees and the Fund intend to pursue appropriately designed and were operating effectively to provide a business plan, operating plan, distribution policy and capital reasonable assurance that the Fund s financial reporting is structure which include: reliable and that its consolidated financial statements were the need for the Processing Facility to make the investments prepared in accordance with IFRS and no material weaknesses necessary to remain competitive; were identified through their evaluation. the need to secure suitable zinc concentrate supplies on a Management also concluded that during the year ended long-term commercial basis to run the Processing Facility at December 31, 2011, no changes were made to internal controls full capacity; over financial reporting that would have materially affected, or the need for the Fund to remain financially viable and protect would be reasonably likely to materially affect those controls. Unitholders equity interests to the end of the life of the Supply and Processing Agreement and beyond; RISKS AND UNCERTAINTIES the need for the Fund to secure its long-term future and protect the interests of all affected stakeholders, including Where appropriate, the Fund has included comments on risks Unitholders, employees, suppliers, customers and the and uncertainties throughout the MD&A. The following are communities of Salaberry-de-Valleyfield, Québec; and additional risks and uncertainties that have not been included the need for the Fund to make adequate allowances for elsewhere in the document. The Fund is also subject to certain employee, environmental and closure obligations and risks and uncertainties that are common in the zinc processing responsibilities. industry and the market environment generally and that may However, there can be no assurance that the Fund s business affect future performance, events, results and operations. The plan, operating plan, distribution policy and/or capital structure risks and uncertainties included here are not exhaustive. The will be able to take into account all of the above objectives or do Fund operates in a very competitive and rapidly changing so on a successful basis. environment. New risk factors may emerge from time to time and At normal operating levels, the Processing Facility purchases it is not possible for the Fund to predict all such risk factors, nor approximately 1,200 million kilowatt hours per year from Hydrocan it assess the impact of all such risks factors on the Fund s Québec at the market price charged to industrial users. During business. In addition, historical trends discussed elsewhere in 2011, the Fund s electricity costs were approximately this MD&A should not be used to anticipate events, $53.7 million (2010 $54.3 million). Increases in energy costs performance, results or trends in future periods. could adversely affect cash realized from operations. Under the Supply and Processing Agreement, changes in the Processing Operational Risks Facility s electricity costs are partially offset by adjustments to The Processing Facility is dependent upon the continuing supply the processing fee in the following year. There can be no of zinc concentrate. Currently, Xstrata Canada is obligated, assurance that a material increase in electricity costs can be except in certain circumstances, to supply zinc concentrate offset by an adjustment to the processing fee; and after the based on the terms set out in the Supply and Processing Supply and Processing Agreement expires, once the Fund is Agreement. During the occurrence of an event of force majeure, subject to market terms, the Fund does not expect there will be the obligations of Xstrata Canada will be suspended to the extent any mechanism for adjusting the processing fee to offset any that such obligations cannot be performed as a result of such increase in electricity costs. In addition, the interruption or force majeure. If the Fund is not able to secure a supply of zinc unavailability of such electricity could have a material adverse concentrate on favourable terms because of the termination of impact upon the operations of the Processing Facility, which the contract in 2017, or during a force majeure situation, or if could in turn have a material adverse effect on the business, Xstrata Canada fails to fulfill all of its obligations under the Supply cash flows and results of operations of the Fund. and Processing Agreement, its cash realized from operations 22 ANNUAL REPORT 2011 NORANDA INCOME FUND

25 Business Risks Otherwise, the Fund will be subject to tax on such earnings at the Demand for the Processing Facility s products is a function of higher personal income tax rate applicable to individuals. The world industrial production growth, the development of new uses Fund has the option of either remaining as a taxable income trust and markets, and substitution. Demand for our products is also or converting to a corporation. However, under both scenarios, impacted by general business and economic conditions and the the cash realized from operations will be negatively impacted by condition of financial and credit markets. additional income tax payable. The Trustees are considering the The Fund has a fixed storage capacity for sulphuric acid at the tax and other implications of conversion while also considering Processing Facility of approximately 37,000 tonnes, compared the implications to Unitholders of remaining as a trust. to an average annual production of approximately The Processing Facility is dependent upon key customers that 400,000 tonnes. The availability of storage facilities outside of are relatively close to the Processing Facility. In 2011, the the Processing Facility is limited due to the special material Processing Facility s 10 largest customers accounted for requirements for sulphuric acid storage. In a market where approximately 70% ( %) of its direct or indirect sales sulphuric acid sales have significantly slowed and the Fund is not (on a volume basis), with its largest customer accounting for able to secure additional storage capacity, the Fund s ability to 24% ( %). The loss of a significant customer may have produce zinc and sulphuric acid is expected to be reduced. a materially adverse effect on the Fund s financial position and The global zinc market has fundamentally changed in recent cash realized from operations. years. Factors that have the potential to positively and/or In 2011, the Processing Facility sold more than 99% (2010 negatively impact the Fund s business in the future include the 98%) of its zinc to customers in the United States and Canada. If increasing influence of demand from China and India as the Processing Facility lost certain customers in the industrialization and urbanization continues in their economies, United States and Canada, there is a risk that it would be forced the growth in low cost smelting capacity in China and the decline to find alternative markets. This could increase distribution costs, in zinc mine production from traditional North American sources thereby adversely affecting future cash realized from operations. that may see North American smelters increasingly dependent A portion of the Processing Facility s Net Revenues results on seaborne zinc concentrate for their supply. The Fund must be from the premiums paid for value-added products, such as zinc prepared to adjust to these issues and, in particular, their impact shapes, zinc shot and zinc powder. Changes in the supply and on the availability of feed sources and treatment charges upon demand for these products can cause premiums to fluctuate, the termination of the Supply and Processing Agreement. The impacting upon the Fund s cash realized from operations. In Fund s failure or inability to adjust to such issues, or to do so in a 2011, each US$0.01 change in the zinc premium impacted the manner that is satisfactory or successful, may have a material Fund s annualized sales and cash realized from operations by US adverse effect on the Fund s business, results of operations and $5.9 million (2010 US $5.9 million). See also Forwardfinancial condition. Looking Information below. With the termination of the Supply and Processing The Processing Facility is dependent upon local transportation Agreement, and should no comparable agreement be available companies to deliver its product to its customers. Changes in the to replace it, the Fund will be subject to market prices rates charged to make these deliveries or a major disruption in ( treatment terms ) for converting zinc concentrate into metal. service, could increase distribution costs or adversely impact the These treatment terms have historically been very volatile and Processing Facility s ability to satisfy its obligations to its there is reason to believe this will continue into the future. The customers, thereby adversely impacting cash realized from Fund s failure or inability to create a more stable stream of operations and potentially exposing the Fund and its business to revenue as per the terms for the processing fee in the Supply and additional liabilities. Processing Agreement, especially when the treatment terms are A portion of the Processing Facility s Net Revenues results low, is expected to have a material adverse effect on the Fund s from sale of by-products, such as sulphuric acid and copper in results of operations and financial condition and its ability to pay cake, as well as from the sale of zinc metal. Changes in the cash distributions. demand and supply of these products can cause them to On January 1, 2011, the specified flow-through entity rules fluctuate, impacting upon the Fund s cash, results of operations became effective under the Tax Act and income funds are no and business. longer able to make distributions to unitholders without the imposition of entity level taxation. Accordingly, the Fund is now Borrowing and Credit Risks taxable. Specifically, the Fund will be subject to tax on its As at December 31, 2011, the Fund had approximately non-portfolio earnings (as defined in the Tax Act) (the NPE $98.7 million of indebtedness. The Fund has credit in the form of Earnings ) at the same rate as a Canadian corporation provided an ABL Facility, as well as through proceeds received upon its it distributes a sufficient portion of such earnings to Unitholders. private placement of Notes, both of which mature in As at ANNUAL REPORT 2011 NORANDA INCOME FUND 23

26 Management s Discussion and Analysis December 31, 2011, there was $82.5 million owing on the Notes and $16.2 million drawn down on the ABL Facility, leaving an excess availability of $66.9 million. Although the Fund currently believes that its existing cash combined with its future anticipated cash flow and credit facility will be adequate to satisfy its working capital needs for the foreseeable future, there is no guarantee that the Fund s anticipated cash flow will provide to be adequate or that its existing credit facility will continue to be available or sufficient in the event of unforeseen contingencies. Material factors that could result in the Fund being unable to fund its working capital needs and long-term strategies include: (i) a material default or breach of a covenant under its outstanding indebtedness; (ii) decreases in sales; (iii) deterioration of economic, market or industry conditions; (iv) may material disruption to the Processing Facility s production or operations; and (v) a material change in the Fund s working capital requirements and anticipated capital expenditures or in its business strategy or activities. The Fund is also subject to the risks associated with its long-term indebtedness, including the risks that cash flow from operations will be insufficient to meet required payments of principal and interest under the Notes and the ABL Facility, and the risk that the existing ABL Facility will not, if necessary, be able to be refinanced or that the terms of any such refinancing will not be as favourable to the Fund. In addition, the Fund is subject to the risk that its interest expense may increase on its current ABL Facility that bears interest at floating rates if interest rates increase, which could have a material adverse effect on the results of operations of the Fund. The Fund s ABL Facility and Notes contain certain covenants and representations and warranties, the breach of which could result in a default and the acceleration of their maturity. The Fund and several of its subsidiaries and affiliates, as well as the Manager, have granted security interests over all of their assets to secure indebtedness owing under the ABL Facility and Notes. If the Fund is not able to meet its debt service obligations, it risks the loss of some or all of its assets. For further details concerning the Fund s Notes and ABL Facility and the risks and uncertainties relating thereto, see Liquidity and Capital Resources above. Reliance on the Fund Administrator and Manager The Fund is dependent upon Xstrata Canada for the operation and maintenance of the Processing Facility. The Fund is also dependent upon Xstrata Canada as its principal supplier of zinc concentrate to the Processing Facility, as the provider of stable, guaranteed annual processing fees that enable the Processing Facility to pass along a portion of the increase in its annual operating and electricity costs, and as its exclusive sales agent for the purchase of additional zinc concentrate and the sale of zinc metal and by-products and related hedging and derivative arrangements, all pursuant to the Supply and Processing Agreement. The Supply and Processing Agreement expires in May 2017, or earlier in certain circumstances, unless extended. Upon termination, the Partnership will be required to establish replacement arrangements for the operation of the Processing Facility. The Fund is also dependent upon the Manager, a subsidiary of Xstrata Canada, for administration and management of the Fund, the Operating Trust and the Partnership. The failure of Xstrata Canada, the Manager or their affiliates to perform their obligations pursuant to and in accordance with the Administration Agreement, Management Services Agreement, O&M Agreement, or the Supply and Processing Agreement, or the termination or expiration of any of such agreements, is likely to have a material adverse impact on the Fund and its business, operations and financial condition. Cash Distributions Are Not Guaranteed and May Fluctuate with the Fund s Performance Even in the absence of contractual restrictions, cash distributions are not guaranteed and will fluctuate with the Fund s performance. The Fund depends on income generated from the processing fee for processing zinc concentrate into zinc metal and additional revenue it earns from premiums, by-product revenues and metal gains to make such distributions. There can be no assurance regarding the amount of revenue generated by the Fund. The amount of distributable income will depend upon numerous other factors, including the profitability of the business and the ability to run the Processing Facility at full capacity and the level of the treatment terms post-2017, fluctuations in working capital, interest rates, capital expenditures, actual and contingent liabilities, including environmental remediation and closure obligations, and other factors which may be beyond the control of the Fund. If the Trustees determine that it would be in the best interests of the Fund, they may reduce or suspend cash distributions to the Unitholders. Impact of the US/Canadian Dollar Exchange Rate A portion of the Processing Facility s Net Revenues is impacted by the US/ Canadian dollar exchange rate. Since the inception of the Fund, the Canadian dollar has generally strengthened against the US dollar, negatively impacting the Fund s cash provided by operating activities. In 2011, a $0.01 Canadian appreciation in the average Canadian/US exchange rate would have negatively impacted the Fund s annual cash provided from operations by approximately $0.7 million (2010 $0.6 million). The further strengthening of the Canadian dollar relative to the US dollar may have a material adverse effect on the Fund s cash flows and results of operations. 24 ANNUAL REPORT 2011 NORANDA INCOME FUND

27 Employee Relations hedging activities may protect the Fund against fluctuations in Good labour relations are fundamental to the Fund s ongoing commodity prices, they can also limit the price that can be success. The Processing Facility has 582 employees, 393 of realized on zinc or zinc by-products. In such forward sales and whom are represented by the United Steel Workers of America, call options, where the market price of zinc exceeds the price in a Local The last labour disruption was in Improved forward sale or call option contract, this reduces the potential labour relations have translated into nine consecutive collective revenue stream for the Fund. In addition, the Fund s ability to agreements without a strike. The current three-year collective hedge against such fluctuations may also be limited by factors agreement expires on October 31, outside of its control, such as pursuant to any covenants that A labour disruption, such as a strike or lockout, could have a may be required in connection with its long-term indebtedness. negative material effect on the Fund s financial position, cash There can be no assurance that the Fund s hedging activities will realized from operations and its business. In addition, the Fund is be successful or will protect the Fund against possible adverse reliant upon the efforts and abilities of its current senior effects resulting from fluctuations in the price of zinc concentrate management team, namely the CEO and CFO, and its Trustees. If and by-products. the Fund were to lose the benefit of these senior managers or Trustees experience and skills, the Fund could be adversely Legal Proceedings affected. The nature of the Fund s business subjects it to regulatory investigations, claims, lawsuits and other proceedings in the Environment, Health and Safety ordinary course of business. The Processing Facility s operations are subject to stringent laws The nature or results of these legal proceedings cannot be governing air emissions, discharges into water, waste, hazardous predicted with certainty. There can be no assurance that these materials and workers health and safety, among other things. As matters will not have a material adverse effect on the business or such, there is a significant risk of environmental, health and results of operations in any future period, and a substantial safety liabilities. The Processing Facility has obtained the adverse judgement could have a material adverse impact on the necessary permits and other approvals relating to the protection Fund s business, financial condition, liquidity and results of the environment and workers health and safety. Compliance of operations. with applicable laws and future changes to them is material to For further information concerning legal proceedings, see the the Processing Facility s operation. Future legislation and section entitled Commitments and Contingencies Litigation regulations could necessitate additional expenditures and above. commitments including Bill 14 (discussed above), capital expenditures, financial assurance and restrictions on the Price and Volatility of Priority Units operation of the Processing Facility, the extent of which cannot The market price and liquidity of Priority Units of the Fund has be predicted. experienced fluctuations which may not necessarily be related to The Fund has a comprehensive environmental management the operating performance, underlying asset values or prospects system, which consists of an environmental policy, as well as of the Fund. It may be anticipated that any market for Priority implementation codes and procedures including codes of Units will be subject to market trends generally and changes or practice, job descriptions, operating procedures, rules and disruptions in securities markets or credit markets generally, and responsibilities, employee training, public and employee the value or liquidity of the Priority Units on the TSX may be communications, emergency preparedness, hazard analysis adversely affected by such volatility. and audits. Restrictions on Certain Unitholders and Liquidity of Units Interest Rates The Trust Indentures of the Fund and the Operating Trust impose As at December 31, 2011, $16.2 million of the Fund s restrictions on non-resident Unitholders who are prohibited from indebtedness bears interest at floating rates (December 31, beneficially owning more than 49% of the Units. This restriction 2010 $194.7 million), which exposes the Fund to financial may limit the rights of certain Unitholders, including risks as a result of interest rate fluctuations and the potential non-residents of Canada, to acquire Units, to exercise their rights volatility of these rates. as Unitholders and to initiate and complete take-over bids in respect of the Units. As a result, these restrictions may limit the Hedging Activities demand for Units from certain Unitholders and thereby adversely The Fund attempts to manage its exposure to fluctuations in zinc affect the liquidity and market value of the Units held by market prices through hedging (as discussed above under the public. Financial Instruments and Other Instruments ). Although ANNUAL REPORT 2011 NORANDA INCOME FUND 25

28 Management s Discussion and Analysis Redemption Right It is anticipated that the redemption right attached to Units will not be the primary mechanism for holders of Units to liquidate their investments. Notes which may be distributed in specie to Unitholders in connection with redemption will not be listed on any stock exchange. No established market is expected to develop in such notes and they may be subject to resale restrictions under applicable securities laws. Insurance Coverage and Compliance While the Fund maintains insurance against certain risks, the nature of these risks is such that liability could exceed policy limits or could be excluded from coverage. There are also risks against which the Fund cannot insure or against which it may elect not to insure for various reasons. The potential costs associated with any liabilities not covered by insurance, or in excess of insurance coverage, or compliance with applicable laws and regulations may cause substantial delays and require significant capital outlays, adversely affecting the future business, assets, prospects, financial condition and results of operations of the Fund. Disclosure and Internal Controls Disclosure controls and procedures and internal controls over financial reporting are procedures designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation. Any failure in the Fund s disclosure controls and procedures and/or internal controls over financial reporting may have a material adverse impact on the Fund, its financial condition or its results of operations. 26 ANNUAL REPORT 2011 NORANDA INCOME FUND

29 OUTLOOK FORWARD-LOOKING INFORMATION The final Purchasing Manager s Index ( PMI ) readings for 2011 This MD&A, including sections entitled Overview, Key suggested that while manufacturing activity is still weak, it does Performance Drivers, Distribution Policy, Liquidity and not appear to have deteriorated further in early This is Capital Resources, Contractual Obligations, Transactions encouraging given the challenges posed by the financial strains with Related Parties, Critical Accounting Estimates and stemming from Europe and the policy-induced slowdown in Changes in Accounting Policy, Commitments and China. The US Institute for Supply Management ( ISM ) data Contingencies, Risks and Uncertainties and Outlook, also reports a growth in economic activity in the manufacturing contains forward-looking statements and forward-looking sector in the US at the moment. The December 2011 PMI information within the meaning of applicable securities laws. reading was 53.9%, up from 52.7% in November 2011, with Amongst others, the Fund has made forward-looking statements new orders rising, production strong and inventories falling. for 2012 expected targets and performance, production, sales, Stronger growth in United States manufacturing was also the processing fee and capital expenditures, the Fund and the supported by the ISM New Orders Index which rose to 67.8%. Operating Trust s future business plans and operation of the Automotive sales in January 2012 were at a pace of Processing Facility, future liabilities and obligations of the Fund, million units per year which is 17% higher than the dependence upon the continuing supply of zinc concentrates January However, residential and non-residential and competition relating thereto, anticipated trends in zinc construction continues to be weak. In spite of slow construction concentrate supply and demand, smelting capacity, sulphuric activity, zinc demand is expected to steadily build during the first acid demand and supply, and zinc treatment charges, future half of 2012 as customers experience better order levels and conversion, structuring and other strategic options available to rebuild their inventories as the general outlook improves. the Fund, and the anticipated financial and operating results of The Fund s current estimates for 2012 production, sales, the Fund and distributions to Unitholders. The Fund provides this processing fee and capital expenditures are as follows: information because they are the key drivers of the business. Production: 265,000 tonnes Readers are cautioned that this information may not be appropriate for other reasons. Sales: 265,000 tonnes These statements and information are based, among others, Processing fee: 39.2 cents per pound on the Fund s current assumptions, expectations, estimates, Capital expenditures $27 million objectives, plans and intentions regarding projected revenues and expenses, the economic and industry environments in which The Fund s ability to meet the targets identified above is the Fund operates or which could affect the Fund s activities, the subject to various risks, uncertainties and assumptions, some of Fund s ability to attract and retain clients and consumers as well which are discussed under Risks and Uncertainties above and as the Fund s operating costs, raw materials and energy supplies can be found in the Forward-Looking Information below. which are subject to a number of risks and uncertainties. Forward-looking information involves known and unknown risks, uncertainties and other factors, which may cause the actual events, results or performance to be materially different from any future events, results or performance expressed or implied by the forward-looking information. Examples of such risks, uncertainties and other factors include, but are not limited to: (1) the Fund s ability to operate at normal production levels; (2) the dependence upon the continuing supply of zinc concentrates (terms of the Supply and Processing Agreement); (3) the demand for zinc metal, sulphuric acid and copper in cake; (4) the ability to manage sulphuric acid inventories; (5) changes to the supply and demand for specific zinc metal products and the impact on the Fund s realized premiums; (6) the ability of the Fund to continue to service customers in the same geographic region; (7) general business and economic conditions and the condition of financial and credit markets; (8) legislation and regulations governing the operation of the Fund including, without limitation, air emissions, discharges into water, waste ANNUAL REPORT 2011 NORANDA INCOME FUND 27

30 Management s Discussion and Analysis including residue ponds, hazardous materials, workers health Assumptions, expectations and estimates made in the and safety, and many other aspects of the Fund s operations, as preparation of forward-looking statements and risks that could well as the impact of current legislation and regulations on cause the Fund s actual events, results or performance to differ expenses, capital expenditures, taxation and restrictions on the materially from the Fund s current expectations are discussed operation of the Processing Facility; (9) reliance on Xstrata throughout this document and in our other continuous disclosure Canada and certain of its affiliates for the management, materials available on SEDAR at Forwardoperation and maintenance of the Processing Facility, the Fund. looking information contained in this MD&A is based on the Operating Trust and the Partnership and credit support in management s current estimates, expectations and connection with the ABL Facility and Notes; (10) loan default and assumptions, which management believes are reasonable as at repayment risks associated with the ABL Facility and the Notes; the current date. You should not place undue importance on (11) the sensitivity of the Fund s Net Revenues to reductions in forward-looking information and should not rely upon this realized zinc metal prices including premiums, copper prices, information as at any other date. Except as required by law, the sulphuric acid prices; the strengthening of the Canadian dollar Fund does not undertake to update these forward-looking vis-à-vis the US dollar; and increasing transportation, labour and statements, whether written or oral, that may be made from time distribution costs; (12) the impact of month prior pricing; to time by the Fund or on the Fund s behalf. (13) the sensitivity of the Fund s production costs to increases in electricity rates, other energy costs, labour costs and operating Noranda Income Fund is an income trust whose priority units supplies used in its operations, and the sensitivity of the Fund s trade on the Toronto Stock Exchange under the symbol interest expense to increases in interest rates; (14) changes in NIF.UN. The Noranda Income Fund owns the CEZinc recoveries and capital expenditure requirements; (15) the processing facility and ancillary assets (the CEZinc processing negotiation of collective agreements with its unionized facility ) located in Salaberry-de-Valleyfield, Québec. The CEZinc employees; (16) transportation disruptions; (17) potential processing facility is the second-largest zinc processing facility in negative financial impact from regulatory investigations, claims, North America and the largest zinc processing facility in eastern lawsuits and other proceedings; and (18) the other general risks North America, where the majority of zinc customers are located. and uncertainties set out in the Fund s continuous disclosure It produces refined zinc metal and various by-products from zinc documents on file with the Canadian Securities Regulatory concentrates purchased from mining operations. The CEZ Authorities. processing facility is operated and managed by Canadian Forward-looking statements can generally be identified by the Electrolytic Zinc Limited. use of words such as anticipates, believes, plans, intends, estimates, are expected, is forecast, Further information about the Noranda Income Fund can be approximately or variations of such words and phrases, or found at statements that certain actions, events or results may, could, would, might or will be taken, occur or be Contact: achieved, or words and expressions of a similar nature. Forward- Financial information: looking information involves known and unknown risks, Michael Boone, Vice President & Chief Financial Officer of uncertainties and other factors, which may cause the actual Canadian Electrolytic Zinc Limited, Noranda Income Fund s events, results or performance to be materially different from any Manager future events, results or performance expressed or implied by the Tel: forward-looking information. As a result, the Fund cannot [email protected] guarantee that any forward-looking statements will materialize. 28 ANNUAL REPORT 2011 NORANDA INCOME FUND

31 Management s Statement of Responsibility The accompanying consolidated financial statements of the Noranda Income Fund (the Fund ) have been prepared by management in accordance with International Financial Reporting Standards ( IFRS ). Financial statements are not precise, since they include certain amounts based on estimates and judgements. When alternative methods exist, management has chosen those which it deems most appropriate in the circumstances in order to ensure that the consolidated financial statements are presented fairly, in all material respects, in accordance with IFRS. Management maintains adequate systems of internal accounting and administrative controls, consistent with reasonable cost. Such systems are designed to provide reasonable assurance that the financial information is relevant and reliable, and that the Fund s assets are appropriately accounted for and adequately safeguarded. The board of trustees oversees management s responsibility for financial reporting and internal control systems through an audit committee. This committee meets periodically with management and the external auditors to discuss internal controls, auditing matters and financial reporting issues, and to satisfy itself that each party is properly discharging its responsibilities. The committee reviews the consolidated financial statements and reports to the board of trustees. The external auditors have full and direct access to the audit committee. 22FEB Manuel Álvarez Dávila Chief Executive Officer Canadian Electrolytic Zinc Limited Noranda Income Fund s Manager Michael Boone Chief Financial Officer Canadian Electrolytic Zinc Limited Noranda Income Fund s Manager 22FEB ANNUAL REPORT 2011 NORANDA INCOME FUND 29

32 Independent Auditors Report To the Unitholders of Noranda Income Fund: We have audited the accompanying consolidated financial statements of Noranda Income Fund, which comprise the consolidated statements of financial position as at December 31, 2011 and 2010, and January 1, 2010, and the consolidated statements of comprehensive income (loss), changes in net assets attributable to Unitholders and non-controlling interest and cash flows for the years ended December 31, 2011 and 2010, and a summary of significant accounting policies and other explanatory information. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Noranda Income Fund as at December 31, 2011 and 2010, and January 1, 2010, and its financial performance and its cash flows for the years ended December 31, 2011 and 2010 in accordance with International Financial Reporting Standards. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. 22FEB Ernst & Young, LLP Chartered Accountants Montreal, Canada February 14, CA auditor permit no Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. 30 ANNUAL REPORT 2011 NORANDA INCOME FUND

33 Consolidated Statements of Financial Position December 31, December 31, January 1, ($ thousands) Notes Assets Non-current assets Property, plant and equipment 9 277, , ,756 Deferred tax assets 8 6,506 2,145 1,957 Employee benefits 14 3,451 1,516 Long-term firm commitments Derivative financial assets , , , ,339 Current assets Inventories 10 61,017 78, ,875 Accounts receivable Trade and other receivables 75,752 76,783 77,521 Xstrata Canada 17 17,027 34,113 7,942 Income taxes receivable Firm commitments 18 5,906 Derivative financial assets 18 5,637 4,409 Current future tax asset Prepaids and other assets 2,254 2, Cash and cash equivalents 1,497 3,398 3, , , , , , ,282 Liabilities Non-current liabilities Long-term firm commitments ,111 Derivative financial liabilities Rehabilitation liability 13 23,606 18,819 16,551 Employee benefits 14 24,188 10,618 8,060 Bank and other loans 15 79,216 Deferred tax liabilities 8 20,257 22,125 20, ,535 51,941 46,517 Current liabilities Accounts payable and accrued liabilities Trade and other payables 29,596 28,653 24,360 Xstrata Canada 17 31,199 36,261 63,418 Income taxes payable 8 11, Firm commitments 18 3,499 4,112 Derivative financial liabilities 18 7,247 3,587 Distribution payable 1,562 Bank and other loans 15 15, , ,886 95, , ,363 Total liabilities excluding net assets attributable to unitholders and non-controlling interest 243, , ,880 Net assets attributable to unitholders and non-controlling interest 204, , ,402 Net assets attributable to: Priority Unitholders , , ,963 Ordinary Unitholders 11 55,017 46,464 39, , , ,617 Non-controlling interest (15,922) (3,455) (3,215) 204, , ,402 [See accompanying notes] On behalf of the Board of Trustees of the Noranda Operating Trust: John J. Swidler 22FEB FEB Barry Tissenbaum ANNUAL REPORT 2011 NORANDA INCOME FUND 31

34 Consolidated Statements of Comprehensive Income (Loss) ($ thousands) Notes Revenues Sales 5,17 $ 662,958 $ 659,146 Transportation and distribution costs (18,687) (16,141) 644, ,005 Raw material purchase costs , ,559 Revenues less raw material purchase costs 303, ,446 Other expenses Production 7 181, ,254 Selling and administration 7 20,101 21,604 Foreign currency (gain) loss 919 (1,240) Loss (gain) on derivative financial instruments 18 3,473 (5,427) Depreciation of property, plant and equipment 34,126 33,709 Rehabilitation expense 13 4,137 1, , ,698 Earnings before finance costs and income taxes 59,860 47,748 Finance costs, net 6 16,110 14,423 Earnings before income taxes 43,750 33,325 Current income tax expense 8 18, Deferred income tax (recovery) expense 8 (3,550) 2,667 Earnings attributable to Unitholders and Non-controlling interest 28,342 30,565 Distributions to Unitholders 12 27,998 17,999 Current income tax recovery on distribution 8 (7,751) Increase in net assets attributable to Unitholders and Non-controlling interest $ 8,095 $ 12,566 Other comprehensive income Actuarial loss on employee benefit plans 14 (10,776) (5,094) Deferred income tax recovery (2,679) (1,524) (8,097) (3,570) Comprehensive income (loss) $ (2) $ 8,996 Increase in net assets attributable to: Priority Unitholders 9,349 6,926 Ordinary Unitholders 3,116 2,310 12,465 9,236 Non-controlling interest (4,370) 3,330 $ 8,095 $ 12,566 Comprehensive income (loss) attributable to: Priority Unitholders 9,349 6,926 Ordinary Unitholders 3,116 2,310 12,465 9,236 Non-controlling interest (12,467) (240) $ (2) $ 8,996 [See accompanying notes] 32 ANNUAL REPORT 2011 NORANDA INCOME FUND

35 Consolidated Statements of Changes in Net Assets Attributable to Unitholders and Non-Controlling Interest Earnings Attributable Priority to Unitholders Actuarial Loss Attributable to Units and and Non- on Employee Non- Ordinary controlling Distributions Benefit, Priority Ordinary controlling ($ thousands) Units interest to Unitholders Net of Tax Total Units Units interest Balance at January 1, , ,746 (350,704) (6,682) 182, ,388 46,464 (3,455) Comprehensive income 36,093 (27,998) (8,097) (2) 9,349 3,116 (12,467) Non-cash distributions 21,749 21,749 16,312 5,437 Balance at December 31, , ,839 (356,953) (14,779) 204, ,049 55,017 (15,922) Earnings Attributable Priority to Unitholders Actuarial Loss Attributable to Units and and Non- on Employee Non- Ordinary controlling Distributions Benefit, Priority Ordinary controlling ($ thousands) Units interest to Unitholders Net of Tax Total Units Units interest Balance at January 1, , ,181 (350,704) (3,112) 155, ,963 39,654 (3,215) Comprehensive income 30,565 (17,999) (3,570) 8,996 6,926 2,310 (240) Non-cash distributions 17,999 17,999 13,499 4,500 Balance at December 31, , ,746 (350,704) (6,682) 182, ,388 46,464 (3,455) ANNUAL REPORT 2011 NORANDA INCOME FUND 33

36 Consolidated Statements of Cash Flows ($ thousands) Notes Operating activities Comprehensive income (loss) (2) 8,996 Adjustments: Depreciation of property, plant and equipment 34,126 33,709 Net change in rehabilitation liability 6,13 4,787 2,268 Deferred income tax (recovery) expense (6,229) 1,142 Loss (gain) on derivative financial instruments 18 3,757 (2,165) Change in fair value of embedded derivatives 18 (11,254) 2,501 Accretion on bank and other loans 6 6,803 2,044 Write-down of inventory 1,144 Loss on sale of assets 746 1,385 Non-cash distributions to Unitholders 21,749 17,999 Net change in employee benefits 17, ,504 69,646 Net change in non-cash working capital items 55,266 (26,012) Cash provided by operating activities 126,770 43,634 Investing activities Purchase of property, plant and equipment (27,255) (24,194) Proceeds from sale of property, plant and equipment 1, Proceeds from government assistance 234 Cash used in investing activities (25,817) (23,788) Financing activities Proceeds from bank loans , ,283 Repayment of bank loans 15 (526,283) (387,184) Debt financing costs 15 (6,838) (6,261) Proceeds from issuance of senior secured notes 15 90,000 Proceeds from issuance of ABL facility 15 54,552 Repayment of senior secured notes 15 (7,500) (153,500) Cash used in financing activities (102,854) (19,662) Net increase (decrease) in cash and cash equivalents (1,901) 184 Cash and cash equivalents at January 1 3,398 3,214 Cash and cash equivalents at end of year 1,497 3,398 Supplemental cash flow information: Cash interest paid 8,471 12,211 [See accompanying notes] 34 ANNUAL REPORT 2011 NORANDA INCOME FUND

37 Notes to the Consolidated Financial Statements NOTE 1. CORPORATE INFORMATION Under the terms of an administration agreement between the Fund and Canadian Electrolytic Zinc Limited (the Manager ), a Noranda Income Fund (the Fund ) is an income trust wholly owned subsidiary of Xstrata Canada, a management established under the laws of the province of Ontario, Canada services agreement between the Operating Trust and the and its Priority Units are publicly traded on the Toronto Stock Manager and an operating and management agreement Exchange (the TSX ). The registered office is located at between the Partnership and the Manager, the Manager provides 100 King Street West, First Canadian Place, Suite 6900 administrative services to the Fund and management services to P.O. Box 403, Toronto, Ontario, Canada, M5X 1E3. the Operating Trust and the Partnership, respectively. The initial The Fund was created in 2002, initially to acquire from term of these agreements will end on May 2, 2017 and will Noranda Inc., indirectly through the Noranda Operating Trust automatically renew for a five year term thereafter, unless (the Operating Trust ) and the Noranda Income Limited terminated in accordance with the terms. Upon the termination Partnership (the Partnership ), the CEZinc Processing Facility of the operating and management agreement, the Partnership (the Processing Facility ). The Processing Facility produces will acquire the Manager from Xstrata Canada. refined zinc metal and various by-products from zinc concentrates and is located in Salaberry-de-Valleyfield, Québec. NOTE 2. STATEMENT OF COMPLIANCE As at June 30, 2005, Noranda Inc. changed its name to Falconbridge Limited ( Falconbridge ) pursuant to a corporate Basis of preparation amalgamation. Falconbridge subsequently changed its name to The consolidated financial statements of the Fund have been Xstrata Canada Corporation ( Xstrata Canada ) after being prepared in accordance with IFRS 1 First-time adoption of acquired by Xstrata plc. ( Xstrata ). Xstrata is a global diversified International Financial Reporting Standards ( IFRS 1 ). These mining group listed on the London and Swiss stock exchanges. are the Fund s first annual statements issued under International Financial Reporting Standards ( IFRS ) in accordance with Supply and processing agreement principal accounting policies described in Note 3. Previously, the Pursuant to a 15 year Supply and Processing Agreement ( SPA ) Fund prepared its consolidated financial statements in signed on May 3, 2002 between Xstrata Canada and the accordance with Canadian generally accepted accounting Partnership, Xstrata Canada is obligated to sell to the Processing principles ( GAAP ). Facility, except in certain circumstances, up to 550,000 tonnes An explanation of how the transition to IFRS has affected the of zinc concentrate annually at a concentrate price based on the reported financial position, financial performance and cash flows price of zinc metal on the London Metal Exchange ( LME ) for of the Fund is provided in Note 20, including reconciliations of payable zinc metal contained in the concentrate less a net assets attributable to unitholders and non-controlling interest processing fee initially set at $0.352 per pound of that payable and total comprehensive income for comparative periods and at zinc metal. Starting in 2004, the processing fee is the the date of transition reported under GAAP to those reported processing fee in the previous year adjusted annually (i) upward under IFRS. by 1% and (ii) upward or downward by 10% of the year-over-year The consolidated financial statements have been prepared on percentage change in average cost of electricity per megawatt a historical cost basis, except for derivative financial instruments hour for the Processing Facility. Payable zinc metal in respect that have been measured at fair value and the employee benefits of a quantity of concentrate is equal to 96% of the assayed zinc which are recognized as plan assets less the present value of the metal content on the concentrate under the SPA. The processing defined benefit obligation. fee for 2011 was $0.389 (2010 $0.385) per pound. The Board of Trustees approved these financial statements on Under the SPA, Xstrata Canada acts as the exclusive agent for February 14, the Partnership to arrange the sale of zinc metal and by-products and related hedging and derivative arrangements. Basis of consolidation The consolidated financial statements comprise the financial statements of the Fund and its wholly-owned subsidiaries and the Manager, a special purpose entity ( SPE ). All intra-group balances, income and expenses, unrealized gains and losses, and dividends resulting from intra-group transactions are eliminated in full. ANNUAL REPORT 2011 NORANDA INCOME FUND 35

38 Notes to the Consolidated Financial Statements The results of subsidiaries acquired or sold are consolidated Consolidation of a special purpose entity for the periods from or to the date on which the Fund obtains The Manager was incorporated in Québec on December 14, control and continue to consolidate until the date when such Since May 3, 2002, the Manager has been operating as a control ceases. Control is achieved where the Fund has the management company that provides management and power to govern the financial and operating policy of an entity so administrative services to the Fund and its subsidiaries. Upon the as to obtain benefits from its activities, generally when the Fund termination of the operating and management agreement, the has more than 50% voting power through ownership or Partnership is required to acquire the Manager from Xstrata agreements. SPEs are consolidated when the substance of the Canada and set up a pension plan for the employees of relationship between the Fund and that entity indicates control. the Manager. Indicators of control include, amongst other factors, having half The Fund has the ability to give directions with respect to the or less of the voting power but having de facto control, the ability operating policies of the Manager, is exposed to the Manager s to give directions with respect to the operating and financial benefits and risks, and the Manager conducts activities solely on policies of the entity concerned, being exposed to the SPE s behalf of the Fund. Accordingly, the Fund has concluded that the benefits and risks or when the activities of the SPE are being Manager is an SPE. conducted on behalf of the reporting entity. The consolidation of Losses within the Manager have been attributed to the SPEs is considered at inception, based on the arrangements in non-controlling interest even if that results in a deficit balance. place and the assessed risk exposures at that time. Non-controlling interests represent the portion of the profit or Use of estimates loss and net assets not held by the Fund and are presented The key assumptions concerning the future and other key separately in the consolidated financial statements. Losses sources of estimation uncertainty which have the most within a subsidiary are attributable to the non-controlling significant effect on the amounts recognized in the consolidated interests even if that results in a deficit balance. The financial financial statements are described below. statements of the subsidiaries are prepared using the same reporting period and same accounting policies as the Fund. Impairment of non-financial assets Impairment exists when the carrying value of a non-financial Functional and presentation currency asset or cash-generating unit exceeds its recoverable amount, The consolidated financial statements are presented in Canadian which is the higher of its fair value less costs to sell and its value dollars, which is the Fund s and its subsidiaries functional in use. Management has used the value in use calculation to currency. All values are rounded to the nearest thousand except determine the recoverable amount which is based on a where otherwise indicated. discounted cash flow model with cash flows expected to be generated from the Processing Facility over its remaining useful Use of estimates and judgments life. Cash flows do not include restructuring activities, if any, that The preparation of the consolidated financial statements in the Fund is not yet committed to or significant future investments conformity with IFRS requires management to make judgments, that may enhance the non-financial assets performance of the estimates and assumptions that affect the reported amounts of cash-generating unit being tested. The recoverable amount revenues, expenses, assets and liabilities, and the disclosure of requires estimates and assumptions such as the discount rate, contingent liabilities, at the date of the financial statements. foreign exchange rate assumption, useful life of the assets, Estimates and assumptions are continuously evaluated and are availability of concentrate, the price of zinc, copper and sulphuric based on management s experience and other factors, including acid, zinc premium, capital expenditures, closure and expectations of future events that are believed to be reasonable rehabilitation expenditures and operating costs. Therefore, there under the circumstances. Actual outcomes could differ from is a possibility that changes in circumstances, in particular the these estimates. availability of concentrate beyond the term of the SPA, may impact the recoverable amount calculated by management. Judgments In the process of applying the Fund s accounting policies, management has made the following judgments, which have the most significant effect on the amounts recognized in the consolidated financial statements. 36 ANNUAL REPORT 2011 NORANDA INCOME FUND

39 Taxes To determine the extent to which deferred income tax assets can be recognized, management must estimate the amount of probable future taxable profits that will be available against which deductible temporary differences. Such estimates are made as part of the budgets by tax jurisdiction on an undiscounted basis and are reviewed at each reporting date. Management exercises judgment to determine the extent to which realization of future taxable benefits is probable, considering factors such as the number of years to include in the forecast period and the history of taxable profits. Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the range of business relationships and the long-term nature of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to income taxes already recorded. The Fund establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities. Employee benefits The cost of defined benefit pension plans and other post-retirement benefits and the present value of the pension obligation are required to be determined annually using actuarial valuations. An actuarial valuation involves making various estimates and assumptions including the determination of the future returns on each different type of asset, discount rate, future salary increases, employee attrition rates, mortality rates, expected remaining periods of service of employees and future pension increases. Due to the complexity of the valuation, the underlying assumptions, and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rate spreads of corporate bonds in Canada with at least AA rating or government bonds with similar maturities. As Canada is not considered to have a deep market in long-term corporate bonds, the government rate on bonds with similar maturities is used taking into consideration the interest rate spread on the short and medium term corporate bonds, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The underlying bonds are further reviewed for quality, and those having excessive credit spreads are removed from the population of bonds on which the discount rate is based, on the basis that they do not represent high quality bonds. Expected returns on assets are based on the asset mix and long-term expected returns. The mortality rate is based on publicly available mortality tables for Canada. Future salary increases and pension increases are based on expected future inflation rates for Canada, average wage growth and historical information and future expectations. Rehabilitation liability The Fund has recognized a rehabilitation liability solely related to the residue ponds on the Processing Facility site. The provisions for rehabilitation costs are based on estimated future costs and expected timing of expenditures using information available at year end. In determining the fair value of the provision, assumptions and estimates are made in relation to discount rates, the expected cost for the reclamation of residue ponds and the expected timing of those costs. To the extent the actual costs and timing of expenditures differ from these estimates, adjustments will be recorded in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). Fair value of financial instruments Where the fair value of financial instruments recorded in the statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible. Where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. Inventory net realizable value Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less estimated costs to completion and the estimated costs necessary to make the sale. NOTE 3. PRINCIPAL ACCOUNTING POLICIES Subject to certain transition elections disclosed in Note 20, the accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing the opening IFRS statement of financial position at January 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated, as if these policies had always been in effect. ANNUAL REPORT 2011 NORANDA INCOME FUND 37

40 Notes to the Consolidated Financial Statements Foreign currency Transactions in foreign currencies are translated at the exchange rates prevailing at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates at the reporting date. All differences that arise are recorded in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). Non-monetary assets measured at historical cost in a foreign currency are translated using the exchange rates at the date of the initial transactions. Revenue For a portion of the Fund s sales contracts, the sales price is determined provisionally at the date of sale, with the final price determined at a mutually agreed date (generally between one and three months from the date of the sale), generally at a quoted market price at that time. This provisional pricing arrangement has the characteristics of an embedded derivative which does not qualify for hedge accounting and is recorded at fair value based on the forward metal prices for the relevant contract period. All subsequent mark-to-market adjustments are recorded in sales revenue up to the date of final settlement. Price changes for shipments awaiting final pricing at period-end could have a material effect on future revenues. As at The Fund recognizes revenue from the sale of refined metals and December 31, 2011, there was $7,700 (December 31, 2010 by-products when all significant risks and rewards of ownership of $7,500) in revenues that were awaiting final pricing. The the asset sold are transferred to the buyer, which generally following table provides an analysis of the revenues awaiting final occurs upon shipment. Revenue is recognized, at fair value of the pricing as at December 31: consideration received or receivable, to the extent that it is probable that economic benefits will flow to the Fund and the revenue can be reliably measured. Revenues from the sale of by-products are also included in sales revenue Average Average Accountable provisional Accountable provisional metal content price metal content price (tonnes) (US$/pound) (tonnes) (US$/pound) Zinc metal 2, Copper in cake Revenues are recorded net of sales taxes. The expected useful lives are as follows: Property, plant and equipment Buildings and plant equipment years On initial acquisition, property, plant and equipment are valued at Anodes (included in buildings and plant cost, being the purchase price and the directly attributable costs equipment) 3.5 years of acquisition or construction required to bring the asset to the Mobile equipment 10 years location and condition necessary for the asset to be capable of Automobiles and trucks 4 years operating in the manner intended by management. The cost also Computers 4 years includes borrowing costs on qualifying assets under construction, if any, less any applicable government assistance. When significant parts of property, plant and equipment are Depreciation is recorded on a straight-line basis over the required to be replaced at intervals, the Fund derecognizes the estimated useful life of the asset taking into account the replaced part, and recognizes the new part with its own estimated residual value. Estimates of remaining useful lives, associated useful life and depreciation. All other repair and residual values and methods of depreciation are reviewed at maintenance costs are recognized in earnings attributable to each reporting date and adjusted prospectively, if appropriate. Unitholders and non-controlling interest on the consolidated When parts of an item of property, plant and equipment have statements of comprehensive income (loss) as incurred. different useful lives, they are accounted for as separate When an item of property, plant and equipment is disposed of components and are depreciated over their useful lives. or when no future economic benefits are expected from its use, it is derecognized and the gain or loss on the difference between its carrying value and proceeds from sale is included in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). 38 ANNUAL REPORT 2011 NORANDA INCOME FUND

41 Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets and overhaul costs. Where an asset or part of an asset that was separately depreciated and is now written off is replaced, and it is probable that future economic benefits associated with the item will flow to the Fund through an extended life, the expenditure is capitalized. Where part of the asset was not separately considered as a component, the replacement value is used to estimate the carrying amount of the replaced asset which is immediately written off. All other day-to-day maintenance and repairs costs are expensed as incurred. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Leases are classified as financing or operating depending on the terms and conditions of the contracts. Lease agreements where the Fund assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. However, if there is no reasonable certainty that the Fund will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Obligations recorded under finance leases are reduced by lease payments, net of imputed interest. Leases where the Fund does not assume substantially all of the risks and rewards are classified as operating leases. Payments made under operating leases are recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss) on a straight-line basis over the term of the lease. Impairment of non-financial assets The Fund assesses at each reporting date whether there is an indication that an asset may be impaired. If there are indications of impairment, a review is undertaken to determine whether the carrying amounts are in excess of their recoverable amounts. An asset s recoverable amount is determined as the higher of its fair value less costs to sell and its value-in-use. Such reviews are undertaken on an asset-by-asset basis, except where assets do not generate cash flows independent of other assets, in which case the review is undertaken at the cash-generating unit level. The Fund has only one cash-generating unit. If the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recorded in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss) to reflect the asset at the lower amount. In assessing the value-in-use, the relevant future cash flows expected to arise from the continuing use of such assets and from their disposal are discounted to their present value using a market-determined pre-tax discount rate that reflects current market assessments of the time value of money and asset-specific risks for which the cash flow estimates have not been adjusted. Fair value less costs to sell is determined as the amount that would be obtained from the sale of the asset in an arm s-length transaction between knowledgeable and willing parties. If no such transactions can be identified, an appropriate valuation model is used. An impairment loss is reversed in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss) if there is a change in the estimates used to determine the recoverable amount since the prior impairment loss was recognized. The carrying amount is increased to the recoverable amount, but not beyond the carrying amount, net of depreciation or amortization that would have arisen if the prior impairment loss had not been recognized. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. ANNUAL REPORT 2011 NORANDA INCOME FUND 39

42 Notes to the Consolidated Financial Statements Financial instruments Financial assets or liabilities at fair value through profit or loss Financial assets are classified as either financial assets at fair Financial assets or liabilities classified as held-for-trading are value through profit or loss, loans and receivables, included in the category financial assets or liabilities at fair value held-to-maturity investments or available-for-sale financial through profit or loss. Financial assets or liabilities are classified assets, as appropriate. Financial liabilities are classified as as held-for-trading if they are acquired for the purpose of selling financial liabilities at fair value through profit or loss, other in the near term. Derivatives are also classified as liabilities, or as derivatives designated as hedging instruments in held-for-trading unless they are designated as and are effective an effective hedge, as appropriate. The Fund determines the hedging instruments. Gains or losses on these items are classification of its financial assets or liabilities at initial recognized in earnings attributable to Unitholders and recognition. When financial assets or liabilities are recognized non-controlling interest on the consolidated statements of initially, they are measured at fair value. The subsequent comprehensive income (loss). measurement of financial assets and liabilities depends on their The Fund considers whether a contract contains an classification. embedded derivative when it becomes a party to the contract. Financial assets and liabilities are offset and the net amount Embedded derivatives are separated from the host contract if it is reported in the statements of financial position when there is a not measured at fair value through profit and loss and when the legally enforceable right to offset the recognized amounts and economic characteristics and risks are not closely related to the there is an intention to settle on a net basis, or realize the asset host contract. and settle the liability simultaneously. The Fund financial assets and liabilities are classified and Loans and receivables measured as follows: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active Classification Measurement market, do not qualify as trading assets and have not been Cash and cash designated as either fair value through profit and loss or equivalents Held for trading Fair value available-for-sale. Such assets are carried at amortized cost Accounts receivable Loans and receivable Amortized cost using the effective interest method, less impairment. Losses are Derivative financial assets Held for trading Fair value recognized in earnings attributable to Unitholders and Derivative financial non-controlling interest on the consolidated statements of liabilities Held for trading Fair value comprehensive income (loss) when the loans and receivables are Bank and other loans Other liabilities Amortized cost derecognized or impaired, as well as through the amortization Accounts payable and process. Trade and other receivables are recognized and carried accrued liabilities Other liabilities Amortized cost at their original invoiced value, adjusted, where appropriate, for Distribution payable Other liabilities Amortized cost provisional pricing or their recoverable amount if this differs from the invoiced amount. Where the time value of money is material, Derecognition of financial assets and liabilities receivables are discounted and are carried at their present value. A financial asset is derecognized when the rights to receive cash A provision is made where the estimated recoverable amount is flows from the asset have expired or the Fund has transferred its lower than the carrying amount. rights to receive cash flows from the asset and either has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Gains and losses on derecognition are recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). 40 ANNUAL REPORT 2011 NORANDA INCOME FUND

43 Held-to-maturity investments For financial instruments not traded in an active market, the Non-derivative financial assets with fixed or determinable fair value is determined using appropriate valuation techniques payments and fixed maturity are classified as held-to-maturity (Level 2). Such techniques may include using recent arm s when the Fund has the positive intention and ability to hold to length market transactions; reference to the current fair value of maturity. Investments intended to be held for an undefined another instrument that is substantially the same; a discounted period are not included in this classification. Other long-term cash flow analysis or other valuation models. Other techniques investments that are intended to be held-to-maturity, such as (Level 3) use inputs not based on observable market data. An bonds, are measured at amortized cost. This cost is computed as analysis of fair values of financial instruments and further details the amount initially recognized minus principal repayments, plus as to how they are measured are provided in Notes 18 and 19. or minus the cumulative amortization using the effective interest method of any difference between the initially recognized amount Impairment of financial assets and the maturity amount. This calculation includes all fees paid The Fund assesses at each reporting date whether there is any or received between parties to the contract that are an integral objective evidence that a financial asset or a group of financial part of the effective interest rate, transaction costs and all other assets carried at amortized costs are impaired. A financial asset premiums and discounts. For investments carried at amortized or a group of financial assets carried at amortized cost are cost, gains and losses are recognized in earnings attributable to deemed to be impaired if, and only if, there is objective evidence Unitholders and non-controlling interest on the consolidated of impairment as a result of one or more events that has statements of comprehensive income (loss) when the occurred after the initial recognition of the asset, such as debtors investments are derecognized or impaired, as well as through the experiencing significant financial difficulty, and that loss event amortization process. has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably Available-for-sale financial assets estimated. Available-for-sale financial assets are those non-derivative The amount of the loss is measured as the difference financial assets that are designated as available-for-sale or are between the asset s carrying amount and the present value of not classified in any of the other three stated categories. After estimated future cash flows (excluding future credit losses that initial recognition, available-for-sale financial assets are have not been incurred) discounted at the financial asset s measured at fair value with gains or losses being recognized in original effective interest rate (i.e. the effective interest rate other comprehensive income (loss) until the investment is computed at initial recognition). The carrying amount of the asset derecognized or until the investment is determined to be is reduced and the amount of the loss is recognized in the impaired, at which time the cumulative gain or loss previously statements of comprehensive income (loss). For available for reported in equity is included in earnings attributable to sale assets, such loss is recorded in earnings attributable to Unitholders and non-controlling interest on the consolidated Unitholders and non-controlling interest on the consolidated statement of comprehensive income (loss). statements of comprehensive income (loss) and removed from accumulated other comprehensive income. Objective evidence Other liabilities of impairment of loans and receivables exists if the counter-party Other liabilities are recognized initially at fair value net of any is experiencing significant financial difficulty, there is a breach of directly attributable transaction costs. Subsequent to initial contract, concessions are granted to the counter-party that recognition, these financial liabilities are measured at amortized would not normally be granted, or it is probable that the counter- cost using the effective interest method. Other liabilities are party will enter into bankruptcy or a financial reorganization. presented as current if payment is due within twelve months. If, in a subsequent period, the amount of the estimated Otherwise, they are presented as non-current liabilities. Finance impairment loss increases or decreases because of an event costs are recognized in earnings attributable to Unitholders and occurring after the impairment was recognized, the previously non-controlling interest on the consolidated statements of recognized impairment loss is increased or reduced by adjusting comprehensive income (loss) using the effective interest the allowance account. Any subsequent reversal of an method. impairment loss is recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated Fair values statements of comprehensive income (loss), to the extent that The fair value of financial instruments that are traded in active the carrying value of the asset does not exceed its amortized cost markets at each reporting date is determined by reference to at the reversal date. quoted market prices or dealer price quotations (Level 1), without any deduction for transaction costs. ANNUAL REPORT 2011 NORANDA INCOME FUND 41

44 Notes to the Consolidated Financial Statements Derivative financial instruments and hedging The Fund periodically uses derivative financial instruments such as commodity contracts to hedge the risks associated with commodity price fluctuations. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivative financial instruments are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. The Fund periodically uses commodity forward contracts to hedge the effect of price changes relating to its firm fixed commitments on the commodities it sells. Hedge accounting is permitted when there is a high degree of correlation between price movements in the derivative instrument and the item designated as being hedged. The relationship between the Fund s firm fixed sales commitments and the commodity forward contracts purchased to hedge these commitments permits the use of hedge accounting on these fair value hedges. The Fund has determined that its derivatives which were contracted in connection with its inventory management hedging program do not meet the hedging requirements. As a result, these derivatives have been recognized on the consolidated statements of financial position as a derivative financial asset or liability with the change in their fair values at each reporting period recognized as a gain or a loss in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are recorded in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). At the inception of a hedge relationship, the Fund formally designates and documents the hedge relationship to which the Fund wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument s effectiveness in offsetting the exposure to changes in the hedged item s fair value or cash flows attributable to the hedged risk. Hedges that are expected to be highly effective in achieving offsetting changes in fair value or cash flows are assessed on an ongoing basis to determine if they actually have been highly effective throughout the financial reporting periods for which they were designated. Fair value hedges Fair value hedges are hedges of the Fund s exposure to changes in the fair value of a recognized asset or liability that could affect profit or loss. The carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged, the derivative is remeasured at fair value, and gains and losses from both are taken to earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). If the hedged item is derecognized, the unamortized fair value is recognized immediately in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability with a corresponding gain or loss recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). The subsequent cumulative change in the fair value of the hedging instrument, the commodity forward contracts, is recognized as an asset or liability with a corresponding gain or loss recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). Inventories Inventories are stated at the lower of cost and net realizable value. Cost of raw materials, work-in-process and finished products is determined on a weighted average basis or for spare parts using a first-in first-out basis and includes all costs incurred in the normal course of business including direct material and direct labour costs and an allocation of production overheads, depreciation and amortization and other costs, based on normal production capacity, incurred in bringing each product to its present location and condition. Inventories are categorised, as follows: Spare parts; Raw materials: zinc concentrate to be consumed in the production process; Work-in-process: items stored in an intermediate state that have not yet passed through all the stages of production; and Finished products: zinc metal and by-products that have passed all stages of the production process. Net realizable value is the estimated selling price in the ordinary course of business less estimated costs to completion and the estimated costs necessary to make the sale. 42 ANNUAL REPORT 2011 NORANDA INCOME FUND

45 Cash and cash equivalents Cash and cash equivalents comprise cash bank balances, cash in hand and highly-liquid short-term deposits with an original maturity of three months or less. Due to the short-term and liquid nature of these financial assets, the Fund has elected to classify them as held-for-trading. As at December 31, 2011, there were no overnight deposits with Canadian chartered banks (December 31, 2010: $2,800 maturing January 4, 2011; January 1, 2010: nil). Government grants Government grants are recognized where there is reasonable assurance that the grant will be received and all the attaching conditions will be complied with. Government grants in respect of capital expenditures are credited to the carrying amount of the related asset and are released to earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss) in equal amounts over the expected useful lives of the relevant assets. Grants that are not associated with an asset are credited to income so as to match them with the expense to which they relate. Rehabilitation liability The Fund records a rehabilitation provision for legal and constructive obligations. Provision is made for restoration and for environmental rehabilitation costs in the financial period when the related environmental disturbance occurs, based on the estimated future costs and timing of expenditures using information available at year end. The provision is discounted using a pre-tax rate that reflects the risk specific to the rehabilitation liability and the unwinding of the discount is recognized in finance costs. At the time of establishing the provision, a corresponding asset is capitalized, where it gives rise to a future benefit, and depreciated over future production from the operations to which it relates. The estimated future costs of rehabilitation are reviewed on a regular basis for changes to obligations, timing of expenditures, legislation or discount rates that impact estimated costs. The cost of the related asset is adjusted for changes in the provision resulting from changes in the estimated cash flows or discount rate and the adjusted cost of the asset is depreciated prospectively unless the corresponding asset is fully depreciated, as is the case for the Fund, in which case the change is recognized immediately in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). Taxes Income tax expense comprises current and deferred tax. Current income tax and deferred income tax are recognized in earnings attributable to Unitholders and non-controlling interest except to the extent that it relates to a business combination, or items recognized directly in other comprehensive income (loss), in which case the current and/or deferred tax is also recognized directly in other comprehensive income. The Fund is a trust for income tax purposes. Effective January 1, 2011, the Fund became subject to Canadian income taxes on certain income distributed to its unitholders at the same combined federal and provincial corporate tax rate applicable to a Canadian taxable corporation. Prior to January 1, 2011, the Fund was not subject to income taxes on income distributed to unitholders. Income not distributed to unitholders is subject to a top marginal individual income tax rates. IAS 12 requires that current and deferred tax assets and liabilities be measured at the tax rate applicable to undistributed profits until such time that the distribution becomes payable. Current income tax Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date. Current income tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax Deferred tax is recognized using the statement of financial position method in respect of all temporary differences between the tax bases of assets and liabilities, and their carrying amounts for financial reporting purposes. Deferred income tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. Deferred income tax assets and liabilities are presented as non-current. Taxes on income in interim periods are accrued using the tax rate that would be applicable to expected total annual earnings. ANNUAL REPORT 2011 NORANDA INCOME FUND 43

46 Notes to the Consolidated Financial Statements The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. To the extent that an asset not previously recognized fulfils the criteria for recognition, a deferred income tax asset is recorded. Deferred tax is measured on an undiscounted basis at the tax rates applicable to undistributed profits that are expected to apply in the periods in which the asset is realized or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date. Employee benefits The Manager participates in deferred benefit pension plans and unfunded post-retirement benefit plans, managed and administered by Xstrata Canada. The Fund accrues its obligations under defined benefit plans and post retirement benefit plans, net of plan assets, where applicable. The calculation is performed annually by an independent qualified actuary. The service cost of providing pension benefits to employees for the year is determined using the projected unit method taking into account management s best estimate of expected plan investment performance, salary escalation, and retirement ages of employees, where applicable, and is recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). Past service cost is recognized as an expense on a straight line basis over the average period until the benefits become vested unless the benefits vest immediately following changes in the defined benefit plan, in which case the past service cost is recognized immediately in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). Plan assets are measured at fair value based on market price information and, in the case of quoted securities, the published bid prices, while plan liabilities are measured on an actuarial basis using the projected unit credit method and discounted at an interest rate equivalent to the current rate of return on Canadian government bonds with equivalent currency and term to the plan liabilities, taking into consideration the interest rate spread on corporate bonds with at least AA rating. In measuring its defined benefit liability, past service costs are recognized as an expense on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately following the introduction of, or changes to, a defined benefit plan, the past service costs are recognized immediately in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). When the calculation results in a benefit to the Fund, the recognized asset is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan of the Fund. An economic benefit is available to the Fund if it is realizable during the life of the plan, or on settlement of the plan liabilities. When the payment in the future of minimum funding requirements related to past service would result in a net defined benefit surplus or an increase in a surplus, the minimum funding requirements are recognized as a liability to the extent that the surplus would not be fully available as a refund or a reduction in future contributions. Remeasurement of this liability is recognized in other comprehensive income in the period in which the remeasurement occurs. All actuarial gains and losses are recognized directly in net assets attributable to unitholders and non-controlling interest through other comprehensive income. The full pension surplus or deficit is recorded in the consolidated statements of financial position. Other provisions Provisions are recognized when the Fund has a present obligation (legal or constructive), as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the effect is material, the provision is discounted to net present value using an appropriate pre-tax rate that reflects, where appropriate, the risk specific to the liability and the unwinding of the discount is included in finance costs. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective asset. Other borrowing costs are recognized as an expense in the financial period they occur. For the years ended December 31, 2011 and 2010, the Fund did not capitalize any borrowing costs. Net assets Balance sheet presentation In accordance with IAS 32 Financial Instruments: Presentation, puttable instruments are generally classified as financial liabilities. The Fund s Priority Units are puttable instruments, meeting the definition of financial liabilities in IAS 32. There are exception tests within IAS 32 which could result in classification as equity, however, the Fund s Priority Units do not meet the 44 ANNUAL REPORT 2011 NORANDA INCOME FUND

47 exception requirements, primarily because the Fund has a contractual obligation to distribute taxable income to unit holders on an annual basis (Note 12). The Partnership s Class B Ordinary Units (the Ordinary Units ) with the attached Special Fund Units (as defined below) are exchangeable into Priority Units are considered a financial liability. Accordingly, the Fund has no instrument qualifying for equity classification on its consolidated statements of financial position. Allocation of comprehensive income (loss) The components of comprehensive income (loss) are allocated between the Priority Units and Ordinary Units based on the weighted average number of units outstanding during the reporting period. Comparatives Where applicable, comparatives have been adjusted to disclose them on the same basis as the current year. The classification of all units as financial liabilities with presentation as net assets attributable to unitholders of the Fund New and amended standards and interpretations effective (the Unitholders ) does not alter the underlying economic as of January 1, 2011 interest of the Unitholders in the net assets and net operating IAS 24 Related Party Disclosures (Amendment) results attributable to Unitholders. The International Accounting Standards Board ( IASB ) has issued an amendment to IAS 24 that clarifies the identification of Balance sheet measurement related party relationships, particularly in relation to significant Priority Units and Ordinary Units are carried on the consolidated influence or joint control. The new definitions emphasize a statements of financial position at net asset value. The net asset symmetrical view on related party relationships as well as clarify value is split based on the number of units outstanding (75% for in which circumstances persons and key management personnel the Priority Units and 25% for the Ordinary Units) prior to the affect related party relationships of an entity. The adoption of the distribution deficiency noted in Note 12. Although instruments amendment did not have any impact on the financial position or classified as financial liabilities are generally required to be performance, or disclosures of the Fund. remeasured to fair value at each reporting period, including the embedded derivative relating to the conversion feature of the IFRIC 14 Prepayments of a Minimum Funding Requirement Ordinary Units, the alternative presentation as net assets (Amendment) attributable to Unitholders reflects that, in total, the interest of The amendment removes an unintended consequence when an the Unitholders is limited to the net assets of the Fund. entity is subject to minimum funding requirements and makes an early payment of contributions to cover such requirements. The Statement of comprehensive income (loss) presentation amendment permits a prepayment of future service cost by the As a result of the classification of all units as financial liabilities, entity to be recognized as a pension asset. The amendment had the consolidated statements of comprehensive income (loss) no effect on the financial position, financial performance or other recognize cash distributions to Unitholders in earnings disclosures of the Fund. attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). The Improvements to IFRSs remeasurement of income taxes on distribution is also recorded In May 2010, the IASB issued its third omnibus of amendments in earnings attributable to Unitholders and non-controlling to its standards, primarily with a view to remove inconsistencies interest on the consolidated statements of comprehensive and clarify wording. There are separate transitional provisions for income (loss). In addition, terminology such as Net income has each amendment. The adoption of the following amendments been replaced by Increase (decrease) in net assets attributable did not have any impact on the financial position or performance to Unitholders to reflect the absence of an equity component on of the Fund. the consolidated statements of financial position. IFRS 7 Financial Instruments: Disclosures: The amendment was intended to simplify the disclosures required, by reducing Presentation of per unit measures the volume of disclosures around collateral held and As a result of the classification of all units as financial liabilities, improving disclosures by requiring qualitative information to the Fund has no equity instrument; therefore, in accordance with put the quantitative information in context. IAS 33 Earnings per Share, there is no denominator for purposes IAS 1 Presentation of Financial Statements: The amendment of calculation of per unit measures. clarifies that an option to present an analysis of each component of other comprehensive income may either be in Non-controlling interest the statement of changes in equity or in the notes to the Non-controlling interest represents the increase in net assets financial statements. and comprehensive income (loss) attributable to the Manager. ANNUAL REPORT 2011 NORANDA INCOME FUND 45

48 Notes to the Consolidated Financial Statements NOTE 4. NEW STANDARDS ISSUED BUT NOT YET EFFECTIVE Standards issued but not yet effective up to the date of issuance of the Fund s consolidated financial statements are listed below. This listing is of standards and interpretations issued, which the Fund reasonably expects to be applicable at a future date. The Fund intends to adopt those standards when they become effective. IFRS 7 Financial Instruments: Disclosures Enhanced Derecognition Disclosure Requirements The amendment requires additional disclosures about financial assets that have been transferred, but not derecognized, to enable the user of the Fund s financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognized assets to enable the user to evaluate the nature of, and risks associated with, the entity s continuing involvement in those derecognized assets. The amendment becomes effective for annual periods beginning on or after July 1, The amendment affects disclosure only and has no impact on the Fund s financial position or performance. IFRS 9 Financial Instruments: Classification and Measurement IFRS 9 as issued reflects the first phase of the IASB s work on the replacement of IAS 39 and applies to the classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard is effective for annual periods beginning on or after January 1, In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Fund s financial assets, but will potentially have no impact on classification and measurements of financial liabilities. The Fund will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture. IFRS 10 Consolidated Financial Statements In May 2011, the IASB released IFRS 10, Consolidated Financial Statements, which replaces SIC-12, Consolidation Special Purpose Entities, and parts of IAS 27, Consolidated and Separate Financial Statements. The new standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included in a company s consolidated financial statements. The standard provides additional guidance to assist in the determination of control where it is difficult to assess. IFRS 10 will be effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. The Fund is considering the impact of the adoption of this standard on its consolidated financial statements. IFRS 11 Joint Arrangements In May 2011, the IASB released IFRS 11, Joint Arrangements, which supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities Non-monetary Contributions by Venturers. IFRS 11 focuses on the rights and obligations of a joint arrangement, rather than its legal form as is currently the case under IAS 31. The standard addresses inconsistencies in the reporting of joint arrangements by requiring the equity method to account for interests in jointly controlled entities. IFRS 11 will be effective for the annual periods beginning on January 1, 2013, with earlier application permitted. The Fund is considering the impact of the adoption of this standard on its consolidated financial statements. IFRS 12 Disclosure of Interests in Other Entities In May 2011, the IASB released IFRS 12, Disclosure of Interests in Other Entities. IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles. The standard requires an entity to disclose information regarding the nature and risks associated with its interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. IFRS 12 will be effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. The Fund is considering the impact of the adoption of this standard on its consolidated financial statements. 46 ANNUAL REPORT 2011 NORANDA INCOME FUND

49 IFRS 13 Fair Value Measurement In May 2011, the IASB released IFRS 13, Fair Value Measurement. IFRS 13 is expected to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The standard will be effective for the annual periods beginning on or after January 1, 2013, with earlier application permitted. The Fund is considering the impact of the adoption of this standard on its consolidated financial statements. IAS 1 Presentation of Financial Statements Components of Other Comprehensive Income The amendments to IAS 1 change the grouping of items presented in other comprehensive income. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and therefore has no impact on the Fund s financial position or performance. The amendments to IAS 1 are effective for annual periods beginning on or after July 1, IAS 19 Employee Benefits Recognition and Disclosure Defined Benefit Plans The IASB has issued numerous amendments to IAS 19. These range from fundamental changes like removing the corridor mechanism and the concept of expected returns on plan assets, to simple clarifications and re-wording. The amendment becomes effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. The Fund is currently assessing the full impact of these amendments. NOTE 5. OPERATING SEGMENT For management purposes, the Fund is organized into one business unit and has one reportable operating segment. All assets and liabilities of the Fund are held in Canada. The following table presents revenue from external customers based on their geographic location and product type for the years ended December 31. Years ended December 31, Canada 188, ,792 United States 452, ,768 Other 22,423 14, , ,146 Zinc 612, ,695 Sulphuric acid 29,535 17,456 Copper and other 20,878 16, , ,146 Management determines revenue concentration based on customers who account for more than 10% of revenues. Revenue from one customer amounted to $98,459 or 15% during the year ended December 31, 2011 (December 31, 2010: $90,814 or 14%), arising from sales of zinc metal. NOTE 6. FINANCE COSTS, NET Finance costs, net for the years ended December 31, are as follows: Years ended December 31, Interest on bank and other loans 8,676 11,696 Accretion on bank and other loans 6,803 2,044 Accretion of rehabilitation expense Interest income (45) (25) 16,110 14,423 ANNUAL REPORT 2011 NORANDA INCOME FUND 47

50 Notes to the Consolidated Financial Statements NOTE 7. EMPLOYEE BENEFITS EXPENSE The deferred tax assets and liabilities of the Fund consist of the following: Employee benefits expense included in production and selling and administration expense for the years ended December 31 is December 31, December 31, January 1, as follows: Deferred tax assets Employee benefits 6,506 2,145 1,957 Wages and salaries (note 17) 51,064 50,875 6,506 2,145 1,957 Benefit costs 8,344 8,488 Deferred tax liabilities Defined contribution pension costs Property, plant and Pension costs (note 14) 9,752 2,036 equipment 47,638 49,006 46,946 Post-retirement benefit plan costs Debt issuance costs (note 14) 1,060 1,002 Rehabilitation liability (9,274) (7,348) (6,502) 70,791 62,920 Eligible capital property (18,274) (19,649) (19,649) 20,257 22,125 20,795 NOTE 8. INCOME TAXES A reconciliation of income tax charge applicable to accounting profit before income tax at the weighted average statutory income tax rate to income tax charge at the Fund effective income tax rate for the year ended December 31 is as follows: Earnings before income taxes 43,750 33,325 Partnership income allocated to Ordinary Units (12,974) (9,294) 30,776 24,031 Expected tax charge at the average statutory income tax rate (48.22% in 2011) 14,840 Deferred tax 2,667 Other Tax charge at an effective income tax rate before distributions 15,408 2,760 Tax recovery on distribution (7,751) Tax charge at an effective income tax rate 7,657 2,760 As at December 31, 2011, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognized is $340,000. The Fund is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. 48 ANNUAL REPORT 2011 NORANDA INCOME FUND

51 NOTE 9. PROPERTY, PLANT AND EQUIPMENT At January 1, 2011, net of accumulated Land and Plant Mobile Auto and buildings equipment equipment Computers trucks Total depreciation 46, , ,739 Additions 1,260 25, ,255 Disposals (250) (1,934) (2,184) Depreciation charge (2,861) (30,420) (81) (297) (16) (33,675) At December 31, 2011, net of accumulated depreciation 44, , ,135 At January 1, 2010, net of accumulated depreciation 45, , ,756 Additions 3,707 19, ,960 Disposals (140) (1,400) (17) (1,557) Reclassifications 25 (25) Depreciation charge (2,911) (29,094) (81) (326) (8) (32,420) At December 31, 2010, net of accumulated depreciation 46, , ,739 At January 1, 2010 Cost 144, ,337 2,746 3, ,336 Accumulated depreciation (99,132) (459,892) (2,428) (2,738) (390) (564,580) Net carrying amount 45, , ,756 At December 31, 2010 Cost 143, ,049 2,495 3, ,127 Accumulated depreciation (97,691) (483,453) (2,151) (2,709) (384) (586,388) Net carrying amount 46, , ,739 At December 31, 2011 Cost 144, ,036 2,496 3, ,416 Accumulated depreciation (100,006) (505,118) (2,233) (2,576) (348) (610,281) Net carrying amount 44, , ,135 Land and buildings at December 31, 2011 include During the year ended December 31, 2011, $555,781 non-depreciating land amounting to $3,799 (December 31, (December 31, 2010: $578,522) of inventory was expensed 2010: $3,799; January 1, 2010: $3,799). Assets under including amortization related to property, plant and equipment construction are not amortized until put in use. of $34,126 (December 31, 2010: $33,709). As at December 31, 2011, raw material, work-in-process and finished NOTE 10. INVENTORIES goods were all carried at cost. December 31, December 31, January 1, NOTE 11. PRIORITY AND ORDINARY UNITHOLDERS Spare parts 9,595 8,794 8,603 December 31, December 31, January 1, Raw materials 18,161 18,150 28, Work-in-process 11,121 14,385 24,335 37,497,975 Priority Units 165, , ,963 Finished products 22,140 37,226 49,615 12,500,000 Ordinary Units 61,017 78, ,875 and Special Fund Units 55,017 46,464 39,654 ANNUAL REPORT 2011 NORANDA INCOME FUND 49

52 Notes to the Consolidated Financial Statements As at December 31, 2011, the Fund had 37,497,975 Priority Units outstanding. Priority Unitholders can redeem their units at a present formula price, to a maximum of $50 per month, subject to the Fund s banking covenants. Pursuant to the Fund s trust indenture as amended and restated (the Trust Indenture ), an unlimited number of Priority Units are issuable. Each Priority Unit represents an equal, undivided beneficial interest in the Fund and in distributions of the Fund. Each Priority Unit is transferable and entitles the holder thereof to participate equally in distributions of the Fund and to one vote. The Partnership has 12,500,000 Ordinary Units outstanding, which are exchangeable into Priority Units on a one-for-one basis only after May 2, 2017, or earlier upon the occurrence of certain events. Each Ordinary Unit is entitled to receive a cash distribution on a monthly basis in an amount that is equal to the monthly cash distribution paid to each Priority Unit, provided each Priority Unit is first paid an amount that is equal to the monthly cash distribution of not less than $ per Priority unit (the Base Distribution ) before any amount is paid to holders of Ordinary Units. See Note 12 for further details. The 12,500,000 outstanding special voting units of the Fund listed above (the Special Fund Units ) provide voting rights in respect of the Fund to the holder of Ordinary Units and vote with the Priority Unitholders together as one class. All Ordinary Units and Special Fund Units are held by a wholly-owned subsidiary of Xstrata Canada. NOTE 12. DISTRIBUTIONS When not restricted and possible, and as may be considered appropriate by the Board, the Fund s policy is to make a sustainable level of distributions to Unitholders, equal to the distributable cash flows from operations, before variations in working capital and after permanent debt reductions and such reserves for operating and capital expenditures as may be considered appropriate by the board of trustees of the Operating Trust. The Fund determines the cash available for distribution, if any, on a monthly basis for the Unitholders of record of the Fund on the last business day of each calendar month and these distributions are to be paid on or about 25 days thereafter. The Fund is required by its Trust Indenture to distribute on December 31 of each year amounts equal to its taxable income and net capital gains for the year so as, to the extent possible, minimize its liability for tax under the Income Tax Act (Canada) (the ITA ) in the year. Such distributions are to be made in cash, unless the Fund is restricted from distributing cash or sufficient cash is not available, in which case such distributions are to be satisfied in whole or in part by the issuance of additional Priority Units having a value equal to the amount of cash which is unavailable for distribution. Following such an in-kind distribution, the Priority Units are automatically consolidated such that each certificate representing a number of units prior to the in-kind distribution of additional units is deemed to represent the same number of units after the distribution of additional units and the consolidation. On December 12, 2011, the board of trustees of the Operating Trust approved an In-Kind Distribution of $0.58 per unit to the Fund s Priority Unitholders of record as at December 31, 2011, in accordance with the provisions of the in accordance with the provisions of the Trust Indenture, as amended and restated as described below. With the changes that became effective to the ITA on January 1, 2011 to include the specified investment flow-through rules, the Fund is now subject to tax on its non-portfolio earnings (as defined in the ITA) (the NPE Earnings ) at the same rate as a Canadian corporation provided it distributes a sufficient portion of such earnings to Unitholders. Otherwise, the Fund would be subject to tax on such earnings at the higher personal income tax rate applicable to individuals. In light of the changes in tax laws, effective December 12, 2011, the board of trustees of the Operating Trust amended the Fund s Trust Indenture, which used to require that the Fund distribute 100% of its taxable income to Unitholders and would, absent such amendment, have resulted in the Fund making larger year-end in-kind distributions than is necessary. As amended, the Fund s Trust Indenture now requires that the Fund distribute a specified percentage (approximately 71.6% in 2011) of its income attributable to its NPE Earnings. This amendment was made to reflect the fact that the Fund is now subject to entity-level tax on its NPE Earnings. The amendment was adopted in accordance with the provisions of the Fund s Trust Indenture. On December 12, 2010, the board of trustees of the Operating Trust approved an In-Kind Distribution of $0.48 per unit to the Fund s Priority Unitholders of record as at December 31, The amount of the In-Kind Distribution was equal to the entire amount of the Fund s estimated taxable income for the purposes of the ITA for 2010, since no cash distribution had been paid to Priority Unitholders during Cash distributions on Ordinary Units of the Partnership are subordinated to distributions on Priority Units of the Fund until May 2017 except upon the occurrence of certain events. Each 50 ANNUAL REPORT 2011 NORANDA INCOME FUND

53 Ordinary Unit is entitled to receive a cash distribution on a monthly basis in an amount equal to the monthly cash distribution paid to each Priority Unit, provided each Priority Unit is first paid an amount that is equal to the monthly cash distribution of not less than $ per Priority Unit (the Base Distribution ) before any amount is paid to the holder of the Ordinary Units. If, notwithstanding the subordination of the Ordinary Units, the cash available for distribution is not sufficient to make the Base Distribution on the Priority Units in a month, the amount of the deficiency does not accumulate and is not paid to holders of the Priority Units. However, if the cash available for distribution in a month is not sufficient to make a distribution on the Ordinary Units that is equal to the distribution on the Priority Units, the amount of the deficiency does accumulate and is to be paid to the holder of the Ordinary Units if and when there is excess cash available for distribution, above the Base Distribution amount, in a subsequent month (the Deficiency Amount ). Any accumulated Deficiency Amount related to the Ordinary Units is not accrued by the Fund until excess cash is available for distribution above the Base Distribution amount and a cash distribution is approved by the board of trustees. If at any time there is an accumulated Deficiency Amount owing on the Ordinary Units, any distributions on the Ordinary Units must be declared on the last business day of the month on which the Partnership has distributable cash flow in that month in excess of any amount required to be paid by the Partnership to the holders of the Ordinary Units so as to ensure the declaration of the Base Distribution by the Fund to the holders of Priority Units for that month together with a declaration of an amount equal to the Base Distribution by the Partnership to the holders of Ordinary Units for that month, until the Deficiency Amount is paid in full. In the event of an exchange of Ordinary Units on a one-to-one basis for Priority Units on or after May 2, 2017 or earlier upon the occurrence of an early exchange event (Note 11), any accumulated Deficiency Amount related to the Ordinary Units prior to the exchange is not accrued by the Fund until such time as excess cash is available for distribution above the Base Distribution and a cash distribution is approved by the board of trustees. Upon the exchange, the holder of Ordinary Units has the right to receive any distributions declared and not paid on the Ordinary Units as of that time and a promissory note in the amount of the outstanding accumulated Deficiency Amount. Subsequent to an exchange, there is no further accumulation of the accumulated Deficiency Amount. As at December 31, 2011 and February 14, 2012, the accumulated Deficiency Amount was $4,584 and $5,104 respectively (December 31, 2010 $2,500; January 1, 2010 $2,500). NOTE 13. REHABILITATION LIABILITY December 31, December 31, Opening balance 18,819 16,551 Accretion of reclamation expense Site restoration expenditures (26) (238) Change in estimates 4,137 1,798 Closing balance 23,606 18,819 The Fund has recognized a rehabilitation liability solely related to the residue ponds within the Processing Facility. The Fund has determined the fair value of this rehabilitation liability as at December 31, 2011, by using a discount rate of 2.26% (December 31, 2010: 3.39% and January 1, 2010: 4.0%). The liability accretes to its future value until the obligation is completed. The estimated rehabilitation expenditures may vary based on changes in operations, cost of rehabilitation activities, and legislative or regulatory requirements. Although the ultimate amount to be incurred is uncertain, the liability for rehabilitation on an undiscounted basis is estimated to be approximately $37,800. The cash flows required to settle the liability are expected to be incurred from now until The Fund s operations are affected by federal, provincial, and local laws and regulations concerning environmental protection. The Fund s provisions for rehabilitation are based on known requirements. It is not currently possible to estimate the impact on operating results, if any, of future legislative or regulatory developments. NOTE 14. EMPLOYEE BENEFITS The Manager participates in defined benefit pension plans managed and administered by Xstrata Canada. There is one plan for unionized workers and a second plan for staff. The plan for staff has been closed to new entrants since The benefit obligation represents the obligations for those employees who have worked for the Manager since the Fund s inception in May The Manager also participates in unfunded post-retirement benefit plans that are managed and administered by Xstrata Canada, for a number of current and former employees. The benefit obligation represents the obligations for those employees who are working for the Manager as of the reporting period or who have retired while working for the Manager. The Manager s funding policy is to contribute amounts sufficient to meet minimum funding requirements as set forth by the Pension and Benefits Agreement with Xstrata Canada plus such additional amounts as the Manager may determine to be appropriate. The Manager s share of plan assets is estimated based on the Manager s defined benefit obligations and any adjustments for historical contributions by the Manager. ANNUAL REPORT 2011 NORANDA INCOME FUND 51

54 Notes to the Consolidated Financial Statements The principal assumptions used in determining pension and post-retirement benefit obligations for the Manager s plans are as follows: December 31, 2011 December 31, 2010 January 1, 2010 Post- Post- Post- Pension retirement Pension retirement Pension retirement plans benefit plans plans benefit plans plans benefit plans Rate of salary increases 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% Expected rate of return on plan assets 6.20% 6.20% 6.45% Discount rate 4.35% 4.50% 5.40% 5.40% 6.20% 6.30% Inflation rate 2.00% 2.00% 2.00% Rate of medical cost increases % 6.50% 6.50% % in 2012, grading down to 4% in and after % in 2011, grading down to 4.5% in and after 2015 The Manager s share of assets and liabilities of the pension and post-retirement benefit plans and the amounts recognized in the Fund s consolidated statements of financial position are as follows: December 31, 2011 December 31, 2010 January 1, 2010 Post- Post- Post- Pension retirement Pension retirement Pension retirement plans benefit plans plans benefit plans plans benefit plans Defined benefit obligations 61,876 12,309 44,356 10,618 34,424 8,060 Fair value of plan assets (49,997) (49,350) (40,379) Minimum funding requirements 1,543 4,439 Net employee benefit liability (asset) 11,879 12,309 (3,451) 10,618 (1,516) 8,060 The reconciliation of the Manager s share of net employee benefit asset (liability) movement during the period in the pension and post-retirement benefit plans are as follows: December 31, 2011 December 31, 2010 Net employee benefit liability (asset), beginning of year (3,451) 10,618 (1,516) 8,060 Net employee benefit expense 9,752 1,060 2,036 1,002 Actuarial loss 9,141 1,635 2,758 2,337 Employer contributions (3,563) (1,004) (6,729) (781) Net employee benefit liability (asset), end of year 11,879 12,309 (3,451) 10,618 The components of Manager s share of benefit expense recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss) during the years ended December 31 are as follows: Post- Post- Pension retirement Pension retirement plans benefit plans plans benefit plans Post- Post- Pension retirement Pension retirement plans benefit plans plans benefit plans Current service costs 2, , Interest costs 2, , Expected return on plan assets (net of expected expenses) (3,060) (2,799) Plan amendments 7,137 Net employee benefit expense 9,752 1,060 2,036 1, ANNUAL REPORT 2011 NORANDA INCOME FUND

55 The components of the Manager s share of actuarial losses recognized in other comprehensive income on the consolidated statements of comprehensive income (loss) during the years ended December 31 are as follows: December 31, 2011 December 31, 2010 Expected return on plan assets (net of expected expenses) 3,060 2,799 Actual return on plan assets 2,742 4,411 Actual return less expected return on plan assets (318) 1,612 Actuarial loss on obligations (5,671) (1,635) (5,740) (2,337) Change in allocation of plan assets (4,695) (1,526) Minimum funding requirements 1,543 2,896 (9,141) (1,635) (2,758) (2,337) The reconciliation of the present value of benefit obligations and fair value of plan asset movements during the years ended December 31 are as follows: December 31, 2011 December 31, 2010 Post- Post- Pension retirement Pension retirement plans benefit plans plans benefit plans Post- Post- Pension retirement Pension retirement plans benefit plans plans benefit plans Benefit obligation present value as at January 1 44,356 10,618 34,424 8,060 Current service costs 2, , Interest cost 2, , Plan amendments 7,137 Actuarial losses 5,671 1,635 5,740 2,337 Actual benefit payments (963) (1,004) (643) (781) Benefit obligation present value at end of year 61,876 12,309 44,356 10,618 Plan assets fair value as at January 1 49,350 40,379 Actual return of plan assets 2,742 4,411 Employer contributions 3,563 1,004 6, Benefits paid (963) (1,004) (643) (781) Change in allocation of plan assets (4,695) (1,526) Plan assets fair value at end of period 49,997 49,350 Funded status 11,879 12,309 (4,994) 10,618 Minimum funding requirements 1,543 Net employee benefit liability (asset) as at end of year 11,879 12,309 (3,451) 10,618 Net employee benefit liability (asset) as at January 1 (3,451) 10,618 (1,516) 8,060 A breakdown of the plan assets by major asset category of the The overall expected rate of return on assets is determined pension benefit plans was as follows: based on the market expectations prevailing on the date, applicable to the period over which the obligation will be settled. December 31 December 31 January 1 The expected contributions to be made in 2012 related to the pension plans are $5,100. Equity securities 36% 43% 42% Cash and fixed income securities 64% 57% 58% 100% 100% 100% ANNUAL REPORT 2011 NORANDA INCOME FUND 53

56 Notes to the Consolidated Financial Statements Pre-May 2, 2002 At any time prior to December 28, 2013, the Operating Trust The estimated liability of the pension plans covering the pension may redeem all or part of the senior secured notes (the Notes ) obligation of the Manager s employees prior to May 2, 2002, at a redemption price equal to 100% of the principal amount of was approximately $88,900 as at December 31, 2011 the Notes redeemed, plus a make-whole premium, and (December 31, 2010: $80,100). There was approximately accrued and unpaid interest. The Notes are redeemable at the $74,700 of assets within the pension plan as at December 31, option of the Operating Trust in whole or in part, at any time on or 2011 (December 31, 2010: $67,000). The benefit obligation after: December 28, 2013 at % of the principal and plan assets for pre-may 2002 would only revert to the Fund amount; December 28, 2014 at % of the principal upon the termination of the administration agreement between amount; December 28, 2015 and thereafter at 100% of the the Manager and the Fund and establishment of a pension plan principal amount; plus, in each case, accrued and unpaid by the Manager and will be subject to regulatory approval. interest to the redemption date. The prepayment options are considered to be closely related to the Notes and are therefore Sensitivity analysis on post-employment and post-retirement not considered to be an embedded derivative. benefits The Notes governing trust indenture lists events that Assumed health care cost trend rates have a significant effect on constitute an event of default, should they occur. They include the amounts reported for the health care plans. A one the non-payment by the Operating Trust of principal, interest or percentage-point change in assumed health care cost trend other obligations of the Operating Trust in respect of the Notes rates would have the following effects: and a breach of any covenant pursuant to the ABL Facility credit agreement (discussed below), subject to customary cure periods One-percentage-point where applicable. If any event of default occurs under the Notes Increase Decrease trust indenture, the holders of the Notes may require the Effect on net employee benefit expense Operating Trust to repay any outstanding obligations pursuant to Effect on net employee benefit liability the Notes trust indenture. NOTE 15. BANK AND OTHER LOANS ABL revolving facility December 31, December 31, January 1, Concurrently with the closing of the Notes offering on July 28, 2011, the Operating Trust entered into a 5-year secured asset backed revolving credit facility (the ABL Facility ) providing Senior secured notes 82, ,500 availability of up to $150,000. The ABL Facility is an asset-based ABL revolving facility 16,213 credit facility and the loans thereunder are made available to the Bridge facility Term loan Operating Trust based on a borrowing base test with the tranche 130,000 maximum amount available thereunder to be the lesser of Bridge facility Revolving (a) $150,000 and (b) the aggregate of (i) 85% of eligible facility tranche 64,730 accounts receivable (90% in the case of insured accounts Revolving facility 54,631 receivable or that are owed by qualified investment grade Total bank and other loans 98, , ,131 account debtors) plus (ii) the lesser of (A) 70% of the lower of Less: unamortized cost or fair market value of eligible inventory, and (B) 85% of the deferred financing fees (4,497) (4,462) (245) appraised net orderly liquidation value of eligible inventory, with Less: current portion (15,000) (190,268) (207,886) availability from inventory subject to a cap of 100% of availability Long term portion Senior secured notes 79,216 under clause (i), minus customary priority payables and reserves. The borrowing base is tested on a monthly basis so long as excess availability is equal to or greater than $15,000 and on a On July 28, 2011, the Operating Trust closed its private weekly basis if excess availability over the most recent 45-day placement of Notes, for an aggregate principal amount of period is less than $15,000. $90,000, bearing interest at 6.875%. Commencing on The borrowing base on the ABL Facility was $83,100 based December 28, 2011, the Notes amortize by an amount of on the Fund s working capital position as at December 31, $7,500 on a semi-annual basis on June 28 and December 28 of As at December 31, 2011, there was $16,213 drawn each year prior to December 28, The $15,000 remaining down on the ABL Facility, leaving an excess availability principal balance will be repayable at maturity on of $66,877. December 28, ANNUAL REPORT 2011 NORANDA INCOME FUND

57 Borrowings under the ABL Facility are available by way of The Notes and the ABL Facility are fully and unconditionally Canadian prime rate advances, US base rate advances, bankers guaranteed, on a senior secured basis (subject to the terms of acceptances, US dollar Libor advances and Canadian and US an inter creditor agreement with the lenders under the new ABL dollar letters of credit. The ABL Facility bears interest at rates that Facility), by the Fund, the Manager, the Partnership and NILP vary with the Canadian prime rate, US base rate, the bankers General Partner Ltd., the Partnership s general partner. Under the acceptance rate and Libor rates plus applicable margins between Notes trust indenture and the ABL Facility credit agreement, the 0.25% and 2.25% depending on the average excess Fund is permitted to distribute excess cash flows to its availability for the preceding quarter. The effective interest rate as Unitholders subject to maintaining the minimum excess of December 31, 2011, including the accretion of deferred availability, compliance with certain financial covenants and financing costs, is 5.0%. other customary restrictions. As at December 31, 2011, $8,900 (Cdn$9,100) was The proceeds of the ABL Facility will be used for working payable in US dollars. capital and other general corporate purposes, and, together with The maturity of the ABL Facility is July 28, The credit the net proceeds of the Notes offering, were used to repay all agreement entered into in connection with the ABL Facility amounts outstanding in respect of the Operating Trust s prior contains covenants that restrict the Operating Trust (and the bridge facility (described below). Fund, the Manager, the Partnership and its general partner, NILP General Partner Ltd., as guarantors) in several respects, Bridge facility including their ability to make distributions or repurchase the On December 2, 2010, the Operating Trust obtained a bridge Notes. The ABL Facility also contains customary representations, facility (the Bridge Facility ) for an amount of $250,000 from a warranties and covenants and conditions to funding. syndicate of lenders, comprised of a $130,000 term loan The ABL Facility credit agreement does not contain financial tranche ( Term Loan Tranche ) and a $120,000 operating line of covenants, provided the Fund s average excess availability over credit ( Revolving Facility Tranche ). The Bridge Facility was the most recent 45-day period is equal to or greater than obtained in order to refinance the then-existing revolving credit $15,000. In the event that the Fund s average excess availability facility of the Fund and the Operating Trust of $120,000 that is less than $15,000 for any 45-day period, the Fund will be matured on December 3, 2010, and to finance general required to maintain corporate purposes including working capital and to repay the then-remaining amounts outstanding on the Operating Trust s (i) adjusted tangible net worth of the Fund and its subsidiaries previously outstanding senior secured notes of $153,500 that at a level prescribed in the credit agreement and matured on December 20, 2010, and to enable the Fund to (ii) annual capital expenditures at a level not to exceed 120% of pursue a long-term debt financing, all as described further below. budgeted annual capital expenditures. Effective June 3, 2011, the Bridge Facility was extended to The ABL Facility credit agreement lists events that constitute December 1, 2011 for a total of $220,000 comprised of an event of default, should they occur. They include the $120,000 under the Term Loan Tranche and $100,000 under non-payment by the Operating Trust of principal, interest or other the Revolving Facility Tranche. The credit agreement governing obligations of the Operating Trust in respect of the ABL Facility the Bridge Facility contained covenants that restricted the Fund credit agreement, a default under the Notes trust indenture that in several respects, including its ability to make cash distributions permits, or has resulted in, the acceleration of the obligations or redeem or repurchase units. On July 28, 2011 the Bridge owing to the holders of Notes, and a breach of any covenant Facility was fully repaid using the proceeds from the Notes and pursuant to the ABL Facility credit agreement, subject to the ABL Facility (discussed above). customary cure periods where applicable. If any event of default occurs under the ABL Facility credit agreement, the ABL Facility Term loan tranche lenders will be under no further obligation to make advances to The Term Loan Tranche was used to partly repay all of the the Operating Trust and may require the Operating Trust to repay previously-outstanding senior secured notes in the amount of any outstanding obligations pursuant to the ABL Facility credit $153,500 that matured on December 20, The Term Loan agreement. Tranche was subject to certain adjustments to include a quarterly reduction of this portion of the Bridge Facility and any repayments permanently reduced the amount available on the Term Loan Tranche. ANNUAL REPORT 2011 NORANDA INCOME FUND 55

58 Notes to the Consolidated Financial Statements Borrowings under the Term Loan Tranche were available by way of Canadian prime rate advances or bankers acceptance and bore interest at the Canadian prime rate plus applicable margins between 3.5% and 4.5%. Revolving facility tranche The Revolving Facility Tranche was used to refinance the Operating Trust s prior revolving facility that matured on December 3, 2010, to finance general corporate purposes including working capital and to repay the then-remaining Included in the above is $5,491 of purchase commitments to related parties as described in Note 17. Certain agreements for operating costs require the Fund to make minimum purchases, or be subject to penalties. Included in the above is $9,740 of capital commitments (December 31, 2010: $9,050; January 1, 2010: $6,600) relating to the purchase of replacement anodes for the cell house and other plant equipment. Litigation $23,500 of the previously-outstanding senior secured notes In August 2004, the Processing Facility was served with a class mentioned above. The terms of the Revolving Facility Tranche action motion presentable before the Québec Superior Court, were substantially the same as the terms of the previous subsequent to an accidental discharge of sulphur trioxide. In revolving facility. June 2008, the Québec Superior Court dismissed the motion to Under the Revolving Facility Tranche, the amount available to institute a class action. The plaintiff appealed the decision. In be drawn varied on a monthly basis and was based on 65% of August 2009, the Québec Court of Appeal dismissed the appeal. the Fund s eligible inventory and 80% of the eligible accounts In December 2009, the Processing Facility was served with a receivable (both as defined in the credit agreement) from the new motion to institute a class action. The second motion to previous month. The monthly calculation was subject to a institute a class action has been heard by the Québec Superior maximum available to be drawn of $100,000. Court and the case has been taken under advisement. Borrowings under the Revolving Facility Tranche were available The Manager continues to maintain that the class action suit by way of Canadian prime rate advances, US base rate is unfounded and intends to defend the proposed claim. advances, bankers acceptances, US dollar Libor advances and Canadian and US dollar letters of credit. The Revolving Facility Appropriation of land Tranche bore interest at rates that varied with the Canadian The Fund is currently in discussion with Québec s Ministry of prime rate, US base rate, the bankers acceptance rate, or Libor Transportation regarding land that the Fund is currently using. rates plus applicable margins between 3.5% and 4.5%. This land was appropriated by the provincial government a number of years ago. The Fund s obligation, if any, cannot NOTE 16. COMMITMENTS AND CONTINGENCIES be determined. Operating leases and purchase commitments As at December 31, 2011, the Fund had commitments under operating leases requiring annual rental payments as follows: As at December 31, 2011, the Fund had purchase commitments requiring payments as follows: , Guarantees Some of the Fund s inceptive agreements, specifically those related to the acquisition of the Processing Facility and the debt, include indemnification provisions in which the Fund may be required to make payments to Xstrata or lenders for breach of fundamental representations and warranty terms in the agreements. As at December 31, 2011, the Fund does not believe these indemnification provisions would require any material cash payments by the Fund. The Fund indemnifies its trustees and officers against claims reasonably incurred and resulting from the performance of their services to the Fund, and maintains liability insurance for its trustees and officers. No amounts have been recorded for the contingencies outlined above. 13, ANNUAL REPORT 2011 NORANDA INCOME FUND

59 NOTE 17. RELATED PARTIES The consolidated financial statements include the financial statements of the Fund, the subsidiaries and the special purpose entity listed in the following table: Compensation of key management personnel of the Fund During the year ended December 31, 2011, the Fund recorded the following as an expense related to executive management personnel Country of % Equity Interest Salaries and other short-term benefits 1,185 1,215 Name Incorporation Employee benefits Subsidiaries: 1,245 1,280 Noranda Income Limited Partnership Canada 81% 81% Noranda Operating Trust Canada 100% 100% Special Purpose Entity: Canadian Electrolytic Zinc Limited 1 Canada 0% 0% NOTE 18. DERIVATIVES AND HEDGES The Fund s derivatives recognized in the consolidated statements of financial position are as follows: 1 Canadian Electrolytic Zinc Limited is a wholly owned subsidiary of Xstrata Canada and is December 31, December 31, January 1, consolidated by virtue of being a special purpose entity During the years ended December 31, the Company entered into the following transactions in the ordinary course of business with Xstrata Canada and its subsidiaries: Years ended December 31 Sales of zinc metal 33,997 72,135 Sales of by-products 29,698 21,455 Purchases of zinc concentrate 319, ,920 Purchases of plant equipment, raw materials and operating supplies 7,742 8,914 Support services 1,210 1,164 Assets Long-term derivative financial assets: Hedges of fixed firm commitments 377 1,110 Long-term firm commitments 271 Derivative financial assets: Hedges of fixed firm commitments 3,478 4,409 Inventory management program 2,159 Sales agency services 1,158 1,239 5,637 4,409 Credit support from Xstrata Canada 402 Dec. 31 Dec. 31 Jan Liabilities Accounts receivable 17,027 34,113 7,942 Long-term derivative Accounts payable 31,199 36,261 63,418 financial liabilities: Firm commitments 5,906 Hedges of fixed firm Glencore International AG ( Glencore ) owns appoximately commitments % of Xstrata. Sales to a subsidiary of Glencore included in Long-term firm sales of zinc metal for the years ended December 31, 2011 and commitments 379 1, were $20,374 and $41,825 respectively. Amounts due Derivative financial from Glencore, included in accounts receivable, were $940 and liabilities: $6,806 as at December 31, 2011 and 2010, respectively. Hedges of fixed firm The sales to and purchases from related parties are made at commitments 5,834 terms equivalent to those that prevail in arm s length Inventory management transactions. All amounts due to and from related parties are program 1,413 3,587 non-interest bearing and are due in the ordinary course of 7,247 3,587 business. All transactions with Xstrata Canada and affiliated companies are carried out in the normal course of operations, Firm commitments 3,499 4,112 and are recorded at fair value. ANNUAL REPORT 2011 NORANDA INCOME FUND 57

60 Notes to the Consolidated Financial Statements Inventory management program As at December 31, 2011, Xstrata Canada had futures The Fund purchases metal in the form of zinc concentrate to be contracts hedging approximately 79 million pounds of zinc processed eventually into refined zinc metal for sale to (December 31, 2010: 23 million pounds) to be sold pursuant to customers. As agent of the Fund, Xstrata Canada provides the firm commitments at fixed prices and delivery dates related to hedging arrangements in the event that the structure of the the Fund. As at December 31, 2011, the fair value of these Fund s sales and purchase contracts does not minimize exposure contracts as determined with reference to pooled market prices to changes in zinc prices during the period in which the zinc (Level 1) was recognized as a current derivative financial liability is refined. of $5,834 and a non-current derivative financial liability of $268 The derivatives associated with the Fund s inventory (December 31, 2010: current derivative financial asset of management program do not meet the requirements for hedge $3,478 and non-current derivative financial asset of $377; accounting. As a result, these derivative financial instruments January 1, 2010: current derivative financial asset of $4,409 have been recognized on the consolidated statements of and a non-current derivative financial asset of $1,110) and the financial position as either a derivative financial asset or liability fair value of the firm fixed sales commitments was recognized as with the change in their fair value at each reporting period date a current firm commitment asset of $5,906 and a long-term firm recognized as a gain or a loss on derivative financial instruments. commitment asset of $271 (December 31, 2010: current firm As at December 31, 2011, the Fund had bought forward commitment liability of $3,499 and a long-term firm approximately 26 million pounds of zinc (December 31, 2010 commitment liability of $379; January 1, 2010: current firm bought forward 16 million pounds of zinc). commitment liability of $4,112 and a long-term firm During the year ended December 31, 2011, the change in commitment liability of $1,111). fair value of these derivatives was a loss of $3,571 which was The net change in fair value of these net positions, recognized in earnings attributable to Unitholders and representing the ineffective portion of the hedge position for the non-controlling interest on the consolidated statements of year ended December 31, 2011 was recognized in earnings comprehensive income (loss) in loss (gain) on derivative financial attributable to Unitholders and non-controlling interest on the instruments (December 31, 2010: gain on derivative financial consolidated statements of comprehensive income (loss) as a instruments of $5,746). As at December 31, 2011, the fair gain on derivative financial instruments of $100 (December 31, value of these positions, as determined with reference to Level 1, 2010: loss of $300). quoted market prices, was a current derivative financial liability of $1,413 (December 31, 2010: current derivative financial asset Embedded derivatives of $2,159, January 1, 2010: current derivative financial liability For the year ended December 31, 2011, the Fund recorded of $3,587). $11,254 as a decrease of raw material purchase costs related to the change in fair value, as determined with reference to pooled Hedges of fixed firm commitments market prices (Level 1) of the embedded derivatives resulting Certain customers request a fixed sales price instead of the LME from the quotational pricing feature of its zinc concentrate average price in the month of shipment. Xstrata Canada enters payables (December 31, 2010: increase of $2,501). into commodity forward and futures contracts on behalf of the Fund that will allow the Fund to receive the LME average price in NOTE 19. FINANCIAL INSTRUMENTS the month of shipment while customers pay the agreed-upon fixed price. Xstrata Canada accomplishes this by settling the Principles of risk management futures contracts during the month of shipment, which generally The Fund s primary risk management objective is to protect the results in the realization of the LME average price. In the event Fund s financial position, comprehensive income (loss), and that the futures contracts have to be terminated early, due to the cash flow in support of providing, when possible, stable monthly customer cancelling a fixed price order, Xstrata Canada has the cash distributions at a sustainable level to Unitholders. right to charge the customer with the cost of settling the LME The main risks arising from the Fund s financial instruments futures contract. A high degree of correlation between the are credit risk, liquidity risk, interest rate risk, foreign currency changes in the fair value of the contracts and the fixed sales risk and commodity price risk. These risks arise from exposures commitments permits hedge accounting to be used. that occur in the normal course of business. 58 ANNUAL REPORT 2011 NORANDA INCOME FUND

61 The Fund s significant financial instruments, other than Management determines credit risk based on customers who derivatives, comprise bank and other loans, cash and cash account for more than 10% of accounts receivable. As at equivalents. The main purpose of these financial instruments is December 31, 2011 and December 31, 2010, two customers to finance the Fund s ongoing operations. The Fund has various (including Xstrata Canada) represented 41% and 47%, other financial assets and liabilities such as accounts receivables respectively of the accounts receivable balance. As at and accounts payables, which arise directly from its operations. December 31, 2011 and December 31, 2010 respectively, The fair values of cash and cash equivalents, accounts $2,268 and $1,939 of the accounts receivable trade were receivable, accounts payable and accrued liabilities and fifteen days past due and the Fund had recorded an allowance distribution payable approximate their carrying values given the for doubtful accounts of nil and $386, respectively. short-term maturity of these instruments. The requirement for impairment is analyzed at each reporting From time-to-time, the Fund may use foreign exchange date on an individual basis for major clients. The calculation is forward contracts and commodity price contracts to manage based on actually incurred historical data. The Fund s maximum exposure to fluctuations in foreign exchange and metal prices. exposure to counterparty credit risk at the reporting date is the The Fund s use of derivatives is based on established practices carrying value of cash and cash equivalents, accounts and parameters, which are subject to the oversight of the board receivables, firm commitments, and derivative financial of trustees of the Operating Trust. instruments. Credit risk Liquidity risk Exposure to credit risk arises as a result of transactions in the Liquidity risk is the risk that the Fund may not be able to settle or Fund s ordinary course of business and is applicable to all meet its obligations on time or at a reasonable price. The Fund financial assets. Investments in cash and cash equivalents, manages liquidity risk by maintaining adequate cash and cash derivative instruments and similar assets are with approved equivalent balances, and by appropriately using the Fund s ABL counter-party banks and other financial institutions. Counter- Facility. The Fund continuously reviews both actual and parties are assessed prior to, during, and after the conclusion of forecasted cash flows to ensure that the Fund has appropriate transactions to ensure exposure to credit risk is limited to an revolving facility capacity. The operational, tax, capital and acceptable level. regulatory requirements and obligations of the Fund are The Fund s major exposure to credit risk is in respect of trade considered in the management of liquidity risk. receivables. Trade receivable credit risk is mitigated through Based on the balance sheet as at December 31, 2011, the established credit monitoring activities. These include conducting Fund had $1,497 of cash and cash equivalents and $66,887 of financial and other assessments to establish and monitor a unutilized ABL Facility. As at December 31, 2011, the Fund had customer s creditworthiness, setting customer limits, monitoring $865 of cash and cash equivalents (excluding cash held by the exposure against these limits, and in some instances moving the Manager) and $66,853 of unutilized ABL Facility. See Note 15 customer to cash-in-advance terms. The Fund does not hold for additional information on the Fund s debt position. collateral as security. The following table summarizes the amount of contractual undiscounted future cash flow requirements for financial instruments as at December 31, 2011: Q and Total Q Q Q thereafter ABL revolving facility 16,213 16,213 Senior secured notes 82,500 7,500 75,000 Accounts payable and accrued liabilities 60,795 56,717 1,204 1,561 1,313 Derivative financial liabilities 7,515 3,168 2,044 1, Distribution payable 1,562 1,562 Total 168,585 61,447 10,748 2,994 93,396 ANNUAL REPORT 2011 NORANDA INCOME FUND 59

62 Notes to the Consolidated Financial Statements Market risk analysis Market risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate because of changes in market prices. IFRS 7 requires sensitivity analyses that show the effects of hypothetical changes of relevant market risk variables on the Fund s earnings. The periodic effects are determined by relating the hypothetical changes in the risk variables to the balance of financial instruments at the reporting date. The Fund s primary market exposures are to interest rate risk, foreign currency risk and commodity price risk. Interest rate risk Interest rate risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Fund is exposed to interest rate risk primarily as a result of exposures to movements in the short term interest rates on the ABL Facility bearing interest at a floating rate. The interest rate sensitivity analysis is based on the following assumptions: The Fund also has exposure to the US dollar for its cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued liabilities, and the ABL Facility. The Fund attempts to manage the overall economic exposure to the US dollar by matching US dollar assets to US dollar liabilities. This currency exposure is managed in part through US dollar overnight transactions. As at December 31, 2011, the Fund had bought forward US dollars with a notional amount of US$66,200 and sold forward dollars with a notional amount of $67,541. An unrealized gain of $214 related to these open positions was recorded as at December 31, The impact of foreign currencies has been determined based on the balances of financial assets and liabilities at December 31, This sensitivity does not represent the statement of comprehensive income (loss) impact that would be expected from a movement in foreign currency exchange rates over the course of a period of time. If the Canadian dollar had gained (lost) 5% against the US dollar, the increase (decrease) on earnings before finance costs and income taxes would have been $2,445 as at and for the for floating rate instruments, statement of comprehensive year ended December 31, income (loss) impacts assume adjustments to interest income and expense for a 12-month period; Commodity price risk the balance of interest-bearing financial instruments at The Fund is subject to price risk from fluctuations in market reporting date is representative of the balance for the year as prices of commodities. The Fund uses future contracts to a whole and hypothetical interest rate movements are manage its exposure to fluctuations in commodity prices. The deemed to apply for the entire reporting period; and use of the future contracts is based on established practices the impact of interest rate movements on the carrying value and parameters. of employee benefits and rehabilitation liability has The Fund s commodity price risk associated with financial been excluded. instruments primarily relates to changes in fair value caused by If the market interest rates had been 100 basis points higher settlement adjustments to receivables and payables and other (lower) at December 31, 2011 earnings, before income tax financial instruments, including firm commitments. would have been $162 (December 31, 2010: $1,947) The impact of commodity prices has been determined based lower (higher). on the balances of financial assets and liabilities at December 31, This sensitivity does not represent the Foreign currency risk statement of comprehensive income (loss) impact that would be Foreign exchange risk is the risk that the fair value of the future expected from a movement in commodity prices over the course cash flows of a financial instrument will fluctuate because of of a period of time. changes in foreign exchange rates. The Fund s foreign exchange The following represents the financial instruments effect on risk arises primarily with respect to the US dollar. The Fund s earnings before finance costs and income taxes as at and for the revenue and raw material purchase costs are exposed to foreign year ended December 31, 2011 from a 10% change to metal exchange risk as commodity sales and raw material purchase prices based on December 31, 2011 LME forward prices: costs are denominated in US dollars. The majority of operating Zinc 10% increase/decrease $(6,703)/$6,703 expenses, principally labour costs and energy costs, are payable Copper 10% increase/decrease $416/$(416) in Canadian dollars. The US dollar revenue exposure is higher than the US dollar raw material purchase cost exposure due to the realization of zinc metal premiums, the sale of copper in cake and sulphuric acid and zinc metal recovery gains in US dollars. 60 ANNUAL REPORT 2011 NORANDA INCOME FUND

63 Capital management 2. The Fund has elected to recognize all cumulative The Fund s capital consists of net assets attributable to unamortized actuarial gains and losses from the unitholders and non-controlling interest. The Fund s objectives Manager s employee benefit plans as at January 1, 2010 when managing capital is to ensure the Fund has the capital and in its opening retained earnings. All future actuarial gains capacity to support the Fund s ability to continue as a going and losses will be recorded in other comprehensive concern, and to enable the Fund to make sustaining and revenue income (loss). generating capital expenditures. The Fund s long-term objective 3. The Fund has elected to disclose the following amounts is to maximize unitholder value and, when possible, provide prospectively from the date of transition (IFRS ordinarily stable monthly distributions at a sustainable level to Unitholders. requires the amounts for the current and previous four The Fund s capital consists of net assets attributable to annual periods to be disclosed): (i) the present value of the unitholders and banks and other loans. defined benefit obligation, the fair value of the plan assets The Fund s capital structure reflects the requirements of a and the surplus or deficit in the plan; and (ii) the business in the zinc processing industry that has long-term fixed experience adjustments arising on the plan liabilities and processing fee supply contracts. The Fund is reducing the the plan assets. amount of debt within the capital structure as it moves closer to In preparing its opening IFRS statement of financial position, the end of the SPA. The Fund s investment in working capital is the Fund has adjusted amounts reported previously in financial directly correlated to the price of zinc and is funded by the statements prepared in accordance with GAAP. An explanation of ABL Facility. how the transition from GAAP to IFRS has affected the Fund s The Fund continually assesses the adequacy of its capital financial position, financial performance and cash flows is set out structure and capacity and makes adjustments within the context in the following tables and the notes that accompany the tables. of the Fund s strategy, economic conditions and the risk characteristics of the business. Income taxes The Fund is subject to tax imposed under the Tax Act on a NOTE 20. EXPLANATION OF TRANSITION TO IFRS Specified Investment Flow-Through Entities ( SIFT ) trust and has previously applied GAAP guidance in Emerging Issues As stated in Note 2, these are the Fund s first consolidated Committee ( EIC )-107 and EIC-167 when measuring its annual financial statements prepared in accordance with IFRS. current and future income tax balances. Using this guidance, if IFRS 1 sets out the procedures that the Fund must follow when it the Fund was able to demonstrate intent and ability to distribute adopts IFRS for the first time as the basis for preparing its earnings, then a lower rate of tax was applied to temporary consolidated financial statements. The Fund is required to differences for the measurement of future income taxes and for establish its IFRS accounting policies for 2011 and, in general, the purpose of calculating a current tax provision. Current apply these retrospectively to determine the IFRS opening income taxes and deferred taxes were measured based on tax balance sheet as at the transition date of January 1, rates and laws that have been enacted or substantively The accounting policies set out in Note 3 have been applied in enacted. For the Fund, deferred tax balances were previously preparing the consolidated financial statements for the year calculated using the tax rates that were expected to apply to the ended December 31, 2011, the comparative information reporting period(s) when the temporary differences were presented for the year ended December 31, 2010 and in expected to reverse, based on tax rates enacted or substantively preparation of an opening IFRS statement of financial position at enacted at the end of the reporting period and on the Fund s January 1, 2010 (the Fund s date of transition). IFRS 1 also current legal structure. There are no corresponding guidelines permits a number of optional and mandatory exemptions from with respect to a SIFT trust under IFRS and, as a result, the Fund full retrospective application. is required to follow IAS 12. On transition to IFRS, the Fund (excluding the Manager) used Exemptions applied an undistributed tax rate and, as such, the deferred taxes were The Fund has elected to use the following optional exemptions recorded under IFRS at the top marginal tax rate for individuals in from full retrospective application of IFRS and has made the jurisdictions where the entity has permanent establishments, following adjustments to transition from GAAP to IFRS: which is approximately 48.22%, as opposed to the combined 1. The Fund has applied the transitional provisions in IAS 23 federal and provincial corporate tax rate which was expected to Borrowing Costs and capitalises borrowing costs on be approximately 28.4% in qualifying assets under construction on the date of transition. ANNUAL REPORT 2011 NORANDA INCOME FUND 61

64 Notes to the Consolidated Financial Statements The remaining decrease in net assets attributable to unitholders and non-controlling interest related to deferred taxes reflects the change in temporary differences resulting from the effect of the IFRS adjustments described above upon transition to IFRS and by the requirement to use the undistributed tax rates as discussed above for the year ended December 31, Classification of Priority and Ordinary Units as liabilities The Fund s Priority and Ordinary Units do not meet the definition of equity under IAS 32 as described above. Therefore, they are recorded under net assets attributable to unitholders. This classification is a result of the Priority Units having a contractual obligation requiring the delivery of taxable income to the Unitholders and the Ordinary Units being convertible to Priority Units. Accordingly, the Fund has no instruments qualifying for equity classification on its consolidated statements of financial position. Previously, the Fund s Priority Units and Ordinary Units were presented as equity and minority interest, respectively, under GAAP. Deferred financing fees IFRS requires that financial liabilities are measured net of total transaction costs that are directly attributable in the acquisition or issuance of the financial liability. The Fund had a policy under GAAP to expense transaction costs for the establishment of loan facilities fewer than two years in length. As a result, deferred financing fees recognized under IFRS related to the Bridge Facility are higher than under GAAP. Consolidation of the Manager IFRS requires that SPEs be consolidated when there is de facto control or when the activities of the SPE are being conducted on behalf of the reporting entity as described above. As a result, the Fund is required to consolidate the Manager when reporting under IFRS. All intra-group balances and income and expenses resulting from intra-group transactions are eliminated in full. Rehabilitation liability IFRS requires that the Fund use an appropriate current marketbased pre-tax discount rate in the calculation of the rehabilitation liability. As at January 1, 2010, this was a lower rate than what was used to calculate the liability under GAAP, resulting in a higher rehabilitation liability being recognized under IFRS. 62 ANNUAL REPORT 2011 NORANDA INCOME FUND

65 Notes to the Consolidated Financial Statements Consolidated Statement of Financial Position As at December 31, 2010 As at January 1, 2010 Canadian Effect of Canadian Effect of ($ thousands) GAAP Transition IFRS GAAP Transition IFRS Assets Non-current assets Property, plant and equipment 285, , , ,756 Deferred tax assets 2,145 2,145 1,957 1,957 Employee benefits 3,451 3,451 1,516 1,516 Derivative financial assets ,110 1, ,116 5, , ,866 3, ,339 Current assets Inventories 78,555 78, , ,875 Accounts receivable Trade 76, ,783 77, ,521 Xstrata Canada 34,203 (90) 34,113 8,270 (328) 7,942 Income taxes receivable Derivative financial assets 5,637 5,637 4,409 4,409 Derivative hedging instruments 242 (242) Prepaids and other assets 2, , Cash and cash equivalents 2, ,398 2, , , , , , ,235 5, , ,390 3, ,282 Liabilities Non-current liabilities Long-term firm commitments ,111 1,111 Rehabilitation liability 9,460 9,359 18,819 9,006 7,545 16,551 Employee benefits 10,618 10,618 8,060 8,060 Deferred tax liabilities 14,137 7,988 22,125 13,147 7,648 20,795 23,976 27,965 51,941 23,264 23,253 46,517 Current liabilities Accounts payable and accrued liabilities Trade 18,495 10,158 28,653 16,254 8,106 24,360 Xstrata Canada 47,556 (11,295) 36,261 72,477 (9,059) 63,418 Income taxes payable Derivative financial liabilities 3,587 3,587 Bank and other loans 191,455 (1,187) 190, , ,886 Firm commitments 3,499 3,499 4,112 4, ,005 (2,225) 258, ,316 (953) 303,363 Total liabilities excluding net assets attributable to unitholders and non-controlling interest 284,981 25, , ,580 22, ,880 Net assets attributable to unitholders and non-controlling interest 202,254 (19,857) 182, ,810 (18,408) 155,402 Net assets attributable to: Priority Unitholders 151,691 (12,303) 139, ,358 (11,395) 118,963 Ordinary Unitholders 50,563 (4,099) 46,464 43,452 (3,798) 39,654 Non-controlling interest (3,455) (3,455) (3,215) (3,215) 202,254 (19,857) 182, ,810 (18,408) 155,402 ANNUAL REPORT 2011 NORANDA INCOME FUND 63

66 Notes to the Consolidated Financial Statements Consolidated Statement of Financial Position As at December 31, 2010 Income Effect of ($ thousands) CEZ ARO Taxes Elimination Transition Assets Non-current assets Deferred tax assets 2,145 2,145 Employee benefits 3,451 3,451 5,596 5,596 Current assets Accounts receivable Trade Noranda Income Limited Partnership 3,837 (3,927) (90) Income taxes receivable Deferred tax assets (242) (242) Prepaids and other assets 5 5 Cash and cash equivalents ,366 (242) (3,837) 287 9,962 (242) (3,837) 5,883 Liabilities Non-current liabilities Rehabilitation liability 9,359 9,359 Employee benefits 10,618 10,618 Deferred tax liabilities 7,988 7,988 10,618 9,359 7,988 27,965 Current liabilities Accounts payable and accrued liabilities Trade 1,481 8,677 10,158 Xstrata Canada 1,219 (12,514) (11,295) Income taxes payable Bank and other loans (1,187) (1,187) Ordinary Unitholders interest (55,917) (55,917) 2,799 (60,941) (58,142) Priority Unitholders interest Priority Unitholders equity (209,272) (209,272) Deficit 62,935 62,935 (146,337) (146,337) Total liabilities excluding net assets attributable to unitholders and non-controlling interest 13,417 9,359 7,988 (207,278) (176,514) Net assets attributable to unitholders and non-controlling interest (3,455) (9,359) (8,230) 203, ,397 Net assets attributable to: Priority Unitholders (7,020) (6,173) 152, ,388 Ordinary Unitholders (2,339) (2,057) 50,860 46,464 Non-controlling interest (3,455) (3,455) (3,455) (9,359) (8,230) 203, , ANNUAL REPORT 2011 NORANDA INCOME FUND

67 Notes to the Consolidated Financial Statements Consolidated Statement of Financial Position As at January 1, 2010 Income Effect of ($ thousands) CEZ ARO Taxes Elimination Transition Assets Non-current assets Deferred tax assets 1,957 1,957 Employee benefits 1,516 1,516 3,473 3,473 Current assets Accounts receivable Trade Noranda Income Limited Partnership 3,965 (4,293) (328) Income taxes receivable Prepaids and other assets Cash and cash equivalents ,384 (3,965) 419 7,857 (3,965) 3,892 Liabilities Non-current liabilities Rehabilitation liability 7,545 7,545 Employee benefits 8,060 8,060 Deferred tax liabilities 7,648 7,648 8,060 7,545 7,648 23,253 Current liabilities Accounts payable and accrued liabilities Trade 3,012 5,094 8,106 Xstrata Canada (9,059) (9,059) Ordinary Unitholders interest (48,619) (48,619) 3,012 (52,584) (49,572) Priority Unitholders interest Priority Unitholders equity (191,273) (191,273) Deficit 66,082 66,082 (125,191) (125,191) Total liabilities excluding net assets attributable to unitholders and non-controlling interest 11,072 7,545 7,648 (177,775) (151,510) Net assets attributable to unitholders and non-controlling interest (3,215) (7,545) (7,648) 173, ,402 Net assets attributable to: Priority Unitholders (5,659) (5,736) 130, ,963 Ordinary Unitholders (1,886) (1,912) 43,452 39,654 Non-controlling interest (3,215) (3,215) (3,215) (7,545) (7,648) 173, ,402 ANNUAL REPORT 2011 NORANDA INCOME FUND 65

68 Notes to the Consolidated Financial Statements Consolidated Statement of Comprehensive Income Twelve months ended December 31, 2010 Canadian Effect of ($ thousands) GAAP Transition IFRS Revenues Sales 659, ,146 Transportation and distribution costs (16,141) (16,141) 643, ,005 Raw material purchase costs 371, ,559 Revenues less raw material purchase costs 271, ,446 Other expenses Production 177,278 (4,024) 173,254 Selling, general and administration 23,751 (2,147) 21,604 Foreign currency gain (1,240) (1,240) Gain on derivative financial instruments (5,427) (5,427) Depreciation of property, plant and equipment 33,709 33,709 Rehabilitation expense 692 1,106 1, ,763 (5,065) 223,698 Earnings before interest and income tax 42,683 5,065 47,748 Interest expense, net 13, ,423 Earnings before income tax 29,192 4,133 33,325 Current income tax expense Deferred income tax expense 748 1,919 2,667 Earnings attributable to Unitholders and Non-controlling interest 28,444 2,121 30,565 Finance costs distributions to Unitholders 17,999 17,999 Increase (decrease) in net assets attributable to Unitholders and Non-controlling interest 28,444 (15,878) 12,566 Other comprehensive income (loss) Actuarial loss on defined benefit pension plans (5,094) (5,094) Deferred income tax recovery (1,524) (1,524) (3,570) (3,570) Comprehensive income (loss) 28,444 (19,448) 8,996 Increase (decrease) in net assets attributable to: Priority Unitholders 21,333 (14,407) 6,926 Ordinary Unitholders 7,111 (4,801) 2,310 Non-controlling interest 3,330 3,330 28,444 (15,878) 12,566 Comprehensive income (loss) attributable to: Priority Unitholders 21,333 (14,407) 6,926 Ordinary Unitholders 7,111 (4,801) 2,310 Non-controlling interest (240) (240) 28,444 (19,448) 8, ANNUAL REPORT 2011 NORANDA INCOME FUND

69 Notes to the Consolidated Financial Statements Consolidated Statement of Comprehensive Income Twelve months ended December 31, 2010 Income Effect of ($ thousands) CEZ ARO Taxes Elimination Transition Revenues Sales 288 (288) Other expenses Production (4,024) (4,024) Selling, general and administration (448) (1,699) (2,147) Rehabilitation expense 1,106 1,106 (4,472) 1,106 (1,699) (5,065) Earnings before interest and income tax 4,760 (1,106) 1,411 5,065 Interest expense, net Earnings before income tax 4,760 (1,814) 1,187 4,133 Current income tax expense Deferred income tax expense 1, ,919 Earnings attributable to Unitholders and Non-controlling interest 3,330 (1,814) (582) 1,187 2,121 Finance costs distributions to Unitholders 17,999 17,999 Increase (decrease) in net assets attributable to Unitholders and Non-controlling interest 3,330 (1,814) (582) (16,812) (15,878) Other comprehensive income (loss) Actuarial loss on defined benefit pension plans (5,094) (5,094) Deferred income tax recovery (1,524) (1,524) (3,570) (3,570) Comprehensive income (loss) (240) (1,814) (582) (16,812) (19,448) Increase (decrease) in net assets attributable to: Priority Unitholders (1,361) (436) (12,610) (14,407) Ordinary Unitholders (453) (146) (4,202) (4,801) Non-controlling interest 3,330 3,330 3,330 (1,814) (582) (16,812) (15,878) Comprehensive income (loss) attributable to: Priority Unitholders (1,361) (436) (12,610) (14,407) Ordinary Unitholders (453) (146) (4,202) (4,801) Non-controlling interest (240) (240) (240) (1,814) (582) (16,812) (19,448) ANNUAL REPORT 2011 NORANDA INCOME FUND 67

70 Notes to the Consolidated Financial Statements Consolidated Statement of Cash Flows Year ended December 31, 2010 Canadian Effect of ($ thousands) GAAP Transition IFRS Operating activities Comprehensive income 28,444 (19,448) 8,996 Adjustments: Depreciation of property, plant and equipment 33,709 33,709 Net change in rehabilitation liability 454 1,814 2,268 Deferred income tax expense ,142 Gain on derivative financial instruments (2,165) (2,165) Change in fair value of embedded derivatives 2,501 2,501 Accretion on bank and other loans 720 1,324 2,044 Write-down of inventory 1,144 1,144 Loss on sale of assets 1,385 1,385 Non-cash finance costs 17,999 17,999 Net change in employee benefits ,940 2,706 69,646 Net change in non-cash working capital items (25,997) (15) (26,012) Cash provided by operating activities 40,943 2,691 43,634 Investing activities Purchase of property, plant and equipment (24,194) (24,194) Proceeds from sale of property, plant and equipment Proceeds from government assistance Cash used in investing activities (23,788) (23,788) Financing activities Proceeds from bank debt issued 527, ,283 Bank debt issue costs (3,750) (2,511) (6,261) Repayment of bank debt (387,184) (387,184) Repayment senior secured notes (153,500) (153,500) Cash provided by (used in) financing activities (17,151) (2,511) (19,662) Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at January 1 2, ,214 Cash and cash equivalents at end of period 2, , ANNUAL REPORT 2011 NORANDA INCOME FUND

71 Corporate Information Transfer Agent and Registrar Processing Facility Canadian Electrolytic Zinc Noranda Operating Trust Inquiries regarding change of Canadian Electrolytic Zinc Limited, Noranda Income Trustees address, unit transfers, distributions Limited Fund s Manager Manuel Álvarez Dávila 3 or lost certificates should be directed 860, Gérard-Cadieux Boulevard Jean Pierre Ouellet 1,2 to our Registrar and Transfer Agent: Salaberry-de-Valleyfield, Officers François R. Roy 1,2 Computershare Trust Company Québec Manuel Álvarez Dávila Bob Sippel 3 of Canada Canada J6T 6L4 Chief Executive Officer John J. Swidler, Chair 1, University Street Barry Tissenbaum 1,2 Suite 700 Contact Eva Carissimi John Whyte 3 Montreal, Québec Michael Boone Vice President, Operations Canada H3A 3S8 Vice President and Chief and General Manager 1 Member of the Audit Committee Tel: Financial Officer 2 Member of the Governance and (North America) Canadian Electrolytic Zinc Michael Boone Human Resources Committee [email protected] Limited Vice President and 3 Related to Xstrata PLC Head Office Noranda Income Fund s Manager Chief Financial Officer Exchange Listing 100 King Street West Tel.: Reid Bowlby TSX: NIF.UN First Canadian Place Vice President, Marketing Suite 6900, P.O. Box 403 Toronto, Ontario Canada M5X 1E3 Tel: Fax: [email protected] [email protected] Auditors Ernst & Young, LLP Chartered Accountants Montreal, Québec Ginette Berthel Corporate Secretary Annual Meeting of Unitholders Will be held at 1:00 p.m. on May 15, 2012 at the TSX Broadcast & Conference Centre, The Exchange Tower, 130 King Street West, Toronto, Ontario M5X 1J2, in the Gallery Room. UNIT TRADING INFORMATION Date Open High Low Close Volume Traded 2011 Q1 $ 4.62 $ 5.40 $ 3.75 $ ,399, Q2 $ 5.00 $ 5.80 $ 4.25 $ ,536, Q3 $ 4.69 $ 6.01 $ 4.69 $ ,144, Q4 $ 5.25 $ 5.85 $ 4.29 $ ,060, Q1 $ 2.54 $ 3.95 $ 2.40 $ ,202, Q2 $ 2.99 $ 3.00 $ 2.11 $ ,202, Q3 $ 2.45 $ 5.10 $ 2.30 $ ,663, Q4 $ 5.10 $ 5.45 $ 3.90 $ ,572,397

72 13MAR King Street West Cover Photo Credits First Canadian Place Suite 6900, P.O. Box 403 Toronto, ON M5X 1E3 Tel: Fax: Processing Facility and loading docks on Beauharnois Canal 2 Operators inspecting acid plant tower 3 Zinc shot produced for electro-galvanizing 4 Zinc jumbos produced for the steel mills