At the annual general meeting of unit holders of Noranda Income Fund held on June 14th 2011 in Toronto, a number of questions were raised relating to Xstrata's intentions in respect of the Fund. The following announcement sets out Xstrata's response for the benefit of all unitholders in the Fund.
Expiry of Xstrata supply contract;
Xstrata has no current intention to continue to supply the Processing Facility beyond the expiry of the Supply and Processing Agreement on May 3rd 2017.
The fundamentals of the zinc concentrate market have changed significantly since the Supply Agreement was entered into. Substantial processing capacity exists and continues to be constructed in China. The introduction of lower cost competition has resulted in overcapacity in global smelting and refining and depressed treatment charges. Market rates for treatment charges have remained well below the charges earned by the Fund under the Supply Agreement for the last several years. Analysis undertaken by independent industry analysts and by Xstrata indicates that treatment charges will remain at low levels due to increased competition for a declining supply of zinc concentrates.
The continued operation of the Processing Facility following the expiry of the Xstrata supply arrangement will require that the Fund secure alternative sources of zinc concentrate in a potentially highly competitive and more costly environment. This is likely to result in a significant reduction in the Fund's profitability.
Potential alternative sources of supply;
Xstrata Zinc's recent agreement to acquire the Hackett River and Wishbone exploration properties in Nunavut from Sabina Gold and Silver Corporation is unrelated to its interest in the Fund. Xstrata did not acquire these properties with an intent to supply the Processing Facility. Any zinc production from these properties is expected to be directed to purchasers that will provide Xstrata with the most competitive prices for such supply.
Closure provisioning and debt amortization;
The expiration of the Supply Agreement in 2017 and the possibility that the Fund may not be able to secure alternative sources of zinc concentrate on profitable terms present a risk that the Processing Facility may have to cease operations. On closure, the Fund would face significant liabilities relating to decommissioning, land reclamation and rehabilitation and employee severance and pension costs, without an ongoing business which could fund these costs.
Given the above, it is Xstrata's view that the refinancing of the Fund's debt should provide for substantial debt amortization prior to 2017. While such amortization would have a significant impact on the Fund's distributions to unit holders, Xstrata believes that appropriate reduction of outstanding debt by 2017 is important in order to ensure that the Fund's obligations to all stakeholders are met.
