NIF NIF AR ENG final.pdf · Xstrata Canada Corporation (“Xstrata Canada”) under an agreement that will last until 2017. The Fund is paid a processing fee for refining the zinc,

Noranda Income Fund Annual Report 2009

NIF.UN

Noranda Income Fund (“Fund”) is an income trust

whose units trade on the TSX under the symbol “NIF.

UN”. The Fund owns the CEZinc processing facility

(“the Processing Facility”) located in Salaberry-de-

Valleyfield, Québec. CEZinc is the second-largest zinc

processing facility in North America and the largest

zinc processing facility on the Eastern Seaboard,

where the majority of its customers are located. Zinc

concentrate is supplied to the Processing Facility by

Xstrata Canada Corporation (“Xstrata Canada”) under

an agreement that will last until 2017. The Fund is

paid a processing fee for refining the zinc, and it earns

additional revenue through zinc metal premiums,

byproduct credits and metal recovery gains. The

Fund’s primary objective is to provide stable, monthly

distributions.

Contents

Letter to Unitholders

MD&A

Management’s Responsibility

and Auditors’ Report

Financial Statements

Notes to Financial

Statements

Corporate Information* All dollar amounts are in Canadian dollars, unless otherwise stated.

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2

23

24

27

IBC

ANNUAL REPORT 2009 NORANDA INCOME FUND 1

Letter to Unitholders

Dear Unitholders,

2009 was a challenging year for the Noranda Income Fund (“Fund”). Market conditions deteriorated rapidly in the first half of the year and this impacted our financial and operating results as well as our distributions. For 2009, the Fund reported a net loss of $3.3 million, compared to net earnings of $27.7 million in 2008. What was surprising about the downturn was how quickly it happened and how far demand dropped. For example, steel capacity utilization in North America fell from around 90% in August/September of 2008 to just over 40% in March of 2009. A similar trend was witnessed in other industries. The situation was exacerbated by the fact that in response to the drop in demand, our consumers began destocking both raw materials and finished products. In response to these market conditions, the Fund took a number of steps to maintain liquidity and a strong balance sheet.

• Production at the Processing Facility was reduced to 80% of normal operating capacity from March until the end of September because of the significantly reduced demand from our sulphuric acid customers and limited storage capacity within the industry.

• The monthly distribution to Priority Unitholders was reduced to 4 cents a month in February. The subordination feature was triggered, and since then, the Ordinary Unitholders have not received a monthly distribution. In July, the distribution to Priority Unitholders was suspended as well.

• A program to reduce labour costs was put in place in March at the Processing Facility.

In spite of these challenges, the Fund had a number of achievements:• Zinc slab capacity was expanded to provide for more

commercial flexibility. With two lines now available, the Fund has the possibility to produce up to 75% of its annual output as zinc slab. As a result, it is in a better position to make spot sales and manage inventories.

• Inventories of zinc metal were reduced in 2009 by 15,300 tonnes due to improved customer orders in the second half of the year and increased production flexibility from the slab capacity expansion.

• The Fund was able to reduce labour costs by $7.7 million as a result of the initiatives introduced in March.

• In the fourth quarter, the Fund received the support of its lending syndicate in order to amend the Revolving Facility to address potential covenant breaches.

Market conditions picked up in the second half of 2009, with improved demand and restocking by our consumers being the main drivers. The Processing Facility returned to normal operating capacity in October. The improved market conditions are expected to continue in 2010. In spite of these favourable trends, the Fund still faces some challenges, such as low zinc premiums and a stronger Canadian dollar. The Fund is also preparing to renew both its Revolving Facility and its senior secured notes that expire on May 3, 2010 and December 20, 2010, respectively. Management has commenced discussions with its lenders to renew its existing credit facilities. The board of trustees will continue to assess these factors, including the progress on the refinancing of the debt, as they consider any change to the distribution policy. At this point in time, the monthly cash distribution remains suspended. On January 1, 2011, income trusts will become taxable. The Fund is studying the best structure for unitholders going forward. The options include, amongst others, converting to a corporation or remaining as an income trust. In light of the upcoming new tax legislation on income trusts and the recent economic events, the board created an Independent Committee to consider structure and strategic options available to the Fund. In closing, my sincere thanks to our employees, board of trustees and unitholders for their continued support and confidence.

Mario ChapadosPresident and Chief Executive OfficerCanadian Electrolytic Zinc LimitedThe Noranda Income Fund’s Manager

2 NORANDA INCOME FUND ANNUAL REPORT 2009

Management’s Discussion and Analysis

The Management’s Discussion and Analysis (“MD&A”) is the responsibility of management and has been prepared as of March 12, 2010. The board of trustees carries out its responsibility reviewing this disclosure principally through its audit committee and it approves this disclosure prior to its publication.

This MD&A provides a review of the performance of the Noranda Income Fund and its subsidiaries (the “Fund”), the Noranda Operating Trust (the “Operating Trust”) and the Noranda Income Limited Partnership (the “Partnership”) for the years ended December 31, 2009 and 2008. It should be read in conjunction with the Fund’s audited consolidated financial statements and notes to those statements. All financial information has been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). All amounts are expressed in Canadian dollars, the Fund’s reporting currency, except where indicated.

Additional information regarding the Fund, including the Fund’s Annual Information Form, is available on SEDAR at www.sedar.com.

This MD&A contains Forward-looking Information. See “Forward-looking Information” below.

OVERVIEW

The Fund is an unincorporated open-ended trust, established under the laws of Ontario, whose units trade on the Toronto Stock Exchange (“TSX”) under the symbol “NIF.UN”. The Fund was created to acquire Xstrata Canada Corporation’s (formerly Falconbridge Limited) CEZinc Processing Facility (the “Processing Facility”), located in Salaberry-de-Valleyfield, Québec. Xstrata Canada Corporation (“Xstrata Canada”) is a wholly owned subsidiary of Xstrata plc. The Processing Facility produces refined zinc metal and various byproducts from zinc concentrate purchased from mining operations and it sells refined zinc products to customers in the open market. The Fund earns a processing fee for processing the zinc concentrate into zinc metal and it earns additional revenue from premiums, byproduct 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. A board of trustees, the majority of whom are independent from Xstrata Canada, oversees the Fund.

Long-Term StrategyThe primary objective of the Fund is to provide stable, monthly cash distributions to its unitholders. Canadian Electrolytic Zinc Limited (the “Manager”), a wholly owned subsidiary of Xstrata Canada, aims to achieve the Fund’s objectives by maximizing zinc metal production and byproduct revenues, increasing zinc recoveries and continuing to develop premium zinc products, as well as continuing to minimize unit costs. The Fund’s ability to provide stable, monthly cash distributions is subject to various risks and assumptions. See “Forward-looking Information” below. There are two unique attributes that support the objectives of the Fund. The first is the Supply and Processing Agreement, and the second is the subordination feature. Pursuant to the Supply and Processing Agreement which expires in 2017, Xstrata Canada is obliged to sell to the Processing Facility up to 550,000 tonnes of zinc concentrate annually 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. In 2009, the Processing Facility processed 447,000 tonnes of zinc concentrate, which is 103,000 tonnes below the Supply and Processing Agreement’s maximum level. While the Fund is focused on processing the maximum concentrate supply under the Agreement, the Processing Facility operated at 80% capacity for seven months in 2009 because of the weakness in the sulphuric acid market. Going forward, the Fund believes that certain capital expenditures incurred to de-bottleneck the Processing Facility should improve the operating performance. Closing the gap to 550,000 tonnes will increase revenue from the processing fee, zinc premiums and byproducts, while expenses associated with the higher production will only be variable costs. Xstrata Canada has subordinated itself in terms of the Fund’s distribution. The Priority Units1 always get paid before the Ordinary Units2. Distributions to the Ordinary Units will only be made once the Priority Units have received their Base

1 Priority Units of the Noranda Income Fund are listed on the TSX under the symbol of NIF.UN. There were 37,497,975 units outstanding at December 31, 2009, representing a 75% economic interest in the Fund.

2 Ordinary Units outstanding at December 31, 2009 were 12,500,000, representing a 25% economic interest in the Fund. Ordinary Units, held by Xstrata Canada, are subordinated to the Priority Units. They are not transferable and will be exchangeable for Priority Units on a one-for-one basis only after May 2, 2017, or upon the occurrence of certain events.


Distribution of $0.08333 per month. The subordination feature lasts until 2017, enhancing the stability of the distributions for the Priority Units and aligning the interests of the Fund and Xstrata Canada. From the inception of the Fund in May 2002 until January 2003, distributions were made at the base level. In February 2003, the Fund increased the monthly distribution to $0.085 per month and this continued until January 2009. From the inception of the Fund until January 2009, distributions were made on an equal basis to both the Ordinary and Priority Unitholders. 2009 began with some of the toughest market conditions the Fund has ever seen. What was surprising about the downturn was how quickly it happened and how far demand dropped. Prices for all of the Fund’s products as well as zinc premiums were negatively impacted. In response to these market conditions, the Fund took a number of steps to maintain liquidity and a strong balance sheet, including reducing the monthly distribution. From February to June 2009, the distribution to Priority Unitholders was reduced to 4 cents per unit. The subordination feature was triggered, and since then, the OrdinaryUnitholders have not received a monthly distribution. As at December 31, 2009, the accumulated distribution deficiency on the Ordinary Units totalled $2.5 million. In July 2009, the Fund suspended distributions to the Priority Unitholders as well. Market conditions improved in the second half of 2009. This trend is expected to continue in 2010. In spite of these favourable trends, the Fund still faces some challenges, such as low zinc premiums and a stronger Canadian dollar. The Fund is also preparing to renew both its Revolving Facility and its senior secured notes that expire on May 3, 2010 and December 20, 2010, respectively. The board of trustees will continue to assess these factors, including the progress on the debt refinancing, as they consider any change to the distribution policy. At this point in time, the monthly cash distribution remains suspended.

Structure of the Fund in 2011On January 1, 2011, income trusts will become taxable. The Fund is studying the best structure for unitholders going forward. The options include, amongst others, converting to a corporation or remaining as an income trust. In light of the upcoming new tax legislation on income trusts and the recent economic events, the board created an Independent Committee to consider structure and strategic options available to the Fund.

2009 Highlights• Zinc slab capacity was expanded to provide for more

commercial flexibility. With both lines running, the Fund has the possibility to produce up to 75% of its annual output as

zinc slab. As a result, it is in a better position to make spot sales and manage inventories.

• Inventories of zinc metal were reduced in 2009 by 15,300 tonnes due to improved customer orders and increasedproduction flexibility from the slab capacity expansion.

• The Fund realized labour costs savings of $7.7 million as a result of the initiatives introduced in March to cut manpower costs. This result is slightly better than the previously estimated labour cost savings of $7.5 million.

• In the fourth quarter, the Fund received the support of its lending syndicate in order to amend the Revolving Facility to address potential covenant breaches.

CURRENT MARKET CONDITIONS

Data from the Purchasing Manager’s Index (“PMI) survey for December 2009 suggested that manufacturing activity started in 2010 with momentum. PMI Indices for all the major economies strengthened in December above the expansion index level of 50. The trend seen in the PMI indices has also been reflected in the Fund’s sales. In recent months, customers have been restocking and supply chains are being replenished. The steel industry, which is the major consumer of zinc in the United States, has seen steady improvement with capacity utilization running at the 65% level compared to a 44% average in the first half of 2009. The improvement is due to the momentum carried forward from government programs, such as the Cash for Clunkers car trade-in incentives, as well as the restocking of the supply pipeline which was virtually depleted during the first half of the year. Looking at 2010, the withdrawal of the stimulus measures in the developed economies and fiscal tightening in China are the two main variables of uncertainty. Manufacturing activity is improving, but not across all sectors. Within North America: • Automotive sales are steady at the 11 million per year level;

however, non-residential construction is slowing. Customers remain cautious on commitments for 2010, adding to their orders only as new business materializes.

• The improvement in sulphuric acid demand that occurred in the second half of 2009 has continued into 2010. This trend is being supported by:• higher U.S. Gulf spot sulphur prices,• higher industrial demand and • the continuation of the strike at Vale Inco’s Sudbury

operations.



SELECTED FINANCIAL INFORMATION

The following table summarizes selected financial information for the past three years:

($ millions, except per-unit amounts) 2009 2008 2007

Revenues $ 468.9 $ 600.7 $ 985.3Revenues less raw material purchase costs $ 215.6 $ 297.6 $ 262.8Net earnings before income taxes $ (3.3) $ 27.7 $ 40.5Net earnings $ (3.3) $ 27.7 $ 27.4Net earnings per Priority Unit (basic and diluted) $ (0.09) $ 0.74 $ 0.73Total assets $ 501.4 $ 467.6 $ 538.0Long-term debt $ 207.9 $ 196.6 $ 240.3Distributions declared per Priority Unit $ 0.285 $ 1.02 $ 1.02Distributions declared per Ordinary Unit $ 0.085 $ 1.02 $ 1.02

RESULTS OF OPERATIONS

As a result of the weakness in the sulphuric acid market, the Processing Facility operated at 80% capacity utilization for seven months in 2009, and this negatively impacted both the financial and operational results. The net loss for the year totalled $(3.3) million, compared to net earnings of $27.7 million in 2008. The $31.0 million decrease was mainly due to lower production, sales, byproduct revenues and premiums, partially offset by lower interest expense, reclamation recovery and a weaker Canadian dollar.• Sales in 2009 were $483.2 million, compared to $619.8

million in 2008. The 22% decrease in sales was the result of lower sales volumes and prices for all of the Fund’s products and lower premiums. Zinc sales in 2009 were 243,969 tonnes compared to 258,665 tonnes in 2008. Zinc prices in 2009 averaged US$0.75 cents per pound compared to US$0.85 per pound in 2008. • Byproduct revenues from sulphuric acid and copper in

cake decreased to $27.6 million in 2009 from $46.7 million in 2008. The decrease was due to a lower sulphuric acid netback and copper price as well as lower sales volumes of sulphuric acid and copper in cake, partially offset by a negative provisional pricing adjustment to fourth quarter 2008 copper revenues.

• In 2009, the Fund realized zinc premiums of 3.5 cents US per pound, down from 5.7 cents US per pound in 2008 due to lower 2009 contract premiums and

slower spot business. The first half of 2009 was particularly challenging as customers focussed on reducing their inventories of raw materials and finished product. The situation was further complicated by a collapse in demand from the steel sector for the Fund’s jumbo product, and the Processing Facility’s limited ability to produce zinc slab, an LME deliverable product. In the first quarter of 2009, the Fund decided to increase its zinc slab casting capacity to provide for more commercial flexibility.

• Transportation and distribution costs in 2009 of $14.3 million were lower than the $19.1 million recorded in 2008. Lower zinc metal shipment volumes and transportation rates explain the decrease.

• Raw material purchase costs in 2009 decreased to $253.3 million from $303.2 million in 2008. The decrease was due to lower average zinc metal prices and purchases of concentrate.

• Net Revenues in 2009 were $215.6 million, compared to $297.6 million in 2008. The $82.0 million decrease was due to lower sales volumes, byproduct revenues and premiums, partially offset by the impact of a weaker Canadian dollar.

• Production costs in 2009 were $165.7 million, $10.0 million lower than the $175.7 million recorded in 2008. Production from March until the end of September ran at 80% of the 2008 level, resulting in lower energy and operating supplies costs. Labour costs were $7.7 million lower as a result of the initiatives introduced in March to cut manpower costs. This result is slightly better than the previously estimated labour cost savings of $7.5 million. Production costs in 2009 increased by $10.2 million as a result of a higher inventory drawdown during 2009 compared to 2008.

Production Cost Breakdown Increase/ ($ millions) 2009 2008 (Decrease)

Labour 55.4 63.1 (7.7)Energy 57.9 64.0 (6.1)Operating supplies 31.9 35.6 (3.7)Other 12.5 15.2 (2.7)Production cost before changes in inventory 157.7 177.9 (20.2)Change in inventory 8.0 (2.2) 10.2 165.7 175.7 (10.0)

• Selling, general and administration costs in 2009 were $17.6 million, compared to $18.0 million in 2008.

• The foreign exchange gain in 2009 was $9.6 million,


compared to a loss of $17.9 million in 2008. The foreign exchange gain was a result of a strengthening Canadian dollar on the Fund’s net US dollar monetary liability. The foreign exchange gain was largely offset by a decrease in the value of in-process and finished inventory. The decrease in the value of inventory is realized in Net Revenues as the metal is sold to customers (thereby decreasing the Net Revenue recorded by the Fund). See “Risks and Uncertainties” below.

• In 2009, the commodity financial instrument loss was $3.0 million and the commodity hedging gain was $0.2 million. During the period, the change in the market value of the Fund’s financial instruments resulted in these amounts being recorded.

• In 2009, amortization was $36.0 million, compared to $32.8 million in 2008. The increase in amortization was due to the higher drawdown in zinc metal inventory during 2009 compared to 2008, as amortization that was previously recorded in inventory was realized upon the sale of the zinc metal.

• In 2009, the reclamation recovery was $3.6 million, compared to an expense of $1.2 million which was recorded in 2008. During the second quarter of 2009, a review of the site restoration and reclamation expenditures was completed by the Fund, including work from a third-party engineering firm. The revisions are subject to approval by the Québec Minister of Natural Resources. The recovery was due to a decline in the expected future reclamation spending, which has resulted in a reduction in the present value of future site restoration and reclamation liabilities.

The sources of the reduced reclamation spending came from the following items:

• The Fund identified opportunities to recycle some of the residues from the operations, therefore, reducing the amount of residues that need to be treated; and

• The projected life of some of the residue ponds was extended by optimizing their storage capacity, thereby deferring the timing of future capital expenditures.

• In 2009, net interest expense was $11.1 million compared to $13.7 million in 2008. The decrease in interest expense was due to lower variable interest rates.

• Minority interest in earnings of subsidiaries in 2009 was a credit of $1.1 million, compared to an expense of $9.2 million in 2008. The decline was due to the Fund’s lower earnings in 2009.

SUMMARY OF QUARTERLY RESULTS

The following table provides a summary of quarterly results for the past two years:

($ millions, except per-unit amounts and production amounts)

2009 Q1 Q2 Q3 Q4

Revenues $ 102.5 $ 82.6 $ 128.7 $ 155.1Net earnings (loss) (2.7) (0.7) (1.3) 1.4Net earnings (loss) per Priority Unit (basic and diluted) $ (0.07) $ (0.02) $ (0.04) $ 0.04Production (tonnes) 58,080 53,062 51,871 65,587

2008 Q1 Q2 Q3 Q4

Revenues $ 162.7 $ 189.6 $ 138.2 $ 110.2Net earnings (loss) 6.2 3.7 10.2 7.6Net earnings (loss) per Priority Unit (basic and diluted) $ 0.17 $ 0.10 $ 0.27 $ 0.20Production (tonnes) 64,060 67,355 63,676 69,140

Fourth-Quarter 2009 ResultsThe Fund reported net earnings of $1.4 million for the fourth quarter of 2009, compared to $7.6 million in the same quarter a year ago. The $6.2 million decrease was mainly due to lower zinc metal production, premiums and byproduct revenues, higher amortization and a stronger Canadian dollar partially offset by, lower interest expense and a commodity financial instrument and foreign exchange gain. Revenues in the fourth quarter of 2009 were $155.1 million up from the $110.2 million recorded in the same quarter of 2008. Much of this increase was due to a higher average quarterly zinc price (US $1.00 in the fourth quarter of 2009 compared to US $0.54 in the fourth quarter of 2008). In the fourth quarter of 2009, zinc metal production was 65,587 tonnes, compared to 69,140 tonnes in the same quarter of 2008. Zinc recoveries were higher in the fourth quarter of 2009 at 97.4%, compared to 95.8% in the same quarter a year ago. Zinc metal is used in a wide range of industries. Its major use, which accounts for 50% of the total zinc metal consumption in North America, is in the production of galvanized steel. The improvement in consumer demand that was witnessed in the third quarter continued into the fourth quarter. Stronger orders came from the automotive and construction sectors, and from inventory rebuilding after they were depleted during the first half of 2009. Fourth quarter 2009 sales were 65,337 tonnes versus 57,202 tonnes in the fourth quarter of 2008.



Zinc metal premiums were 3.7 cents US per pound in the fourth quarter of 2009, compared to 4.1 cents US per pound in the same quarter of 2008 due to lower contract premiums. In the fourth quarter of 2009, the Fund generated $6.6 million in revenue from the sale of its copper in cake and sulphuric acid, compared to $10.5 million in the fourth quarter of 2008. Revenues from the sale of sulphuric acid were $2.6 million, down from $9.9 million in the fourth quarter of 2008 as a result of lower netbacks and sales volumes. Copper revenues were $3.6 million compared to $0.3 million in the fourth quarter of 2008 as a result of higher copper prices in the fourth quarter 2009 and a negative provisional pricing adjustment to fourth quarter 2008 revenues. Copper in cake sales volumes in the fourth quarter of 2009 totalled 520 tonnes compared to 935 tonnes in the same period of 2008. Cash realized from operations, before net change in non-cash working capital items in the fourth quarter of 2009 was $16.9 million compared to $22.3 million in the fourth quarter of 2008. During the fourth quarter of 2009, non-cash working capital increased by $12.8 million. The increase in working capital resulted from increases in accounts receivable and inventory, partially offset by an increase in accounts payable and accrued liabilities. The increases resulted from the increase in the price of zinc during the quarter. Capital expenditures in the fourth quarter of 2009 were $5.9 million, compared to $12.0 million in the fourth quarter of 2008. Regular maintenance accounted for almost all of the expenditures in the quarter. There were no distributions paid to unitholders during the 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 2009, the processing fee accounted for 81% of the Fund’s Net Revenues (2008 – 76%). The second 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 2009, product premiums accounted for 4% of the Fund’s Net Revenues (2008 – 6%). The sale of byproducts (copper in cake and sulphuric acid) and zinc metal recovery gains generated 12% and 3%, respectively, of the Fund’s Net Revenues in 2009 (2008 – 15% and 3%). The Canada/US exchange rate also impacts upon the Fund’s performance through premiums, byproduct revenues and zinc

recovery gains which, collectively, represented 19% of the Net Revenues in 2009 (2008 – 24%). As the processing fee is earned in Canadian dollars, 81% of the Fund’s Net Revenues are not exposed to currency risk. Two other performance drivers that impact upon the Fund are managing costs and a disciplined use of capital. The following table provides a summary of the key performance drivers for the past two years:

Year 2009 2008

Zinc metal production (tonnes) 228,600 264,231Zinc metal sales (tonnes) 243,969 258,665Zinc concentrate processed (tonnes) 447,059 508,008Zinc recovery (%) 97.5 97.4Processing fee (cents/pound) 38.0 37.5Zinc metal premiums (US$/pound) 0.035 0.057Byproduct revenues ($ millions) 27.6 46.7Copper in cake production (tonnes) 3,054 3,448Copper in cake sales (tonnes) 2,378 3,531Sulphuric acid production (tonnes) 372,156 422,905Sulphuric acid sales (tonnes) 359,909 426,112Average LME zinc price (US$/pound) 0.75 0.85Average LME copper price (US$/pound) 2.34 3.16Sulphuric acid netback (US$/tonne) 31 60Average US/Cdn. exchange rate 1.14 1.07

Historically, the Fund provided annual guidance for a number of its key performance drivers, including production, sales, processing fee, premiums and capital expenditures, to advance its long-term goals and drive results. In 2009, management found that it was unable to predict those variables given the uncertainty around the duration and depth of the global crisis. As a consequence, annual guidance was only provided for capital expenditures and the processing fee.

Productive Capacity The productive capacity of the Processing Facility corresponds mainly to the number of tonnes of zinc concentrate that can be processed annually. Concentrate grade can also have an impact on productive capacity. The Fund has processed the following amounts of zinc concentrate over the last 5 years:

2005 524,233 tonnes2006 527,178 tonnes2007 513,717 tonnes2008 508,008 tonnes2009 447,059 tonnes

While the annual productive capacity in 2009, under normal operating conditions, was 515,000-535,000 tonnes of zinc concentrate, the Processing Facility only treated 447,000 tonnes


due to the fact that it ran at 80% of the normal operating level for seven months of the year. The Fund continues to believe that the Supply and Processing Agreement will provide sufficient concentrate to run the Processing Facility at its productive capacity. In 2010, the bulk of the zinc concentrate will come from five mines: Brunswick, Antamina, Perseverance, Kidd Creek and Duck Pond. Four out of the five mines are owned or partly-owned by Xstrata, and all are operating today. Starting in 2010, the Processing Facility will begin a project to replace the liners protecting the concrete walls in the cell house. The project is expected to take 3 to 4 years and it can be done without having to stop production. The program requires two cells to be off-line at any time, thereby reducing availability by approximately 2%. As a result, effective annual capacity will drop from 515,000-535,000 tonnes to 505,000-524,000 tonnes of zinc concentrate. In spite of this program in 2010, the Processing Facility is expected to operate at a higher level than what was achieved in 2009. When the project is completed, the Fund is expected to be in a position that should allow it to take advantage of the maximum concentrate supply of 550,000 tonnes under the Supply and Processing Agreement. Processing the maximum supply of concentrate will increase processing fees, and revenues from zinc premiums and byproducts. The target for productive capacity is subject to various risks and uncertainties. The assumptions for them can be found in the “Forward-looking Information” below.

Production Production in 2009 was 228,600 tonnes compared to 264,231 tonnes in 2008. Production was lower than 2008 due to the fact that the Processing Facility ran at 80% of the normal operating level for seven months in 2009. In the past few years, management has undertaken a series of revenue-generating projects that would increase capacity in different parts of the Processing Facility. One of the projects addressed how to improve zinc recoveries. In 2009, recoveries were higher at 97.5% compared to 97.4% in 2008.

Sales Sales in 2009 were 243,969 tonnes compared to 258,665 tonnes in 2008. The drop in sales in 2009 is directly related to the lower level of production and weak market conditions. Inventories of zinc metal were reduced by 15,300 tonnes during 2009. In 2009, zinc slab capacity was expanded to provide for more commercial flexibility. With both lines running, the Fund has the possibility to produce up to 75% of its annual output as zinc slab. As a result, it is in a better position to make spot sales and manage inventories.

Processing Fee In 2009, the processing fee was 38.0 cents per pound, compared to 37.5 cents per pound in 2008. The processing fee is adjusted annually by (i) upward by 1% and (ii) upward or downward by 10% of the year-over-year percentage change in the average cost of electricity per megawatt hour for the Processing Facility. Based on the annual 1% increase and the average increase in electricity costs, the processing fee for 2010 is expected to be 38.5 cents per pound.

Premiums Premiums also came under pressure in 2009, averaging 3.5 cents US per pound compared to 5.7 cents US per pound in 2008. The decrease in realized premiums reflects lower annual contract premiums, and lower spot premiums on the sale of an inventory of jumbos that was liquidated in the first quarter of the year.

Byproducts The Fund produces copper in cake and sulphuric acid as byproducts from refining zinc concentrates. In 2009, the Fund generated $27.6 million in revenue from the sale of copper in cake and sulphuric acid, compared to $46.7 million in 2008. Byproduct revenues were lower in 2009 because of lower volumes and prices than in 2008.

Copper in CakeIn 2009, the Fund generated $13.7 million in Net Revenues from the sale of its byproduct copper in cake compared to $17.6 million in 2008. The $3.9 million decrease was due to lower copper prices and sales volumes, partially offset by a negative provisional pricing adjustment to fourth quarter 2008 revenues. LME copper prices in 2009 averaged US$2.34 per pound, compared to US$3.16 per pound in 2008. In 2009, a 10 cent US change in the price of copper impacts the Fund’s cash available for distribution by approximately US$0.7 million on an annual basis.

Sulphuric AcidThe fundamentals for sulphuric acid declined sharply in the first half of 2009 as demand slowed dramatically and customers destocked both raw materials and final products. The market improved in the second half of 2009, but not to the level witnessed in 2008. As a result of the weakness in sulphuric acid demand and the lack of storage capacity at the Processing Facility, the Processing Facility operated at 80% capacity utilization for seven months in 2009, and this impacted both the financial and operational results. Net Revenues in 2009 fell by roughly 50% to $13.0 million from $27.5 million in 2008, because of lower netbacks (US$31 per tonne in 2009 compared to US$60 per tonne in 2008) and lower sales volumes (359,909 tonnes in 2009 compared to 426,112 tonnes in 2008).



The following table provides a summary of the sulphuric acid production, sales, selling price and netback for the years 2009 and 2008:

2009 2008

Sulphuric acid production (tonnes) 372,156 422,905Sulphuric acid sales (tonnes) 359,909 426,112Average pool selling price (US$/tonne) 88 117Sulphuric acid netback (US$/tonne)1 31 60

1 after deduction for selling and transportation costs and reseller profit

Exchange Rate A stronger Canadian dollar has a negative impact on the Fund’s financial results. In 2009, a one-cent Canadian strengthening in the average Canadian/US exchange rate would have negatively impacted the Fund’s annual cash available for distribution by approximately $0.5 million.

Costs Production costs include labour, energy, supplies and other costs directly associated with the production process. Production costs in 2009 were $165.7 million, $10.0 million lower than the $175.7 million recorded in 2008. Production from March until the end of September ran at 80% of the 2008 level, resulting in lower energy and operating supplies costs. Labour costs were $7.7 million lower as a result of the initiatives introduced in March to cut manpower costs. This result is slightly better than the previously estimated labour cost savings of $7.5 million. Production costs in 2009 increased by $10.2 million as a result of a higher inventory drawdown during 2009 compared to 2008.

Capital Expenditures Capital spending was on budget at $24.0 million in 2009 and this compares to $28.4 million in 2008. A total of $18.0 million was spent on sustaining capital and an additional $6.0 million was spent on revenue-generating projects.

Operating Cash Flows Cash realized from operations, before net change in non-cash working capital items in 2009 was $36.5 million compared to $77.3 million in 2008. During 2009, non-cash working capital increased by $8.1 million due to an increase in accounts receivable and inventory which more than offset the increase in accounts payable and accrued liabilities. The increases resulted from the average zinc price increasing from US$0.54 in the fourth quarter of 2008 to US$1.00 in the fourth quarter of 2009. The higher zinc price more than offset the 2009 reduction in zinc metal inventories.

STANDARDIZED DISTRIBUTABLE CASH

Standardized distributable cash is defined as the GAAP measure of cash from operating activities after adjusting for capital expenditures, restrictions on distributions arising from compliance with financial covenants restrictive at the time of reporting, and minority interests. Standardized distributable cash should not be seen as a measurement of liquidity or be used as a substitute for other measures, in accordance with GAAP. Management believes that, in addition to net earnings, standardized distributable cash is a useful supplemental measure for evaluating the Fund’s performance as the standardized distributable cash net of the fluctuations in non-cash working capital items provides investors with an indication of cash available for distributions and working capital needs. Investors are cautioned, however, that standardized distributable cash should not be construed as an alternative to the statement of cash flows as a measure of liquidity and cash flows. The method of calculating standardized distributable cash for the purposes of this MD&A may differ from that used by other issuers and, accordingly, standardized distributable cash in this MD&A may not be comparable to standardized distributable cash used by others.


A reconciliation of cash realized from operations to standardized distributable cash for the years 2009 and 2008 is provided below:

($ thousands) 2009 2008

Cash realized from operations 28,380 122,340Less: portion attributable to minority interest (7,095) (30,585)Cash realized from operations attributable to Priority Unitholders (a) 21,285 91,755Capital adjustments: Purchase of property, plant and equipment (23,964) (28,351) Proceeds from government assistance — 478 Proceeds on sale of property, plant and equipment 7 193 Accretion on long-term debt (255) (255) (24,212) (27,935)Plus: portion of capital adjustments attributable to minority interest 6,053 6,984Capital adjustments attributable to Priority Unitholders (b) (18,159) (20,951) Standardized distributable cash (a) + (b) 3,126 70,804 Other adjustments including discretionary items: Increase/(decrease) in non-cash working capital 8,070 (45,060) Decrease/(increase) in operating reserve (488) 1,653 Less/(plus) portion of other adjustments attributable to minority interest (1,896) 10,851Impact of Ordinary Unit subordination 1,875 —Distributions declared to Priority Unitholders 10,687 38,248 Weighted average number of Priority Units outstanding (basic and diluted) 37,497,975 37,497,975Standardized distributable cash per Priority Unit $0.08 $1.89Distributions declared per Priority Unit $0.285 $1.02 The Fund has included the amortization of deferred financing fees as a capital adjustment. The fees associated with completing a notes offering in 2003 are being spread over the term of the note offering for the calculation of standardized distributable cash. From February to June 2009, the distribution to Priority Unitholders was reduced to 4 cents per unit. The subordination feature was triggered, and since then, the Ordinary Unitholders have not received a monthly distribution. In July 2009, the Fund suspended distributions to the Priority Unitholders as well. The amount that was paid to the Priority Units and was not paid to the Ordinary Units will accumulate and be paid to the

Ordinary Units if there is excess cash available for distribution above the Base Distribution amount of 8.333 cents per unit in a subsequent month. As of December 31, 2009, the accumulated distribution deficiency was $2.5 million. On September 28, 2009, the Fund announced that sulphuric acid and zinc production would return to full capacity in early October due to improvements in the sulphuric acid market. While the return to full capacity is positive, the Fund still faces some challenges, such as low zinc premiums and a stronger Canadian dollar. The Fund is also preparing to renew both its Revolving Facility and its senior secured notes that expire on May 3, 2010 and December 20, 2010, respectively. The board of trustees will continue to assess these factors, including the progress on the debt refinancing, as they consider any change to the distribution policy. At this point in time, the monthly cash distribution remains suspended. In 2009, standardized distributable cash was $3.1 million and distributions declared to Priority Unitholders were $10.6 million.

Distribution Policy The Fund’s long-term goal is to provide stable, monthly distributions to unitholders. At this time, no distributions are being paid. The Fund’s policy is to make distributions to unitholders equal to cash flows from operations, before variations in working capital and such reserves for operating and capital expenditures as may be considered appropriate by the trustees. When management and the board of trustees consider making a distribution decision, they first review the current and prospective performance. Some of the factors considered include cash amounts required to service debt obligations, current business conditions, capital expenditures, taxes, working capital requirements and other items considered to be prudent. The amount of monthly distribution to unitholders is a function of the Fund’s debt management strategy and productive capacity maintenance program. The Fund’s calculation, as compared to the Canadian Institute of Chartered Accountants’ (“CICA’s”) standardized distributable cash, excludes changes in non-cash working capital as the changes within the working capital components are often temporary by nature and, if needed, can be financed with the Fund’s Revolving Facility. One of the main factors influencing the non-cash working capital balances is the zinc metal price. As zinc metal prices increase, inventory and accounts receivable will increase, resulting in higher non-cash working capital balances. When zinc metal prices decrease, inventory and accounts receivable will decrease, resulting in lower non-cash working capital balances. The following table provides information on cumulative cash distributions, cumulative standardized distributable cash and cumulative pay-out ratio for the years 2009 and 2008:



Since inception, Since inception, May 3, 2002, May 3, 2002,($ thousands) to Dec. 31, 2009 to Dec. 31,2008

Cumulative distributions to Priority Unitholders including amounts paid for the repurchase of Priority Units $ 264,855 $ 254,168Cumulative standardized distributable cash $ 243,978 $ 240,852Cumulative pay-out ratio to Priority Unitholders 109% 106% Cumulative distributions to Priority and Ordinary Unitholders including amounts paid for the repurchase of Units $ 350,641 $ 338,892Cumulative standardized distributable cash to Priority and Ordinary Unitholders $ 325,304 $ 321,136Cumulative pay-out ratio to Priority and Ordinary Unitholders 108% 106%

The reason for the 109% cumulative pay-out ratio is due to the $48 million increase in non-cash working capital since the inception of the Fund. The amount of the increase attributable to the Priority Units is $36 million. Excluding the impact of the increase in working capital on the calculation, the cumulative pay-out ratio would adjust to 95%. As discussed earlier, the Fund does not include changes in non-cash working capital when determining the amount of cash to be distributed as the changes within the working capital components are often temporary by nature and, if needed, can be financed with the Fund’s Revolving Facility.

Working Capital Benchmarks The Fund has an internal benchmark for annualized inventory turnover of six to seven

times. This would represent approximately two months of annualized sales in the Fund’s inventory. The Fund’s internal benchmark for number of days sales in receivables is 30-35 days. The Fund does not believe that there is any seasonality in the amount of working capital required to run the business.

Notional Operating Reserve and Capital and Site Restoration Reserve In order to meet the Fund’s goal to provide a stable, monthly distribution, a notional operating reserve is utilized. In a period in which standardized distributable cash, net of the changes in non-cash working capital attributable to Priority Unitholders, is greater than the distributions declared to the Priority Unitholders, the notional operating reserve will increase. In a period during which standardized distributable cash, net of the changes in non-cash working capital attributable to Priority Unitholders, is less than the distributions declared to the Priority Unitholders, the notional operating reserve will decrease. The notional operating reserve provides financial flexibility and adheres to the Fund’s trust indentures and debt covenants. During 2009, the notional operating reserve increased by $0.5 million to $17.1 million. This compares to a reserve of $16.6 million at the end of 2008. The Fund also utilizes a notional capital and site restoration reserve. In a period in which unexpected or unusually high capital expenditures are required, the Fund has the ability to reduce the notional capital and site restoration reserve, while adhering to the Fund’s trust indentures and debt covenants. As of December 31, 2009, the notional capital and site restoration reserve was $5.0 million (December 31, 2008 - $5.0 million).

Cash Distributions Compared to Net Earnings and Cash Realized from Operations The following table provides an analysis of cash distributions to unitholders for the past three years:

Three months ending Dec. 31, Year ending Dec. 31($ thousands) 2009 2009 2008 2007

A. Cash realized from operations $ 4,026 $ 28,380 $ 122,340 $ 67,870B. Net earnings (loss) before minority interest $ 1,883 $ (4,405) $ 36,879 $ 40,876C. Actual cash distributions paid or payable1 $ — $ 11,750 $ 50,998 $ 50,998

Excess (shortfalls) of cash realized from operations over cash distributions $ 4,026 $ 16,630 $ 71,342 $ 16,872

Excess (shortfalls) of net earnings over cash distributions $ 1,883 $ (16,155) $ (14,119) $ (10,122)D. Percentage of excess (shortfalls) of cash realized from operations over cash distributions N/A 142% 140% 33%E. Excess (shortfalls) of net earnings over cash distributions N/A N/A (28%) (20%)

1 Starting in July 2009, the Fund suspended distributions.


Excess/Shortfalls of Cash Realized from Operations over Cash Distributions For the year ending December 31, 2009, cash realized from operations was greater than cash distributions by $17 million. The main reason for this was that the capital expenditures were being funded from operational cash flow. For the year ending December 31, 2008, cash realized from operations was greater than cash distributions by $71 million. The main reasons for this were due to the $45.0 million decrease in non-cash working capital and capital expenditures being funded from operational cash flow. The decrease in the working capital was due to the decrease in zinc price (average monthly LME price fell to US$0.50 per pound in December 2008 from US$1.07 per pound in December 2007). For the year ending December 31, 2008, cash realized from operations was greater than cash distributions by $16.9 million. The main reasons for this were due to capital expenditures being funded from operational cash flow and the $7.2 million increase in the notional operating reserve, partially offset by the $14.0 million increase in non-cash working capital.

Shortfalls of Net Earnings over Cash Distributions For the 2007-2009 reporting years, the Fund’s cash distributions paid or payable were in excess of the Fund’s net earnings. This was as a result of the following items:• Amortization and reclamation expenses were higher than

the Fund’s cash used for investment activities.• In 2007, there was a $13.1 million non-cash future income

tax expense relating to changes to tax legislation. The Fund does not use net earnings as a basis to calculate distributions. Other non-cash items, such as amortization and reclamation are items which will fluctuate from period to period depending upon various factors or are based on long-term assumptions and as such may not be indicative of the cash generation capacity of the Fund. In all periods, the Fund does not believe that it provided an economic return of capital.

Tax Attributions of Distributions The following table provides a summary of the tax attributes of the distributions made by the Fund to the unitholders for 2009 and 2008:

2009 2008

Percentage of the distributions represented by:Distributions in the form of taxable income 92% 85%Distributions in the form of return of capital 8% 15%

In 2009, 92% of the distributions were in the form of taxable income and 8% in the form of return of capital for tax purposes. The Fund’s property, plant and equipment are the class of asset that will shelter future operating cash flows from taxation. As of December 31, 2009, the book value of these assets was $308 million while the tax value was $226 million. The preceding target for tax attributes is subject to various

risks and uncertainties. The assumptions for them can be found in the “Forward-looking Information” below.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2009, the Fund’s total debt (short-term and long-term) was $207.9 million, up from $196.6 million at the end of December 2008. The Fund’s cash and cash equivalents at December 31, 2009 totalled $2.9 million, down from $3.5 million at December 31, 2008. The following table provides an analysis of the Fund’s overall net debt position as of December 31, 2009 and December 31, 2008:

December 31, December 31,($ millions) 2009 2008

Revolving Facility 54.6 43.6Notes 153.3 153.0Cash and cash equivalents (2.9) (3.5)Net debt position 205.0 193.1

Overall, the Fund’s net debt position has increased by $11.9 million from the end of 2008 to the end of 2009. The reason for this increase is due to the higher zinc price from December 2008 to December 2009. The higher zinc price increases the value of the inventory and receivables in the Fund’s working capital. The Fund has a Revolving Facility with a syndicate of Canadian chartered banks in place that is used for general corporate purposes, including financing working capital. In April 2009, the Revolving Facility was extended to May 3, 2010. The amount available to be drawn on the Revolving Facility varies on a quarterly basis and is based on percentages of the Fund’s eligible inventory and accounts receivable from the previous quarter. The maximum available to be drawn at any time is $200 million and the minimum available to be drawn is $55 million. The Fund has the ability to draw down the Revolving Facility in both Canadian and US dollars. The amount available based on the Fund’s December 31, 2009 balance sheet was $134 million of which $57.5 million was drawn (including $2.8 million for letters of credit). Fluctuations in working capital balances as a result of operations are generally funded by, or used to repay, the Revolving Facility. During 2009, $297.3 million of debt was drawn and $286.2 million was repaid related to the fluctuations in working capital. The Fund has $153.5 million of senior secured notes (the “Notes”) outstanding. When issued, the Notes had a term of seven years and will mature on December 20, 2010. The Notes offering was made by way of a private placement and the proceeds were used to repay a term facility that had been outstanding since the inception of the Fund.



Both the Revolving Facility and the Notes contain customary representations, warranties, 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 impact upon the Fund’s ability to make distributions. All of the assets of the Fund have been pledged in support of the obligations under the Notes and the Revolving Facility. The main covenants under the Revolving Facility agreement require the Fund to maintain, at the end of each quarter, a specific leverage ratio, an interest coverage ratio, and a current ratio.• The leverage ratio at the end of each quarter is based on

the most-recent four rolling quarters and is calculated by dividing the total debt at the end of the period by the earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in the Revolving Facility agreement for the period. For the periods ending December 31, 2009 and March 31, 2010, the leverage ratio must not exceed 5.25 to 1.

• The interest coverage ratio at the end of each quarter, on a rolling four-quarter basis, is calculated by dividing the EBITDA for the period by the total interest expense for that period net of the interest expense related to any subordinated loans, as defined in the Revolving Facility agreement, and must be no less than 3 to 1.

• The current ratio is calculated at the end of each quarter by dividing the current assets by the total of the current liabilities plus the Revolving Facility, as defined in the Revolving Facility agreement, at the balance sheet date, and must be no less than 1 to 1.

All of the covenants under the Revolving Facility agreement were met as at December 31, 2009 and 2008. The following table provides a synopsis of these three ratios, on a twelve-month rolling average for 2009 and 2008:

As at December 31, 2009 2008

Leverage ratio1 (must not exceed 5.25 to 1) 4.3 2.2Interest coverage ratio1 (must be no less than 3 to 1) 4.4 6.7Current ratio (must be no less than 1 to 1) 1.3 1.6

1 four rolling-quarter average

The Revolving Facility agreement lists events that constitute an event of default should they occur. Events that constitute a default include the non payment by the Fund of principal, interest or other obligations of the Fund in respect of the Revolving Facility agreement and a breach of any covenant pursuant to the Revolving Facility agreement. If any event of default occurs under the Revolving Facility agreement, the Revolving Facility lenders will be under no further obligation to

make advances to the Fund and may require the Fund to repay any outstanding obligation pursuant to the Revolving Facility agreement, which may impact the Fund’s ability to make cash distributions. There were no conditions of default existing during each of the years ending December 31, 2009 and 2008. During the fourth quarter of 2009, the Fund amended the Revolving Facility to provide that the Notes that mature on December 20, 2010 will be excluded from the definition of current liabilities under the Revolving Facility agreement for the purposes of calculating the current ratio covenant. As a result of the Processing Facility operating at less than full capacity from March to September 2009 and because of the weaker market conditions throughout 2009, the Fund could have been in breach of the leverage ratio covenant as of December 31, 2009. This would have stemmed from the reduced profitability and cash flow generated in 2009, as well as the impact of higher zinc prices on the Fund’s working capital requirements. The amendment also provides that the maximum leverage ratio has been increased from 4.25 to 1 to 5.25 to 1 for the periods ending December 31, 2009 and March 31, 2010. With the Processing Facility now operating at full capacity and with the amendment, the risk of breaching the leverage ratio has been significantly reduced. As a result of the amendment and reflecting the current credit market, the interest rate spread increased from 2% to 4.5% for the remainder of the Revolving Facility agreement. The Fund has provided covenants to the Noteholders, including the commitment to the punctual payment of principal and interest accrued on the Notes, in accordance with the terms of the Trust Indenture. The Fund is required to maintain a letter of credit or cash, for the benefit of the holders of the Notes, for an amount equal to or greater than three months’ interest expense. The letter of credit amounted to $2.6 million as at December 31, 2009. All of the covenants under the Trust Indenture were met for the years ending December 31, 2009 and 2008. As at December 31, 2009, the Fund had a working capital deficiency of $99.9 million, due to maturity in 2010 of the Revolving Facility and the Notes. During the fourth quarter 2009, the Fund continued discussions with the Revolving Facility syndicate regarding the extension of the Revolving Facility and it expects to reach an agreement prior to the maturity date of May 3, 2010. In the course of 2010, the Fund expects to approach the Noteholders with the goal of refinancing the Notes on a long-term basis. The refinancing is expected to eliminate the current working capital deficiency. The Fund’s inability to further extend the Revolving Facility or refinance the Notes may require it to seek additional funding sources. The refinancing may be done at less favourable terms than what currently exist, and it may require that a portion of the debt be repaid. There


is no assurance that such indebtedness could be renewed or refinanced, which can have a material adverse effect on the Fund. The Fund’s future financial requirements related to capital expenditures are expected to be funded from operating cash flow. The ability to fund future capital expenditures from operating cash flow, to extend the Revolving Facility or to refinance the Notes is subject to various risks and assumptions. The future site restoration and reclamation obligation amounted to $9.0 million as at December 31, 2009, compared to $12.8 million at December 31, 2008. 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 million as at December 31, 2009. The cash flows required to settle the liability are expected to be incurred from now until 2046 with approximately $4.0 million being incurred over the next five years.

Outstanding Unit Data (As of March 12, 2010)

Priority Units 37,497,975Ordinary Units 12,500,000

derivative contracts. Under the terms of an administration agreement between the Fund and the Manager, a wholly owned subsidiary of Xstrata Canada, the Manager provides administrative services to the Fund and management services to the Operating Trust. In addition, the Manager operates and maintains the Processing Facility and provides management services to the Partnership. Any agreements entered into by Xstrata Canada as agent on behalf of the Partnership with any party related to Xstrata Canada, and which are material to the Partnership, must be on terms that are, collectively, no less favourable to the Partnership than those available at the time from a reputable, non-related party and must be reviewed and approved by the audit committee whose members are unrelated to Xstrata Canada. In 2009, Xstrata Canada sold to the Partnership $283.1 million of concentrate (2008 – $232.9 million) and provided $1.3 million in sales agency services (2008 – $1.0 million). The sales agency services are provided on a cost recovery basis.

The administration, management and operating services are also provided on a cost recovery basis and for a management fee of $0.3 million per annum, adjusted by 2% per annum. The table below summarizes Xstrata Canada’s services to the Fund for the years 2009 and 2008:

Services provided by Xstrata Canada ($ millions) 2009 2008

Salary and benefits $ 61.6 $ 70.7Support services 1.2 1.1Operating and management agreement management fee 0.3 0.3Total $ 63.1 $ 72.1

CONTRACTUAL OBLIGATIONS

The following table provides Fund’s contractual obligations schedule for the years 2010 to 2015:

($ millions) Payments Due by Period

Contractual Obligations Total 2010 2011 2012 2013 2014 2015

Long-term Debt $ 207.9 $ 207.9 – – – – –Operating Leases 2.5 1.1 0.8 0.4 0.1 – 0.1Purchase Commitments 18.2 10.9 3.3 2.6 1.4 – –

Total $ 228.6 $ 219.9 $ 4.1 $ 3.0 $ 1.5 – $ 0.1

TRANSACTIONS WITH RELATED PARTIES

Other than as described elsewhere, the Fund entered into the following transactions with related parties. Xstrata Canada’s 12,500,000 Ordinary Units represent 100% of these Units and a 25% economic interest in the Fund. The Ordinary Units are not transferable and will, except in certain limited circumstances, be exchangeable for Priority Units on a one-for-one basis only after May 2, 2017. Pursuant to the Supply and Processing Agreement, the initial term of which expires in 2017, Xstrata Canada is obligated to sell to the Processing Facility up to 550,000 tonnes of zinc concentrate annually. In addition, Xstrata Canada acts as the agent for sales of zinc metal and byproducts and purchases of



In addition, the Fund undertakes other transactions with Xstrata Canada, at terms that reflect market rates. The table below summarizes sales and purchases that were transacted with Xstrata Canada for the years 2009 and 2008:

Sales and Purchases ($ millions) 2009 2008Sales

Sales of zinc metal $ 80.3 $ 54.9Sales of byproduct 27.4 50.3PurchasesPurchases of raw materials and operating supplies $ 4.2 $ 7.5

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

Due to the structure of the Processing Facility’s purchase and sale contracts, the Fund has the ability to manage its zinc price exposure. Zinc metal products are generally sold approximately two months after the concentrate from which they are made is delivered. As a result, by pricing the payable zinc metal contained in zinc concentrate at the LME zinc reference price in the second month following its delivery, and by pricing the processing fee in Canadian dollars, the Supply and Processing Agreement provides a natural hedge against zinc metal price fluctuations. This results in matching the timing of pricing of the purchase of zinc concentrate with the expected timing of sales of the refined zinc metal produced from that concentrate. The Processing Facility, through Xstrata Canada, enters into hedges to the extent that the natural hedge does not fully minimize exposure to fluctuations in zinc prices, referred to as ‘inventory management hedges’. At December 31, 2009, the Processing Facility had sold forward approximately 21 million pounds of zinc, related to inventory management hedges (December 31, 2008 – 27 million pounds). The change in fair value of these positions for the year ending December 31, 2009 was a loss of $3.0 million which was recognized in the consolidated statements of earnings and comprehensive income in commodity financial instruments loss. In addition, some customers request a fixed sales price (instead of the LME average price in the month of shipment) in order to lock in the price of their zinc purchases for a future period of time, generally not exceeding one year. These arrangements, referred to as fixed forward sales contracts, are generally made available to customers who request them and who meet the Fund’s credit criteria for such contracts. When entering into a fixed forward sales contract, the Fund, through Xstrata Canada, offsets this price risk by hedging with appropriate zinc derivative contracts on the LME which will match the future months in which the customer has contracted to purchase the metal. These futures contracts typically allow the Processing Facility to receive the LME average price plus

premium in the month of shipment, while customers pay the agreed-upon price plus premium. In the event that the futures contracts have to be terminated early, due to the customer cancelling a fixed price order, Xstrata Canada has the right to charge the customer with the cost of settling the LME contract. The effectiveness of these hedges allows the Fund to utilize hedge accounting. The change in fair value of the net positions representing the ineffective portion of the hedge position, which has been recorded in the consolidated statement of earnings and comprehensive income in commodity hedging gain, was a gain of $0.2 million as of December 31, 2009. The Fund does not enter into any derivative contracts for the purposes of speculation. Xstrata Canada monitors the Fund’s zinc price exposure through Xstrata Canada’s risk management system and uses policies for risk management in accordance with normal practice. The Fund has separated and recorded at fair value, embedded derivatives resulting from the provisional pricing feature in the Supply and Processing Agreement. As noted above, under the terms of this agreement, final prices for purchases of concentrate (“quotational pricing”) are based on the LME price prevailing on a specified future date after shipment (“quotational period”), usually two months. The Fund accounts for changes in the fair value of unsettled concentrate payable amounts resulting from quotational pricing with reference to forward LME rates for the remaining quotational period through gains or losses recorded in raw material purchases costs and corresponding adjustments in accounts payable and accrued liabilities. An amount of $4.3 million was recorded as an increase of raw material purchase costs in 2009 due to the change in fair value of these embedded derivatives.

CRITICAL ACCOUNTING ESTIMATES AND CHANGES IN ACCOUNTING

POLICY

Future Site Restoration and Reclamation Estimated future site restoration and reclamation costs included within future site restoration and reclamation may vary based on changes in operations, costs 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 flow.

Revenue Recognition The Fund recognizes revenue from the sale of refined metals and byproducts at the time of the sale, when the rights and obligations of ownership pass to the buyer.


This generally occurs upon shipment. Prices for provisionally priced sales are based on market prices and exchange rates prevailing at the time of shipment and are adjusted based upon market prices and exchange rates until final settlement with customers, pursuant to the terms of sales contracts. Price changes for shipments awaiting final pricing at quarter-end could have a material effect on future revenues. As of December 31, 2009, $6.2 million in revenues were awaiting final pricing (December 31, 2008 - $3.3 million). The following table provides an analysis of the revenues awaiting final pricing as at December 31, 2009:

Accountable Metal Average Provisional Content Price (Tonnes) (US$/pound)

Zinc metal 1,199 $ 1.15Copper in cake 465 $ 3.34

The Fund makes a portion of its sales based on the average price from the previous month (“month prior pricing”). This form of pricing is often used for those customers for whom cash-in-advance terms have been negotiated as a way of managing the Fund’s liquidity position and credit exposure. In a market in which zinc prices are rising, a portion of the Fund’s revenues will lag behind the higher zinc prices; while in a market in which zinc prices are falling, a portion of the Fund’s revenues will benefit from higher zinc prices from the month prior.

Income Taxes The Fund follows the liability method of accounting for future income taxes. Under the liability method, future income tax 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 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. On June 2007, the Federal Government substantively enacted its tax legislation, Bill C-52, relating to the taxation of existing income and royalty trusts, at effective rates similar to Canadian corporations commencing in 2011. In December 2007, the Federal Government substantively enacted some additional changes to the future federal tax rates, resulting in reductions in the federal tax rate in 2009 through to 2012. Prior to June 2007, the Fund estimated the future income tax on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes at a nil effective tax rate. Under the new legislation, the Fund now estimates the effective tax rate on post 2010 reversal of these temporary differences to be 28.4% in 2011 and 26.9% in 2012 and beyond. Temporary differences reversing before 2011 will still

give rise to nil future income taxes. The Fund has estimated its future income taxes based on its best estimates of future results of operations, tax pool claims and cash distributions and assuming no material changes to the Fund’s organizational structure. The Fund estimates that the unrecognized temporary differences outstanding as of December 31, 2009 that will remain outstanding as of January 1, 2011 are approximately $54 million. The recording of the future tax liability related to these temporary differences resulted in the Fund recording a non-cash future income tax expense and an increase in long-term future tax liabilities of $13.1 million in 2007. The future tax liability is only recognized for the portion of the Partnership that is owned by the Priority Unitholders. The Fund’s estimate of its future income taxes will vary based on actual results of the factors described above, and such variations may be material. Currently, the Fund does not pay income tax as long as distributions to Unitholders exceed the amount of the Fund’s income that would otherwise be taxable. However, Canadian Unitholders who receive the distributions personally (i.e. outside a Registered Retirement Savings Plan or other tax deferred plan) are liable for income tax at full personal tax rates on the taxable portion of the distributions. Bill C-52 will result 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. The new tax legislation will apply to the Fund and its unitholders effective January 1, 2011. Cash distributions to Ordinary Unitholders are subordinated to distributions to Priority Unitholders until 2017, except on the occurrence of certain events. With respect to Bill C-52, the Fund expects that the subordination will remain unchanged.

Inventories As of December 31, zinc-related inventories at the end of 2009 and 2008 included the following balances:

($ million) 2009 2008

Raw materials $ 28.3 $ 14.7Work-in-process $ 24.3 $ 6.3Finished products $ 49.6 $ 51.0Total $ 102.2 $ 72.0

These inventories are valued at the lower of average cost or net realizable value. Based on the estimated volumes, the Fund has estimated the 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. At December 31, 2009 and 2008, all of the above inventories were recorded at cost.

Supplies Inventory As of December 31, 2009, the supplies inventory balance was $8.6 million (December 31, 2008 - $7.9 million). The Fund uses the accounting principle of the lower of average cost and net realizable value. If a portion of the supplies inventory became obsolete, the Fund would be required to write off the difference between the salvage value and the book value of the obsolete inventory. If a supplies inventory write-off were required, net earnings for that year would be reduced and the balance in the inventories account would have to be lowered. There would be no net impact on the Fund’s cash flow.

Property, Plant and Equipment Included in the $501.4 million of assets at December 31, 2009 ($467.6 million at December 31, 2008) were property, plant and equipment with a carrying value of $295.8 million (2008 - $308.3 million). This amount represents 59% (2008 – 66%) of the book value of the asset base. As such, the estimates used in accounting for property, plant and equipment and the related amortization charges are critical and have a material impact on the Fund’s financial condition and earnings. Property, plant and equipment are recorded at cost and the amortization is based on estimated service lives of the assets, calculated on the straight line basis. Assets under construction are not amortized until put into use.

COMMITMENTS AND CONTINGENCIES

Manager’s Pension Plan Upon the termination of the operating and management agreement, the Partnership will acquire the Manager from Xstrata Canada. If this occurs, the Partnership will establish a pension plan for the employees of the Manager. Pension plan assets and liabilities will be transferred into the newly-established pension plan, subject to obtaining regulatory approvals. As of December 31, 2009, the estimated liability of the Manager’s pension plan was $106.5 million (2008 - $101.8 million). There is currently $104.5 million of assets within the Manager’s pension plan. The cost of providing benefits through defined benefit pension plans and post-retirement benefit plans is determined by an actuarial calculation. Cost and obligation estimates depend upon management’s assumptions about future events, which are used by actuaries in calculating such amounts. These assumptions include discount rates, the expected return of plan assets and future compensation increases. In addition, actuarial consultants utilize subjective factors, such as withdrawal and mortality rates. Actual results may differ materially from those estimates based on these assumptions.

Litigation In August 2004, the Processing Facility was served with a class action motion presentable before the Québec Superior Court, subsequent to an accidental discharge of sulphur trioxide. In June 2008, the Québec Superior Court dismissed the motion to institute a class action. The plaintiff appealed the decision. In August 2009, the Québec Court of Appeal dismissed the appeal. In December 2009, the Processing Facility was served a new motion for leave to institute a class action. The motion is expected to go before the courts in 2010. The Manager continues to maintain that the class action suit is unfounded.

Appropriation of Land The Fund is currently in discussion with Québec’s Ministry of Natural Resources regarding land that the Fund is currently using. This land was appropriated by the provincial government a number of years ago. The Fund does not believe that these discussions will require any material cash payment from the Fund.

Guarantees Some of the Fund’s inceptive agreements, specifically those related to the acquisition of the Processing Facility and the debt, include an indemnification provision where the Fund may be required to make payments to Xstrata Canada or lenders for breach of fundamental representations and warranty terms in the agreement. As at December 31, 2009, the Fund does not believe these indemnification provisions would require any material cash payment 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.

Changes in Accounting Policies Effective January 1, 2009, the Fund adopted the CICA Handbook Section 3064, Goodwill and Intangible Assets. Section 3064 states that upon the initial identification, intangible assets are to be recognized as assets only if they meet the definition of an intangible asset and the recognition criteria. This section also provides further information on the recognition of internally generated intangible assets. As for subsequent measurement of intangible assets, goodwill, and disclosure, Section 3064 carries forward the requirements of old Section 3062, Goodwill and Other Intangible Assets. The application of this new section did not have any impact on the Fund’s financial statements. Effective January 1, 2009, the Fund adopted Emerging Issues Committee (“EIC”) - 173 - Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. Under this new standard, an entity’s own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities, including


derivative instruments. The adoption of these guidelines did not have any material effect on the Fund’s results, financial position or cash flows. In May 2009, the CICA amended Section 3862, Financial Instruments – Disclosures, to improve disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. Fair values of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant inputs are observable, either directly or indirectly. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement. The amendments to Section 3862 are effective for the Fund’s interim and annual financial statements beginning on October 1, 2009.

Upcoming Changes to Accounting Policy The CICA issued Handbook Sections 1582, Business Combinations, which replaces Section 1581, Business Combinations; 1601, Consolidations; 1602, Non-controlling Interests; and 1625, Comprehensive Revaluation of Assets and Liabilities. These standards are effective for the Fund’s interim and annual financial statements beginning on January 1, 2011, with earlier application permitted. The suite of business combinations standard (CICA 1582, 1601 and 1602) were harmonized with the converged the International Accounting Standards Board (“IASB”) and the Financial Accounting Standards Board (“FASB”) standards on business combinations and with their guidance on accounting for non-controlling interests. In conjunction, with these changes, amendments were made to CICA 1625 and CICA 3251 to remove guidance no longer applicable and to make these standards consistent with the suite of business combinations standards. The adoption of these standards is not expected to have a material impact on the financial statements of the Fund.

Convergence to International Financial Reporting Standards (“IFRS”) In February 2008, the CICA’s Accounting Standards Board (“AcSB”) announced that Canadian public companies will be required to adopt IFRS as issued by the IASB effective January 1, 2011. The changeover date applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. For the Fund, the changeover date of January 1, 2011 will require the restatement for comparative purposes of amounts reported by the Fund for the year ended December 31, 2010. The key IFRS dates are:

• January 1, 2010 (transition date): The Fund will prepare an opening statement of financial position according to IFRS, as at this date, to facilitate the changeover to IFRS in 2011. The Fund will report its fiscal 2010 results according to Canadian GAAP.

• January 1, 2011 (changeover date): the date after which the Fund will prepare and report interim and annual 2011 financial statements according to IFRS with 2010 comparatives also according to IFRS.

The table below is provided to allow investors and others to obtain a better understanding of the Fund’s IFRS changeover plan and the resulting possible effects on, for example, our financial statements and operating performance measures. Readers are cautioned that it may not be appropriate to use such information for any other purpose. This information reflects our most recent assumptions and expectations. Circumstances may arise, such as changes in IFRSs, regulations, or economic conditions which could change these assumptions or expectations.



IFRS to Canadian GAAP Differences are based on IFRS standards issued to December 31, 2009, and based on the Fund’s assessment of its accounting policies as of March 12, 2010.

The Fund’s conversion plan includes:

Key Activity Key Milestones Status

IFRS Conversion Scoping Phase Review of current Canadian Generally Accepted Accounting Principles (“GAAP”) standards versus IFRS. Identification of significant differences.

The review is complete and the determination of financial statement impact is in progress.

Decisions on Accounting Policies and IFRS 1 First-Time Adoption

Assessment of differences between IFRS and the Fund’s current Canadian GAAP practices and accounting policies.

The Fund has initiated the assessment of differences during 2009 and is approximately 90% complete.

Decision on accounting policy choices and IFRS 1 for each assessed area.

The Fund has initiated the decision on accounting policy choices and IFRS 1 First-Time Adoption exemptions and exceptions for each area and is approximately 90% complete.

Information Technology (“IT”) Evaluation Identification of IT requirements for IFRS conversion.

The Fund has identified the IT requirements for IFRS conversion. Plans are in place to capture 2010 results under IFRS in addition to under Canadian GAAP.The Fund to confirm 2010 results to be

produced in Canadian GAAP and IFRS.

Control Environment: Internal Control over Financial Reporting (“ICOFR”) and Disclosure Controls and Procedures (“DC&P”)

Review and assessment of impact of accounting policy changes relating to IFRS conversion on ICOFR and DC&P.

As the Fund makes decisions on IFRS accounting policies and IFRS 1 choices, appropriate changes to ensure effective ICOFR and DC&P are being made.

Financial Statement Preparation Identification of transactions impacted by IFRS conversion.

Changes and re-mapping of the financial statements and notes to the financial statements have started in 2009 and will continue in 2010.An assessment of these transactions,

appropriate changes and re-mapping of the financial statements and notes to the financial statements will be completed.

Financial Impact Analysis for Transactional Areas

Analysis of differences between Canadian GAAP and IFRS that was completed will be quantified by management. External auditors to review and sign-off on assessments.

Quantification of differences between Canadian GAAP and IFRS has begun and will be completed during 2010. External auditor’s review continues on assessments.

Business Activities Impact Identification of impacts on business activities to be completed. For example, the review and assessment of contracts and agreements.

Assessments and identifications of impacts of the conversion to IFRS are underway. Identification of impacts is to be completed during 2010.

Define and Introduce Appropriate Level of IFRS Training and Expertise for the Following:

Training for the Fund’s Manager and Corporate Controller’s Office, as required, in 2009 and 2010. Training in 2010, for the Audit Committee.

Training completed in 2009 for Corporate Controller’s office and Fund’s Manager. Training occurring throughout the project. Expert resources have been identified to provide training and insights in 2010 to the Audit Committee, Fund’s Manager, and Controller’s Office.

• Audit Committee• The Fund’s Management• Corporate Controller’s Office


Basis for Consolidation Under GAAP, the Fund determines whether it should consolidate an entity using two different frameworks: the variable interest entity (“VIE”) and voting control models. Under IFRS, the Fund will consolidate an entity if it is determined to be controlled by the Fund. Control is defined as the power to govern the financial and operating policies of an entity to obtain benefit. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of an entity’s voting power, but also exists when the parent owns half or less of the voting power but has legal or contractual rights to control, or de facto control. This change in policy will result in an entity being consolidated by the Fund that was not consolidated under Canadian GAAP as a result of the Fund’s legal or contractual rights to control the entity, as defined by IFRS. This change is not expected to have a material impact on the net income of the Fund.

Borrowing Costs IFRS requires the capitalization of borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset as part of the cost of that asset. Under Canadian GAAP, the Fund made an accounting policy choice to expense these costs as incurred. Upon the adoption of IFRS, the Fund will capitalize borrowing costs of qualifying assets.

Impairment of Assets Canadian GAAP generally uses a two-step approach to impairment testing: first comparing asset carrying values with undiscounted future cash flows to determine whether impairment exists; and then measuring any impairment by comparing asset carrying values with fair values. IFRS uses a one-step approach for both testing for and measurement of impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use (which uses discounted future cash flows). The difference in methodologies may potentially result in asset impairments upon transition to IFRS.

Provisions IFRS Provisions, Contingent Liabilities, and Contingent Assets requires a provision to be recognized when: there is a present obligation as a result of a past transaction or event; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the obligation. “Probable” in this context means more likely than not. Under Canadian GAAP, the criterion for recognition in the financial statements is “likely,” which is a higher threshold than “probable.” Therefore, it is possible that some contingent liabilities which would meet the recognition criteria under IFRS were not recognized under Canadian GAAP.

Future Site Restoration and Reclamation Other differences between IFRS and Canadian GAAP exist in relation to the measurement of provisions, such as the methodology for determining the best estimate where there is a range of equally possible outcomes, and the requirement under IFRS for provisions to be discounted where material. This may give rise to a change in the measurement of the existing provisions (including the Future Site Restoration and Reclamation) and the identification of additional provisions.

First-Time Adoption of International Financial Reporting Standards The Fund’s adoption of IFRS will require the application of IFRS 1 First-Time Adoption of International Financial Reporting Standards, which provides guidance for an entity’s initial adoption of IFRS. IFRS 1 generally requires that an entity apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS 1 does include certain mandatory exceptions and limited optional exemptions in specified areas of certain standards from this general requirement. The following are the significant optional exemptions available under IFRS 1 that the Fund expects to apply in preparing its first financial statements under IFRS.

Business Combinations

The Fund expects to elect not to restate any Business Combinations that have occurred prior to January 1, 2010.

Borrowing Costs The Fund expects to elect to apply the requirements of IAS 23 Borrowing Costs prospectively from January 1, 2010.

Employee Benefits

The Fund expects to elect to recognize any actuarial gains/losses as at January 1, 2010 in retained earnings as a result of having to consolidate the Manager’s financial statements into the consolidated financial statements of the Fund.

Several IFRS Standards are in the process of being amended by the IASB. Amendments to existing standards are expected to continue. The Fund is actively monitoring the IASB’s schedule of projects, giving consideration to any proposed changes, where applicable, in its assessment of differences between IFRS and Canadian GAAP.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of December 31, 2009, an evaluation of the effectiveness of the issuer’s disclosure controls and procedures (as such term is defined under the rules adopted by the Canadian securities regulatory authorities) was carried out by management, under the supervision of, and with the participation of, the Manager’s chief executive officer (“CEO”) and chief financial officer (“CFO”). Based upon that evaluation, the CEO and CFO concluded that



as of such date, the Fund’s disclosure controls and procedures were effective such that information relating to the Fund required to be disclosed by us in the reports which we file or submit to such regulatory authorities (a) is recorded, processed, summarized and reported within the time periods specified under applicable securities laws, and (b) is accumulated and communicated to the Fund’s management, including the CEO and CFO, to allow timely decisions regarding disclosure.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During 2009, the Fund documented and assessed the design and effectiveness of internal controls over financial reporting. The design of internal controls over financial reporting was evaluated as defined in Multilateral Instrument 52-109. Based on the results of this evaluation, the CEO and CFO attested that the internal controls over financial reporting are designed to provide reasonable assurance that its financial reporting is reliable and that the Fund’s consolidated financial statements were prepared in accordance with Canadian GAAP. Management also concluded that during the year ended December 31, 2009, no changes were made to internal controls over financial reporting that would have materially affected, or would be reasonably considered to materially affect those controls.

RISKS AND UNCERTAINTIES

Where appropriate, the Fund has included comments on risks and uncertainties throughout the MD&A. The following are additional risks and uncertainties that have not been included elsewhere in the document.

Operational Risks The Processing Facility is dependent upon the continuing supply of zinc concentrate. Currently, Xstrata Canada is obligated to supply zinc concentrate based on the terms set out in the Supply and Processing Agreement. During the occurrence of an event of force majeure, the obligations of Xstrata Canada will be suspended to the extent that such obligations cannot be performed as a result of such force majeure. If the Fund is not able to secure a supply of zinc concentrate on favourable terms because of the termination of the contract in 2017, or during a force majeure situation, or if Xstrata Canada fails to fulfill all of its obligations under the Supply and Processing Agreement, its cash realized from operations may decline. At normal operating levels, the Processing Facility purchases approximately 1,200 million kilowatt hours per year from Hydro-Québec at the market price charged to industrial users. During 2009, the Fund’s electricity costs were approximately $49 million (2008 - $54 million). Increases in energy costs could

adversely affect cash realized from operations. Changes in the Processing Facility’s electricity costs are partially offset by adjustments to the processing fee in the following year.

Business Risks Demand for the Processing Facility’s products is a function of world industrial production growth, the development of new uses and markets, and substitution. The Processing Facility is dependent upon key customers that are relatively close to the Processing Facility. In 2009, the Processing Facility’s 10 largest customers accounted for approximately 72% (2008 – 67%) of its direct or indirect sales (on a volume basis), with its largest customer accounting for 19% (2008 – 16%). The loss of a significant customer may have a materially adverse effect on the Fund’s financial position and cash realized from operations. In 2009, the Processing Facility sold more than 98% (2008 – 97%) of its zinc to customers in the United States and Canada. If the Processing Facility lost certain customers in the United States and Canada, there is a risk that it would be forced to find alternative markets. This could increase distribution costs, thereby adversely affecting future cash realized from operations. A portion of the Processing Facility’s Net Revenues results from the premiums paid for value-added products, such as zinc shapes, zinc shot and zinc powder. Changes in the supply and demand for these products can cause premiums to fluctuate, impacting upon the Fund’s cash realized from operations. In 2009, each 0.1 cent US change in the zinc premium impacted the Fund’s annualized sales and cash realized from operations by US $0.5 million (2008 – US $0.5 million). See “Forward-looking Information” below. The Processing Facility is dependent upon local transportation companies to deliver its product to its customers. Changes in the rates charged to make these deliveries, or a major disruption in service could increase distribution costs, thereby adversely impacting cash realized from operations. A portion of the Processing Facility’s Net Revenues results from sale of byproducts, such as sulphuric acid and copper in cake, as well as from the sale of zinc metal. Changes in the demand and supply of these products can cause them to fluctuate, impacting upon the Fund’s cash realized from operations. The Fund only has a fixed storage capacity for sulphuric acid at the Processing Facility (approximately 33,000 tonnes). The availability of storage facilities outside of the Processing Facility is limited due to the special material requirements for such storage facilities. In a market where sulphuric acid sales have slowed and the Fund is not able to secure additional storage capacity, the Fund’s ability to produce zinc and sulphuric acid may be reduced.


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 strengthened against the US dollar, negatively impacting the Fund’s net earnings and cash available for distribution. In 2009, a one-cent Canadian appreciation in the average Canadian/US exchange rate would have negatively impacted the Fund’s annual cash realized from operations by approximately $0.5 million (2008 - $0.9 million).

Employee Relations Good labour relations are fundamental to the Fund’s ongoing success. The Processing Facility has 612 employees, 422 of whom are represented by the United Steel Workers of America, Local 6486. The last labour disruption was in 1986. Improved labour relations have translated into eight consecutive collective agreements without a strike. On February 19th, 2008, the Fund announced that an agreement had been reached with the union on a new four year contract. A labour disruption, such as a strike or lockout, could have a negative material effect on the Fund’s financial position and cash realized from operations.

Interest Rates As of December 31, 2009, $93.6 million of the Fund’s indebtedness bears interest at floating rates (December 31, 2008 - $82.6 million).

Environment, Health and Safety The Processing Facility’s operations are subject to laws governing air emissions, discharges into water, waste, hazardous materials and workers’ health and safety. As such, there is a risk of environmental, health and safety liabilities. The Processing Facility has obtained the necessary permits and other approvals relating to the protection of the environment and workers’ health and safety. Compliance with applicable laws and future changes to them is material to the Processing Facility’s operation. Future legislation and regulations could necessitate additional expenses, capital expenditures and restrictions on the operation of the Processing Facility, the extent of which cannot be predicted. The Fund has a comprehensive environmental management system, which consists of an environmental policy, as well as implementation codes and procedures including codes of practice, job descriptions, operating procedures, rules and responsibilities, employee training, public and employee communications, emergency preparedness, hazard analysis and audits.

Legal Proceedings The nature of the Fund’s business subjects it to regulatory investigations, claims, lawsuits and other proceedings in the ordinary course of business. The results of these legal proceedings cannot be predicted with certainty. There can be no assurance that these matters will not have a materially adverse effect on the results of operations in any future period, and a substantial judgement could have a materially adverse impact on the Fund’s business, financial condition, liquidity and results of operations.

Reliance on the Fund Manager The Fund is dependent upon Xstrata Canada for the operation and maintenance of the Processing Facility. The agreement may be terminated after 2017, or earlier, in certain circumstances. Upon termination, the Partnership will be required to establish replacement arrangements for the operation of the Processing Facility. The Fund is dependent upon Xstrata Canada for the operation and maintenance of the Processing Facility.

OTHER DEVELOPMENTS

In August 2004, the Processing Facility was served with a class action motion to institute a class action presentable before the Québec Superior Court, subsequent to an accidental discharge of sulphur trioxide. In June 2008, the Québec Superior Court dismissed the motion. The plaintiff appealed the decision. In August 2009, the Québec Court of Appeal dismissed the appeal. In December 2009, the Processing Facility was served with a new motion for leave to institute a class action. The motion is expected to go before the courts in 2010. The Manager continues to maintain that the class action suit is unfounded.

OUTLOOK

The Fund is providing guidance for 2010 production, sales, premiums, processing fee and capital expenditures:

Production: 265,000 tonnesSales: 265,000 tonnes Premiums: 4 cents US per poundProcessing fee: 38.5 cents per poundCapital expenditures: $ 24 million

The Fund’s ability to meet the targets identified above is subject to various risks and the assumptions can be found in the “Forward-looking Information” below.



FORWARD-LOOKING INFORMATION

Forward-looking Information involves known and unknown risks, uncertainties and other factors, which may cause the actual results or performance to be materially different from any future 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, the following: (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 impact of month prior pricing; (7) the ability of the Fund to continue to service customers in the same geographic region; (8) the sensitivity of the Fund’s Net Revenues to reductions in realized zinc metal prices including premiums, copper prices, sulphuric acid prices; the strengthening of the Canadian dollar vis-à-vis the US dollar; and increasing transportation and distribution costs; (9) the sensitivity of the Fund’s production costs to increases in electricity rates, other energy costs, labour costs and operating supplies used in its operations, the sensitivity of the Fund’s interest expense to increases in interest rates; (10) changes in recoveries and capital expenditure requirements; (11) the negotiation of collective agreements with its unionized employees; (12) general business and economic conditions; (13) transportation disruptions; (14) the legislation governing the operation of the Fund including, without limitation, air emissions, discharges into water, waste, hazardous materials, workers’ health and safety, and many other aspects of the Fund’s operation as well as the impact of future legislation and regulations on expenses, capital expenditures, taxation and restrictions on the operation of the Processing Facility; (15) potential negative financial impact from regulatory investigations, claims, lawsuits and other proceedings; (16) loan default and refinancing risk; and (17) reliance on Xstrata Canada for the operation and maintenance of the Processing Facility.


The accompanying consolidated financial statements of the Noranda Income Fund (the “Fund”) have been prepared by management in accordance with Canadian generally accepted accounting principles. 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 generally accepted accounting principles. 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 ensures that management fulfils its responsibilities for financial reporting and internal control 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.

Mario Chapados Michael BoonePresident and Chief Vice-President and Chief Executive Officer Financial OfficerCanadian Electrolytic Canadian Electrolytic Zinc Limited Zinc LimitedThe Noranda Income The Noranda Income Fund’s Manager Fund’s Manager

January 29, 2010

Ernst & Young, LLPChartered AccountantsMontreal, Canada

January 29, 2010

1 CA auditor permit no. 15783

To the unitholders of the Noranda Income Fund:We have audited the consolidated balance sheets of the Noranda Income Fund as at December 31, 2009 and 2008 and the consolidated statements of earnings (loss) and deficit and comprehensive income (loss) and cash flows for the years then ended. These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion regarding these financial statements, based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Fund as at December 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended, in accordance with Canadian generally accepted accounting principles.

Management’s statement of responsibility Auditors’ report

1


Consolidated Balance Sheets

December 31 ($ thousands) 2009 2008

(note 1)

Assets (note 6)

Current assets:

Cash and cash equivalents $ 2,895 $ 3,455 Accounts receivable

Trade 77,126 32,520

Xstrata Canada (note 15) 8,270 36,583

Commodity hedging instruments (note 12) 4,409 –

Firm commitments (note 12) – 4,773 Inventories (note 4) 110,875 79,943 Prepaids and other assets 949 2,110

204,524 159,384

Long-term commodity hedging instrument (note 12) 1,110 –Property, plant and equipment (note 5) 295,756 308,258

501,390 467,642

Liabilities And Equity

Current liabilities:

Accounts payable and accrued liabilities Trade 16,254 22,819 Xstrata Canada (note 15) 72,477 22,708

Commodity financial instruments (note 12) 3,587 630 Commodity hedging instruments (note 12) – 4,702 Firm commitments (note 12) 4,112 – Distributions payable – 4,250 Current portion of long-term debt (note 6) 207,886 –

304,316 55,109

Long-term firm commitments (note 12) 1,111 –Future tax liability (note 9) 13,147 13,147 Future site restoration and reclamation (note 7) 9,006 12,806 Long-term debt – 196,615 Interests of Ordinary Unitholders (note 10) 48,619 50,783

Unitholders’ Interest:

Unitholders’ equity (note 11) 191,273 191,273 Deficit (66,082) (52,091)

125,191 139,182

501,390 467,642

[See accompanying notes] Going concern uncertainty (note 1)Commitment and contingencies (note 8)

On behalf of the Board of Trustees of the Noranda Operating Trust:

Lisa de WildeChair

James BaconChair,Audit Committee


Consolidated statements of earnings (loss) and deficit and comprehensive income (loss)


Revenues

Sales (note 15) $ 483,175 $ 619,770

Transportation and distribution costs (14,321) (19,053)

468,854 600,717

Raw material purchase costs (note 15) 253,276 303,155

Revenues less raw material purchase costs 215,578 297,562

Other expenses

Production (note 15) 165,716 175,731

Selling, general and administration (note 15) 17,609 17,964

Foreign exchange loss (gain) (9,605) 17,849

Commodity financial instruments loss (note 12) 2,957 1,594

Commodity hedging gain (note 12) (224) (88)

Amortization of property, plant and equipment 36,021 32,826

Reclamation (note 7) (3,595) 1,153

208,879 247,029

Earnings before interest, minority interest and income tax 6,699 50,533

Interest expense, net (note 6) 11,104 13,654

Earnings (loss) before minority interest and income tax (4,405) 36,879

Minority interest in earnings (loss) for Ordinary Unitholders (1,101) 9,220

Net earnings (loss) and comprehensive income (3,304) 27,659

Deficit, beginning of period (52,091) (41,502)

Distributions to Priority Unitholders (note 11) (10,687) (38,248)

Deficit, end of period (66,082) (52,091)Net earnings (loss) per Priority Unit (basic and diluted) $ (0.09) $ 0.74

Weighted average number of Priority Units outstanding

(basic and fully diluted) 37,497,975 37,497,975

[See accompanying notes]


Consolidated statements of cash flows


Cash realized from (used for) operations:

Net earnings (loss) $ (3,304) $ 27,659 Items not affecting cash:

Amortization of property, plant and equipment 36,021 32,826 Reclamation (note 7) (3,595) 1,153 Minority interest in earnings for Ordinary Unitholders (1,101) 9,220 Mark-to-market loss on commodity financial instruments (note 12) 2,957 1,594 Mark-to-market loss on hedging financial instruments (note 12) (224) (88)Change in fair value of embedded derivatives (note 12) 4,290 3,522 Accretion on long-term debt (note 6) 255 255 Loss from sale of assets 1,356 1,616

Site restoration expenditures (note 7) (205) (477)

36,450 77,280

Net change in non cash working capital items:

Accounts receivable (16,293) 17,724 Inventories (31,850) 48,594 Prepaid expenses and other assets 1,161 85 Accounts payable and accrued liabilities 38,912 (21,343)

(8,070) 45,060

28,380 122,340

Cash realized from (used for) investment activities:

Purchases of property, plant and equipment (23,964) (28,351)Proceeds from government assistance – 478 Proceeds from sale of property, plant and equipment 7 193

(23,957) (27,680)Cash realized from (used for) financing activities: Distributions – Priority Unitholders (note 11) (13,874) (38,248) – Ordinary Unitholders (note 10) (2,125) (12,750)Long-term debt issued (note 6) 297,263 282,500 Long-term debt repaid (note 6) (286,247) (326,409)

(4,983) (94,907)Change in cash and cash equivalents during the period (560) (247)Cash and cash equivalents, beginning of period 3,455 3,702 Cash and cash equivalents, end of period 2,895 3,455 Supplemental cash flow information:

Cash interest paid 11,375 14,204 Cash taxes paid – –

[See accompanying notes]


The Noranda Income Fund (the “Fund”) was created in 2002, initially to acquire from Noranda Inc. (“Noranda”), indirectly through the Noranda Operating Trust (the “Operating Trust”) and the Noranda Income Limited Partnership (the “Partnership”), the CEZinc processing facility (the “Processing Facility”) in Salaberry-de-Valleyfield in Québec. The Processing Facility produces refined zinc metal and various byproducts from zinc concentrates. As of June 30, 2005, Noranda changed its name to Falconbridge Limited (“Falconbridge”) pursuant to a corporate amalgamation. Falconbridge was subsequently acquired by Xstrata plc (“Xstrata”), a global diversified mining group, listed on the London and Swiss stock exchanges. In October 2007, Falconbridge changed its name to Xstrata Canada Corporation (“Xstrata Canada”).

The Fund’s consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) on a going concern basis, which presumes the Fund will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the ordinary course of business for the foreseeable future. The use of these principles may not be appropriate. For the year ended December 31, 2009, the Fund incurred a $3.3 million consolidated loss for the first time in the history of the Fund, and realized $28.4 million in cash from operations. The results reflected the impact of the Processing Facility operating at less than full capacity from March to September 2009 and the weaker market conditions throughout 2009. The Fund’s committed cash obligations for the year ending December 31, 2010 exceed its committed sources of funds at December 31, 2009, and the Fund has a working capital deficiency of $99.8 million as at December 31, 2009. The Fund anticipates it needs to renew its current debt or raise additional capital in the form of debt to supplement or replace its existing credit facilities and notes in order to have sufficient liquidity to meet its obligations over the next 12 months. Management of the Fund has commenced discussions with its lenders to renew its existing credit facilities. The Fund has also initiated discussions with other sources of financing, including government sponsored lenders, in order to provide financing alternatives if the discussions with the lending syndicate and noteholders does not generate the required level of refinancing. However, given the state of the current capital market, there is uncertainty as to whether sufficient capital would be made available either from the Fund’s current lenders or other parties. The Fund’s inability to further extend its revolving credit facility or refinance its notes may require it to seek additional funding sources on less favourable terms. Due to these circumstances, there is uncertainty upon the Fund’s ability to continue as a going concern. The refinancing may be done at less favourable terms than what currently exist, and it may require that a portion of the debt be paid down.

There are a number of facts that support the ability for the Fund to refinance its debt coming due in 2010, including the following:• The Fund returned to full production in the fourth quarter of

2009 which improves the economics of the business going forward, and it generated net earnings of $1.4 million for the quarter.

• In the fourth quarter of 2009, the Fund received the support of its lending syndicate in order to amend the Revolving Facility to address potential covenant breaches.

• The Fund has a history of being able to generate positive cash flow from operations, including $122.3 million in 2008, $67.9 million in 2007 and $20.2 million in 2006. The cash flow from operations before the changes in working capital for the same three periods was $77.3 million in 2008, $81.8 million in 2007 and $73.2 million in 2006.

• The Fund responded to the economic challenges that it faced in 2009 by suspending the distribution in July 2009, reducing inventories and production costs and investing capital to increase product flexibility.

• The Fund is faced with several risks that may have a material impact on its liquidity. While it believes it has developed a course of action and identified other opportunities to mitigate liquidity risks, there is no assurance that the Fund will be able to achieve any or all of the opportunities it has identified, and whether it can obtain sufficient liquidity, if needed.

These consolidated financial statements do not give effect to any adjustments to the amounts and classifications of assets and liabilities which might be necessary should the Fund not be successful in its efforts to renew its current debt or obtain new sources of financing. Such adjustments could be material.

Significant agreementsPursuant to a 15 year Supply and Processing Agreement signed on May 3, 2002, between Xstrata Canada and the Partnership, Xstrata Canada is obligated to sell to the Processing Facility, except in certain circumstances, up to 550,000 tonnes of zinc concentrate annually at a concentrate price (based on the price of zinc metal on the London Metal Exchange (“LME”)) for “Payable zinc metal” contained in the concentrate less a processing fee initially set at $0.352 per pound of that “Payable zinc metal”. As of January 1, 2004, the processing fee is the processing fee in the previous year adjusted annually (i) upward by 1% and (ii) upward or downward by 10% of the year-over-year percentage change in the average cost of electricity per megawatt hour for the Processing Facility. The processing fee for 2009 was $0.38 (2008 - $0.375) per pound. “Payable zinc metal” in respect of a quantity of concentrate was equal to 96% of the assayed zinc metal content on that concentrate under the Supply and Processing Agreement. Under the Supply and Processing Agreement, Xstrata Canada acts as the exclusive agent for the Partnership to arrange the sale of zinc metal and byproducts and related hedging and derivative arrangements. Under the terms of an administration agreement between the Fund and the management of Canadian Electrolytic Zinc Limited (the “Manager”), a wholly owned subsidiary of Xstrata Canada, and a management services agreement between the Operating Trust and the Manager, the Manager provides administrative

NOTE 1. NATURE AND DESCRIPTION OF THE NORANDA INCOME FUND AND GOING CONCERN UNCERTAINTY


Notes to consolidated financial statements December 31st, 2009 [$ thousands except as otherwise indicated]

services to the Fund and management services to the Operating Trust, respectively. The initial terms of these agreements end on May 2, 2017 and will automatically renew thereafter for a five year term, unless terminated in accordance with the terms. Under the terms of an operating and management agreement between the Manager and the Partnership, the Manager operates and maintains the Processing Facility and provides management services to the Partnership. The initial terms of these agreements end on May 2, 2017 and will automatically renew thereafter for a five year term, unless terminated in accordance with the terms. Upon the termination of the operating and management agreement, the Partnership will acquire the Manager from Xstrata Canada. Cash distributionsThe Fund’s practice is to make distributions to unitholders equal to cash flows from operations before variations in working capital and such reserves for operating and capital expenditures as may be considered appropriate by the Board of Trustees. The Fund determines the cash available for distribution 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. Cash distributions on Ordinary Units are subordinate to distributions on Priority Units until 2017 except 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 $0.08333 per Priority Unit (the “Base Distribution”) before any amount is paid to holders of Ordinary Units. If, notwithstanding the subordination of the Ordinary Units, the cash available for distribution is not sufficient to make the Base Distributions on the Priority Units in a month, the amount of the deficiency shall not accumulate and will not be paid to holders of the Priority Units. 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 will accumulate and be paid to holders of the Ordinary Units from excess cash available for distribution in a subsequent month. Any accumulated distribution deficiency related to the Ordinary Units will not be accrued by the Fund until such time excess cash available for distribution is available. As of December 31, 2009, the accumulated distribution deficiency was $2,500.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared in accordance with Canadian GAAP and within the framework of the significant accounting policies summarized as follows:

Use of estimatesThe preparation of these consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions. These estimates affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Significant estimates include, but are not limited to, inventory valuation, amortization, income taxes, revenue recognition, impairment of long-lived assets and future site restoration and reclamation. Actual results could differ from these estimates.

Foreign currency translationForeign currency denominated monetary assets and liabilities are translated at the exchange rate prevailing at the year end, and revenues and expenses at average rates of exchange during the year. Exchange gains and losses arising on the translation of the accounts are included in the consolidated statements of earnings and deficit and comprehensive income.

Cash equivalentsCash and cash equivalents consist of cash and highly-liquid short-term investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. The Fund considers these highly-liquid short-term investments, with a maturity on acquisition of less than three months, to be cash equivalents. Due to the short-term and liquid nature of these financial assets, the Company has elected to classify them as held for trading. As of December 31, 2008, cash equivalents included an overnight deposit with a Canadian chartered bank maturing on January 2, 2009 at a rate of 1.45%. As of December 31, 2009, there were no overnight deposits with Canadian chartered banks.

InventoriesFinished goods, raw materials and work-in-process inventories are valued at the lower of average cost or net realizable value. Inventories of spare parts are valued at the lower of average cost or replacement value on a first-in and first-out basis.

Revenue recognitionRevenues from the sale of refined metals, copper cake, sulphuric acid and calcine are recorded at the time of sale, when the rights and obligations of ownership pass to the buyer, which generally occurs upon shipment. For a portion of the Fund’s sales contracts, final prices for metals are set based on the prevailing spot metal prices on a specified future date based on the date the products are delivered. The Fund records revenues under these contracts based on the forward prices at the time of the sale. At each subsequent balance sheet date, the prices are adjusted to the then current forward price. Price changes for shipments which are awaiting final pricing at year end could have a material effect on future revenues. As of December 31, 2009 there was $6,214 (2008 - $3,322) in revenues that were awaiting final pricing, comprising 1,199 tonnes of zinc and 465 tonnes of copper (2008 – 487 tonnes of zinc and 983 tonnes of copper).


Property, plant and equipmentProperty, plant and equipment are recorded at cost, less any applicable government assistance. Amortization of property, plant and equipment is based on the estimated service lives of the assets, calculated on the straight-line basis at the following annual rates: Computers and software 4 years Automobiles and trucks 4 years Mobile equipment 10 years Buildings and plant equipment 10 - 25 years Anodes 3.5 years

Assets under construction are not amortized until put into use.

Future site restoration and reclamationThe fair value of the future liability for an asset retirement obligation is recognized in the period in which it is incurred and is included within future site restoration and reclamation, with an offsetting amount being recognized as an increase in the carrying amount of the corresponding asset. The liability accretes to its future value until the obligation is completed.

Transaction CostsTransaction costs for financial instruments classified as other than held for trading are recognized as an expense, included in interest expense, in the period they were incurred, except to the extent that they are related to the establishment of a loan facility that has a duration longer than two years. In such cases, they are capitalized and amortized using the effective interest rate method over a period that corresponds with the term of the loan facility.

Income taxesThe Fund follows the liability method of accounting for future income taxes and the related recommendations of Emerging Issues Committee (“EIC”) - 167, Future Income Tax Liabilities – Income Trusts and Other Specified Investment Flow Throughs. Under the liability method, future income tax 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 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. As the Fund is an unincorporated trust, it is entitled to deduct from income, for tax purposes, cash distributions paid or payable to unitholders. Consequently, it is expected that the Fund will not be liable for tax under Part 1 of the Income Tax Act (Canada). The deductibility of distributions to the unitholders represents an exemption from future income taxes relating to temporary differences, as the Fund is committed to continue to distribute to its unitholders all or virtually all of its taxable income that would otherwise be taxable in the Fund. In June 2007, the Federal Government substantially enacted its tax legislation relating to the taxation of existing income and royalty trusts, at effective rates similar to Canadian corporations beginning in 2011. The new tax structure has the intended impact of eliminating any tax advantage enjoyed by the trust

structure over the corporate structure from the perspective of Canadian tax-exempt investors and foreign investors. These changes are effective for existing trusts in 2011.

Comprehensive incomeEffective January 1, 2007, the Fund adopted section 1530, Comprehensive Income. This section describes how to report and disclose comprehensive income and its components. Comprehensive income is the change in the Fund’s net assets that results from transactions, events and circumstances from sources other than the Fund’s unitholders. It includes items that would not normally be included in the net earnings such as: unrealized gains or losses on available for sale investments; and gains and losses designated as cash flow hedges.

Impairment of long-lived assetsProperty, plant and equipment and other long-lived assets are regularly reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset to be held may not be 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.

Exchangeable securities issued by subsidiaries of income trustsOn January 19, 2005, the EIC of the Canadian Institute of Chartered Accountants (“CICA”) issued EIC-151, Exchangeable Securities Issued by Subsidiaries of Income Trusts. The Ordinary Units issued by Noranda Income Limited Partnership, of which the Fund indirectly owns 100% of the Partnership Units, are exchangeable securities that contain a subordination feature. Under EIC-151, these Ordinary Units are required to be presented as minority interest.

Consolidation of Variable Interest EntitiesOn January 1, 2005, the Fund adopted the CICA recommendations on Consolidation of Variable Interest Entities (“VIEs”). These recommendations provide a new framework for identifying VIEs and determining when a company should include assets, liabilities and results of operations of VIEs in the consolidated financial statements. The Fund did not have any VIEs for the years ending December 31, 2008 and 2009.

Government assistanceGrant amounts from government assistance programs are reflected as reductions in the cost of the assets or in the expenses to which they relate at the time which the assistance becomes receivable, when there is reasonable assurance that the assistance will be received. For the year ending December 31, 2009, the Fund received $40, which was recorded as a reduction of the production costs (2008 - $478; reduction of the related plant equipment). There are no ongoing obligations related to the assistance, which is subject to audit by the government agency.



Financial instrumentsThe Fund recognizes a financial asset or financial liability only when the entity becomes a party to the contractual provisions of the financial instrument. Financial assets and liabilities should, with certain exceptions, be initially measured at fair value. After initial recognition, the measurement of each financial instrument will vary depending on their classification: financial assets and financial liabilities held for trading, available-for sale financial assets, held-to maturity investments, loans and receivables, and other financial liabilities. The Fund has classified its cash and cash equivalents as held for trading and its accounts receivable as loans and receivables. Accounts payable, distributions payable and debt are classified as other financial liabilities. Section 3855 also requires that under certain conditions, an embedded derivative be separated from its host contract and accounted for as a derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. The Fund has separated and recorded at fair value, the embedded derivatives resulting from the provisional pricing feature in the concentrate payables as set out in the Supply and Processing Agreement. Under the terms of this agreement, final prices for purchases of concentrate are set based on LME prices prevailing on a specified future date after shipment (“quotational pricing”). The Fund accounts for changes in the fair value of unsettled concentrate payable amounts resulting from quotational pricing with reference to forward LME rates for the remaining quotational period through gains or losses recorded in raw material purchases costs and corresponding adjustments in accounts payable and accrued liabilities.

HedgesThe Fund has determined that the derivatives it has contracted in connection with its inventory management hedging program do not meet the hedging requirements. As a result, and in accordance with Section 3855, these derivatives have been recognized on the balance sheet as either a commodity financial asset or a commodity financial liability with the change in their fair values at each reporting period recognized as a gain or a loss. 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 under Section 3865 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 under the Section. At the inception of the hedge, the Fund documents the hedging relationship and the risk management objective and strategy for undertaking the hedge. Such hedges are expected to be highly effective and this effectiveness is tested at each reporting period. Hedge accounting is discontinued prospectively

when the derivative no longer qualifies as an effective hedge, or the derivative is terminated or sold upon the sale or early termination of the hedged item.

NOTE 3. CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2009, the Fund adopted the CICA Handbook Section 3064, Goodwill and Intangible Assets. Section 3064 states that upon the initial identification, intangible assets are to be recognized as assets only if they meet the definition of an intangible asset and the recognition criteria. This section also provides further information on the recognition of internally generated intangible assets. As for subsequent measurement of intangible assets, goodwill, and disclosure, Section 3064 carries forward the requirements of old Section 3062, Goodwill and Other Intangible Assets. The application of this new section did not have any impact on the Fund’s financial statements. Effective January 1, 2009, the Fund adopted EIC-173 - Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. Under this new standard, an entity’s own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities, including derivative instruments. The adoption of these guidelines did not have any material effect on the Fund’s results, financial position or cash flows. In May 2009, the CICA amended Section 3862, Financial Instruments – Disclosures, to improve disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. Fair values of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant inputs are observable, either directly or indirectly. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement. The amendments to Section 3862 are effective for the Fund’s interim and annual financial statements beginning on October 1, 2009. The new disclosures are included in Note 12.

Future changes in accounting policiesThe CICA issued Handbook Sections 1582, Business Combinations, which replaces Section 1581, Business Combinations; 1601, Consolidated Financial Statements; 1602, Non-controlling Interests; and 1625, Comprehensive Revaluation of Assets and Liabilities. These standards are effective for the Fund’s interim and annual financial statements beginning on January 1, 2011, with earlier application permitted. The suite of business combinations standard (CICA 1582, 1601 and 1602) were harmonized with the converged International Accounting Standards Board (“IASB”) and the Financial Accounting Standards Board (“FASB”) standards on business combinations and with their guidance on accounting for non-controlling interests. In conjunction, with these changes, amendments were made to CICA 1625 and CICA 3251 to remove guidance no longer applicable and to make these standards consistent with the suite of business combinations standards.


Revolving Facility matures May 3, 2010. The amount available to be drawn on the Revolving Facility will vary on a quarterly basis and will be based on 65% of the Fund’s eligible inventory and 80% of the Fund’s eligible accounts receivable (both as defined in the Revolving Facility agreement) from the previous quarter-end. The maximum available to be drawn at any time is $200,000 and the minimum available to be drawn is $55,000. The amount available to be drawn based on the Fund’s December 31, 2009 balance sheet is $134,000 (2008 - $78,000). Borrowings under the Revolving Facility bear interest at rates that vary with the prime rate, the bankers’ acceptance rate, or Libor rates plus applicable margins between 3.5% and 4.5%, and vary based on certain financial ratios of the Fund. As at December 31, 2009, $35,000 (Cdn$36,631) was payable in US Dollars. As at December 31, 2009, the effective interest rate on the Revolving Facility was 4.9% (2008 – 3.3%). On December 19, 2003, the Fund’s subsidiary, Noranda Operating Trust, completed the issue of $153,500 of senior secured notes (the “Notes”) pursuant to a private placement. The Notes have a term of seven years and will mature on December 20, 2010. The Notes are comprised of $114,500 fixed-rate notes (“A-1 Notes”) with a coupon of 6.529%, payable quarterly, and $39,000 floating rate notes (“A-2 Notes”) at a rate of the three-month Canadian Dollar Offer Rate (“CDOR”) plus 1.94%. As of December 31, 2009 the effective interest rate on the A-2 Notes was 2.4% (2008 – 3.6%). The Fund is required to maintain a letter of credit or cash, for the benefit of the holders of the Notes, for an amount equal to or greater than three months interest expense ($2,556 – letter of credit as at December 31, 2009). The assets of the Partnership, the Operating Trust and the Manager are pledged as collateral against the Revolving Facility and the Notes. The Fund has provided covenants to its lenders. All of the covenants were complied with during 2009 and 2008.

Interest, net 2009 2008

Interest on long-term debt $ 10,865 $ 13,540Accretion on long-term debt 255 255Interest income (16) (141) $ 11,104 $ 13,654

NOTE 7. FUTURE SITE RESTORATION AND RECLAMATION

The Fund has determined the fair value of the future liability by using a discount rate of 8%. The liability accretes to its future value until the obligation is completed. The majority of the estimated future site restoration and reclamation expenditures currently recorded relate to the reclamation of residue ponds at the Processing Facility. The estimated future site restoration and reclamation expenditures may vary based on changes in operations, cost of restoration and reclamation activities and regulatory requirements. During the second quarter of 2009, a review of the site restoration and reclamation expenditures was completed by the Fund, including work from a third-party engineering firm. The revisions are subject to approval by the Québec Minister of Natural Resources. The decrease was due to a reduction in the expected future reclamation spending, which has resulted in a reduction in the present value of future

NOTE 4. INVENTORIES

2009 2008

Spare parts $ 8,603 $ 7,870Raw materials 28,322 14,743Work in process 24,335 6,305Finished products 49,615 51,025 $ 110,875 $ 79,943

During 2009, $455,013 (2008 - $511,712) of inventory was expensed including amortization related to property, plant and equipment of $36,021 (2008 - $32,826). Write-downs from cost to net realizable value were nil (2008 - $248).

NOTE 5. PROPERTY, PLANT AND EQUIPMENT

2009 Cost Accumulated Net Book Amortization Value

Plant equipment1 $ 709,337 $ 459,892 $ 249,445Buildings 140,846 99,132 41,714Mobile equipment 2,746 2,428 318Computers and software 3,191 2,738 453Automobiles and trucks 417 390 27Land 3,799 – 3,799 $ 860,336 $ 564,580 $ 295,756

1 Includes $15,003 of plant equipment in progress that was not being amortized asof December 31, 2009.

2008 Cost Accumulated Net Book Amortization Value

Plant equipment2 $ 693,454 $ 433,988 $ 259,466Buildings 138,856 94,890 43,966Mobile equipment 2,828 2,378 450Computers and software 4,204 3,663 541Automobiles and trucks 456 420 36Land 3,799 – 3,799 $ 843,597 $ 535,339 $ 308,258

2 Includes $14,024 of plant equipment in progress that was not being amortized as of December 31, 2008.

NOTE 6. DEBT

2008 2009

Revolving Facility $ 54,631 $ 43,615A-1 Notes 114,500 114,500A-2 Notes 39,000 39,000 $ 208,131 $ 197,115Deferred transaction costs (245) (500) $ 207,886 $ 196,615

On November 16, 2009, the Noranda Operating Trust, a subsidiary of the Fund, completed an amendment with a syndicate of Canadian chartered banks to its secured revolving operating line of credit (the “Revolving Facility”). The amended



site restoration and reclamation liabilities. The sources of the reduced reclamation spending came from:

1. The Fund identified opportunities to recycle some of the residues in operations, therefore, reducing the amount of residues that need to be treated; and

2. The life of some of the residues ponds was extended, thereby deferring the timing of some of the expenditures for the projects.

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 $37,000. The cash flows required to settle the liability are expected to be incurred from now until 2046.

Future Site Restoration and Reclamation Continuity 2009 2008

Opening balance $ 12,806 $ 12,130Accretion of reclamation expense 1,020 957Site restoration and (205) (477) reclamation expendituresChange in estimates (4,615) 196Closing balance $ 9,006 $ 12,806

The Fund’s operations are affected by federal, provincial and local laws and regulations concerning environmental protection. The Fund’s provisions for future site restoration and reclamation 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 8. COMMITMENTS AND CONTINGENCIES

a) Operating leases and purchase commitmentsAt December 31, 2009, the Fund had commitments under operating leases requiring annual rental payments as follows:

2010 $ 1,0652011 7892012 4242013 932014 482015 and thereafter 87 $ 2,506

At December 31, 2009, the Fund had purchase commitments requiring payments as follows:

2010 $ 10,8982011 3,3002012 2,6162013 1,347 $ 18,161

Included in the above is $4,821 of purchase commitments to related parties. Certain agreements for operating costs require the Fund to make minimal purchases, or be subject to penalties.

b) Manager’s pension plan As discussed in Note 1, upon the termination of the operating and management agreement, the Partnership will acquire the Manager from Xstrata Canada. If this occurs, the Partnership will establish a pension plan for the employees of the Manager. Pension plan assets and liabilities will be transferred into the newly established pension plan, subject to obtaining regulatory approvals. As of December 31, 2009, the estimated liability of the Manager’s pension plan was $106,500 (2008 - $101,800). There are currently $104,500 (2008 - $92,100) of assets within the Manager’s pension plan. The cost of providing benefits through defined benefit pension plans and post-retirement benefit plans is actuarially determined. Cost and obligation estimates depend on management’s assumptions about future events, which are used by the actuaries in calculating such amounts. These assumptions include discount rates, the expected return of plan assets and future compensation increases. In addition, actuarial consultants utilized subjective factors, such as withdrawal and mortality rates. Actual results may differ materially from those estimates based on these assumptions.

c) Litigation In August 2004, the Processing Facility was served with a class action motion presentable before the Québec Superior Court, subsequent to an accidental discharge of sulphur trioxide. In June 2008, the Québec Superior Court dismissed the motion to institute a class action. The plaintiff appealed the decision. In August 2009, the Québec Court of Appeal dismissed the appeal. In December 2009, the Processing Facility was served a new motion for leave to institute a class action. The motion is expected to go before the courts in 2010. The Manager continues to maintain that the class action suit is unfounded.

d) Appropriation of landThe Fund is currently in discussion with Québec’s Ministry of Natural Resources regarding land that the Fund is currently using. This land was appropriated by the provincial government a number of years ago. The Fund does not believe that these discussions will require any material cash payment from the Fund.

e) GuaranteesSome 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 agreement. As at December 31, 2009, the Fund does not believe these indemnification provisions would require any material cash payments by the Fund. The Fund indemnifies its directors and officers against claims reasonably incurred and resulting from the performance of their services to the Fund, and maintains liability insurance for its directors and officers. No amounts have been recorded for the contingencies outlined under b) through e) above.


NOTE 9. INCOME TAXES

The Fund follows the liability method of accounting for future income taxes. Under the liability method, future income tax 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. On June 2007, the Federal Government substantively enacted its tax legislation relating to the taxation of existing income and royalty trusts, at effective rates similar to Canadian corporations commencing in 2011. Prior to June 22, 2007, the Fund estimated the future income taxes on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes at a nil effective tax rate. Under the legislation, the Fund now estimates the effective tax rate on post 2010 reversal of these temporary differences to be 28%. Temporary differences reversing before 2011 will still give rise to nil future income taxes. The Fund has estimated its future income taxes based on its best estimates of future results of operations, available CCA deduction and cash distributions and assuming no material changes to the Fund’s organizational structure. The Fund estimates that the unrecognized temporary differences outstanding as of December 31, 2009 that will remain outstanding as of January 1, 2011 are approximately $54,000. The Fund’s estimate of its future income taxes may vary based on actual results of the factors described above, and such variations may be material. The components of the future tax liability are as follows:

Future Tax Liabilities 2009 2008

Property, plant and equipment $ 25,260 $ 27,520Future site restoration and reclamation (1,834) (2,921)Eligible capital property (10,279) (11,452) $ 13,147 $ 13,147

NOTE 10. INTERESTS OF ORDINARY UNITHOLDERS

The Partnership has 12,500,000 Ordinary Units outstanding, which are exchangeable into Priority Units. Ordinary Units are entitled to distributions from the Fund equivalent to distributions paid by the Fund on the Priority Units, provided that the holders of the Priority Units are first paid the Base Distribution of $0.08333 per unit, per month. The Ordinary Units are entitled to a number of votes equal to the number of votes attached to a Priority Unit and vote with the Priority Unitholders as one class. Xstrata’s Ordinary Units are generally not transferable and are exchangeable for Priority Units on a one-for-one basis only after May 2, 2017, or earlier upon the occurrence of certain events.

NOTE 11. UNITHOLDERS’ CAPITAL ACCOUNTS

Unitholders’ Capital Accounts 2009 2008

37,497,975 Priority Units $ 191,273 $ 191,273

The equity of the Fund as of December 31, 2009 consists of 37,497,975 Priority Units. Unitholders can redeem their units at a present formula price, to a maximum of $50 per month, and subject to the Fund’s banking covenants. Pursuant to the Fund’s 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.

Deficit

2009 2008

Deficit, beginning of period $ (52,091) $ (41,502)Net earnings (will change) ( 3,304) 27,659Distributions to Priority Unitholders (10,687) (38,248)Deficit, end of period $ (66,082) $ (52,091)

NOTE 12. DERIVATIVES AND HEDGES

a) Inventory management programThe Fund purchases metal in the form of zinc concentrate to be processed eventually into refined zinc metal for sale to customers. As agent of the Fund, Xstrata Canada provides the hedging arrangements in the event that the structure of the Fund’s sales and purchase contracts does not minimize exposure to changes in zinc prices during the period in which the zinc is refined. The derivatives associated with the Fund’s inventory management program do not meet the requirements for hedge accounting. As a result, these derivative financial instruments have been recognized on the consolidated balance sheets as either a commodity financial instrument financial asset or liability with the change in their fair value at each reporting period date recognized as a financial instrument gain or a loss. As at December 31, 2009, the Fund had sold forward approximately 21 million pounds of zinc (2008 – 27 million pounds of zinc). In 2009, the change in fair value of these derivatives was recorded as financial instruments loss of $2,957 which was recognized in the consolidated statement of earnings (loss)and deficit and comprehensive income (loss) in commodity financial instrument loss (2008 – commodity financial instrument loss of $1,594). As at December 31, 2009, the fair value of these positions, as determined with reference to quoted market prices (level 1), was a commodity financial liability of $3,587 (2008 – commodity financial instrument liability of $630).

b) Hedges of fixed firm commitments Certain customers request a fixed sales price instead of the LME average price in the month of shipment. Xstrata enters into commodity forward and futures contracts on behalf of



the Fund that will allow the Fund to receive the LME average price in the month of shipment while customers pay the agreed-upon fixed price. Xstrata Canada accomplishes this by settling the futures contracts during the month of shipment, which generally results in the realization of the LME average prices. In the event that the futures contracts have to be terminated early, due to the customer cancelling a fixed price order, Xstrata Canada has the right to charge the customer with the cost of settling the LME futures contract. A high degree of correlation between the changes in the fair value of the contracts and the fixed sales commitments permits hedge accounting to be used. At December 31, 2009, Xstrata Canada had futures contracts hedging approximately 28 million pounds of zinc (2008 – 31 million pounds) to be sold pursuant to firm commitments at fixed prices and delivery dates related to the Fund. At December 31, 2009, the fair value of these contracts as determined with reference to pooled market prices (level 1) was recognized as a financial instrument asset of $4,409 and a long-term commodity hedging instrument asset of $1,110 (2008 – financial instrument liability of $4,702) and the fair value of the firm fixed sales commitments was recognized as a firm commitment liability of $4,112 and a long-term firm commitment liability of $1,111 (2008 – firm commitment asset of $4,773). The net change in fair value of these net positions, representing the ineffective portion of the hedge position for 2009 was recognized in the consolidated statement of earnings (loss) and deficit and comprehensive income (loss) as a commodity hedging gain of $224 (2008 – gain of $88)

c) Embedded derivativesFor the year ended December 31, 2009, the Fund recorded $4,290 as a increase of raw material purchase costs related to the change in fair value, as determined with reference to pooled market prices (level 1) of the embedded derivatives resulting from the quotational pricing feature of its zinc concentrate payables (2008 - increase of $3,522).

d) US dollar purchasesThe Fund’s foreign exchange risk arises primarily with respect to the US dollar. The Fund’s revenue and raw material purchase costs are exposed to foreign exchange risk as commodity sales and raw material purchase costs are denominated in US dollars. The majority of operating expenses, principally labour costs and energy costs, are payable 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 cake and sulphuric acid and zinc metal recovery gains in US dollars. As of December 31, 2009, there are no outstanding US dollar forward purchases.

NOTE 13. FINANCIAL INSTRUMENTS

Financial risk managementThe Fund’s activities expose it to a variety of financial risks, which include market risk, credit risk and liquidity risk. The Fund’s primary risk management objective is to protect the Fund’s balance sheet, earnings and cash flow in support of

providing stable monthly cash distributions to unitholders. From time-to-time, the Fund may use foreign exchange forward contracts and commodity price contracts to manage exposure to fluctuations in foreign exchange and metal prices. The Fund’s use of derivatives is based on established practices and parameters, which are subject to the oversight of the Board of Trustees.

Market riskThe Fund purchases zinc concentrate, issues debt at fixed and floating rates, invests surplus cash, sells zinc, copper cake and sulphuric acid in US dollars and purchases inputs in US dollars. These activities expose the Fund to market risk from changes in zinc prices, interest rates, and foreign exchange rates, which affect the Fund’s balance sheet, earnings and cash flows. The Fund uses derivatives as part of its overall risk management policy to manage certain exposures to market risk that result from these activities.

Interest rate riskThe Fund’s financing strategy is to access private capital markets to raise long-term core financing and utilize the banking market to provide committed revolving facilities to support its short-term cash flow needs and to support its working capital requirements. The Fund has fixed-rate debt, which subjects it to interest rate price risk, and has floating-rate debt, which subjects it to interest rate cash flow risk. As at December 31, 2009, the Fund had $114,500 (55%) of short-term debt at fixed interest rates and $93,631 (45%) of short-term debt at variable interest rates, before taking into consideration $245 of deferred transaction costs. The Fund invests surplus cash in bank deposits and short-term money market securities, which due to their short-term nature, do not expose the Fund to material interest rate risks. As at December 31, 2009, with other variables unchanged, a 1% change in the variable interest rates would have an insignificant impact on the net earnings of the Fund.

Foreign exchange riskThe Fund’s foreign exchange risk arises primarily with respect to the US dollar. The Fund’s revenue and raw material purchase costs are exposed to foreign exchange risk as commodity sales and raw material purchase costs are denominated in US dollars. The majority of operating expenses, principally labour costs and energy costs are payable 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 cake and sulphuric acid and zinc metal recovery gains in US dollars. As of December 31, 2009, there are no outstanding forward US dollar purchases. The Fund also has exposure to the US dollar for its cash, account receivable, inventory, accounts payable and accrued liabilities and long-term debt. The Fund attempts to manage the overall economic exposure to US dollar by matching US dollar assets to US dollar liabilities. This currency exposure is managed in part through US dollar overnight transactions. Each US one-cent change in the value of the Canadian dollar as of December 31, 2009 impacts earnings before minority interest by approximately $902.


Commodity price riskThe Fund is subject to price risk from fluctuations in market prices of commodities. The Fund uses future contracts to manage its exposure to fluctuations in commodity prices. The use of the future contracts is based on established practices and parameters. The Fund’s commodity price risk associated with financial instruments primarily relates to changes in fair value caused by settlement adjustments to receivables and payables and other financial instruments, including firm commitments. The following represents the financial instruments’ effect on the net earnings after-tax as at December 31, 2009 from a 10% change to metal prices, based on the December 31, 2009 LME forward prices:

Effect on financial Price on instruments on December 31, 2009 Change Net Earnings

Zinc US$ 1.15 per pound +10%/-10% $(9,416)/9,416Copper US$ 3.34 per pound +10%/-10% $ 269/269

Credit riskThe Fund invests surplus cash in bank deposits and short-term money market securities, sells its products to customers on standard market credit terms, and uses derivatives to manage its market risk exposures. These activities expose the Fund to counterparty credit risk that would result if the counterparty failed to meet its obligations in accordance with the terms and conditions of its contracts with the Fund. Accounts receivable credit risk is mitigated through established credit monitoring activities. These include conducting financial and other assessments to establish and monitor a customer’s creditworthiness, setting customer limits, monitoring exposure against these limits, and in some instances moving the customer to cash-in-advance terms. The Processing Facility is dependent on key customers. In 2009, the Processing Facility’s 10 largest customers accounted for approximately 72% (2008 – 67%) of its direct and indirect sales (on a volume basis), with its largest customer accounting for 19% (2008 – 16%). As of December 31, 2009, the accounts receivable from the largest customer represented 33% of the account receivable – trade balance (2008 – 11%). The loss of a significant customer may have a materially adverse effect on the Fund’s financial position and the results of operations. The Processing Facility’s sales are concentrated primarily in the

north-eastern and mid-western United States and in central and eastern Canada, with a number of the large customers being steel producers. As at December 31, 2009, $76 of the accounts receivable – trade were thirty days past due. The Fund expects to collect these funds from the customer, therefore, the Fund does not consider them to be impaired. Surplus cash is only invested with counterparties meeting minimum credit quality requirements. Derivative transactions are executed only with approved high-quality counterparties under master netting agreements. The Fund monitors and manages its concentration of counterparty risk on an ongoing basis. The Fund’s maximum exposure to counterparty credit risk at the reporting date is the carrying value of cash and cash equivalents, accounts receivables, firm commitments and commodity financial instruments.

Liquidity riskThe Fund manages liquidity risk by maintaining adequate cash and cash equivalent balances, and by appropriately using the Fund’s revolving facility. The Fund continuously reviews both actual and forecasted cash flows to ensure that the Fund has appropriate revolving facility capacity. Based on the balance sheet as of December 31, 2009, the Fund had $2,895 of cash and cash equivalents and $76,000 of unutilized Revolving Facility. The following table summarizes the amount of contractual undiscounted future cash flow requirements for contractual obligations as at December 31, 2009:

NOTE 14. CAPITAL RISK MANAGEMENT

The Fund’s objectives when managing capital is to provide stable monthly cash distributions to its unitholders, to ensure the Fund has the capital and capacity to support the Fund’s ability to continue as a going concern, and to enable the Fund to make sustaining and revenue generating capital expenditures. The Fund’s capital consists of unitholders’ interest and long-term debt. The Fund’s capital structure reflects the requirements of a company in zinc processing industry that has long-term fixed processing fee supply contracts. The Fund expects to reduce the amount of long-term debt within the capital structure as it moves closer to the end of the long-term fixed processing fee supply contract (May 2, 2017). The Fund’s investment in working capital

Payments due by period

Contractual Obligations Total Q1 2010 Q2 2010 Q3 2010 Q4 2010 2011 and thereafter

Revolving Facility $ 54,631 – $ 54,631 – – –Notes 153,500 – – – 153,500 –Accounts payable and accrued liabilities 88,731 83,926 1,403 1,442 1,960 –Commodity financial instruments 3,587 3,587 – – – –Firm commitments 5,223 1,118 1,271 1,020 703 1,111

Total $ 305,672 $ 88,631 $ 57,305 $ 2,462 $ 156,163 $ 1,111



is directly correlated to the price of zinc and is funded by the Revolving Facility. The Fund continually assesses the adequacy of our capital structure and capacity and makes adjustments within the context of the Fund’s strategy, economic conditions and the risks characteristics of the business. The Fund monitors its capital using the measures that are consistent with the main covenants under the Revolving Facility. They require the Fund to maintain, at the end of each quarter, a leverage ratio, an interest coverage ratio, and a current ratio. The leverage ratio at the end of each quarter, on a rolling four-quarter basis, is calculated by dividing the total debt at the end of the period by the Fund’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the period, as defined in the Revolving Facility agreement, and must be no greater than 4.25 to 1. In November 2009, the Fund reached an agreement with the Revolving Facility syndicate to amend the Revolving Facility. The amendment provides that the maximum Leverage ratio has increased from 4.25 to 1 to 5.25 to 1 for the periods ending December 31, 2009 and March 31, 2010. The interest coverage ratio at the end of each quarter, on a rolling four-quarter basis, is calculated by dividing the Fund’s EBITDA for the period by the total interest expense for that period net of the interest expense related to any subordinated loans, as defined in the Revolving Facility agreement, and must be no less than 3 to 1. The current ratio is calculated at the end of each quarter by dividing the current assets by the total of the non-debt current liabilities plus the Revolving Facility, as defined in the Revolving Facility agreement, at the balance sheet date, and must be no less than 1 to 1. The following provides a summary of the measures based on a rolling four-quarter basis:

Twelve month period ending as at December 31, 2009

Leverage ratio 4.3Interest coverage ratio 4.4Current ratio 1.3

NOTE 15. RELATED PARTY TRANSACTIONS

As discussed in Note 1, the Fund has entered into significant agreements with related parties. As a result of the Supply and Processing Agreement, during 2009, Xstrata has sold $283,143 of concentrate (2008 - $232,890) and provided $1,320 of sales agency services (2008 - $996). The sales agency services are provided on a cost recovery basis. As of December 31, 2009 the Partnership has a payable of $59,053 to Xstrata Canada (2008 - $8,032) related to the Supply and Processing Agreement. This amount is included in accounts payable and accrued liabilities. As a result of the administration agreement between the Fund and the Manager, the management agreement between the Operating Trust and the Manager and an operating and management agreement between the Partnership and the Manager, Xstrata Canada has provided the following administration, management and operating services to the Fund:

Selling, General and Administration 2009 2008

Salary and benefits $ 5,989 $ 7,184Support services 1,169 1,091Operating and management agreement management fee 282 276 Total $ 7,440 $ 8,551

During 2009, the Fund’s production expenses included $55,639 (2008 – $63,493) of salary and benefits provided by the Manager. The support services, which include administration, management and operating services are provided on a cost recovery basis in addition to an annual management fee of $282 in 2009 (2008 - $276). The annual management fee is adjusted by 2% per annum at the beginning of each calendar year. As of December 31, 2009 the Fund, Operating Trust and the Partnership had a payable of $13,087 (2008 - $13,017) related to the agreements. This amount was included in accounts payable and accrued liabilities. In addition to the related party transactions above, the Partnership undertakes transactions with Xstrata Canada and affiliated companies at terms that reflect market rates. The following table summarizes the related party transactions for the periods.

2009 2008

Sales Sales of zinc metal $ 80,291 $ 54,882Sales of copper, sulphuric acid, and calcine 27,449 50,315Expenses Purchases of raw materials

and operating supplies $ 4,221 $ 7,499 Included in the accounts receivable as at December 31, 2009 was $8,270 (2008 - $36,583) of amounts due from sales of zinc metal and copper, sulphuric acid and calcine. Included in accounts payable and accrued liabilities as at December 31, 2009 was $337 (2008 - $1,659) of amounts due to related parties, excluding amounts due under agreements identified above. All amounts due to and from related parties are non-interest bearing and are due in the ordinary course of business. All transactions with Xstrata Canada and affiliated companies are carried out in the normal course of operations, and are recorded at an agreed upon exchange amount.

NOTE 16. SEGMENTED INFORMATION

The Fund operates in one business segment; all sales are made from Canada and all assets are located in Canada. Sales are attributed to customers based on their geographic location.

2009 2008

Canada $ 133,506 $ 190,200United States 338,932 415,623Other 10,737 13,947 $ 483,175 $ 619,770

Transfer Agent and Registrar

For information concerning

monthly distributions and general

inquiries, please contact:

Computershare Trust Company

of Canada

1500 University Street

Suite 700

Montreal, Québec

Canada H3A 3S8

Tel: 1-800-564-6253

(North America)

Email: [email protected]

Head Office

100 King Street West

First Canadian Place

Suite 6900, P.O. Box 403

Toronto, Ontario

Canada M5X 1E3

Tel: 416-775-1500

Fax: 416-775-1749


www.norandaincomefund.com

Annual Meeting of Unitholders

Will be held at 3:00 p.m. on May 3, 2010 at the TSX Broadcast & Conference Centre, The Exchange Tower, 130 King Street West, Toronto, Ontario M5X 1J2, in the Gallery Room.

Auditors

Ernst & Young, LLP

Chartered Accountants

Montreal, Québec

Processing Facility

Canadian Electrolytic Zinc Limited

860, Gérard-Cadieux Boulevard

Salaberry-de-Valleyfield, Québec

Canada J6T 6L4

Contact

Michael Boone

Vice President and Chief

Financial Officer

Canadian Electrolytic Zinc Limited

Noranda Income Fund’s Manager

Tel.: 416-775-1561


Canadian Electrolytic

Zinc Limited,

Noranda Income

Fund’s Manager

Officers

Mario Chapados

President and

Chief Executive Officer

Michael Boone

Vice President and

Chief Financial Officer

Reid Bowlby

Vice President, Marketing

Ginette Berthel

Corporate Secretary

Trustees

Lisa de Wilde, Chair 1,2

James Bacon 1

Bob Sippel 3

John Eby 1,2

Manuel Álvarez Dávila 3

Gérard Limoges 1,2

John Whyte 3

¹ Member of the Audit Committee

² Member of the Governance and

Nominating Committee

³ Related to Xstrata PLC

Exchange Listing

TSX: NIF.UN

Corporate Information

UNIT TRADING INFORMATION

Date High Low Close Volume Traded

2009 Q1 $ 4.94 $ 2.25 $ 2.80 5,088,489

2009 Q2 $ 3.16 $ 2.75 $ 2.82 2,804,401

2009 Q3 $ 2.99 $ 1.53 $ 2.52 6,656,997

2009 Q4 $ 3.45 $ 2.01 $ 2.55 12,544,914

Date High Low Close Volume Traded

2008 Q1 $ 9.90 $ 8.05 $ 9.18 2,993,064

2008 Q2 $ 9.20 $ 7.78 $ 8.47 3,937,092

2008 Q3 $ 9.45 $ 6.52 $ 7.00 2,235,674

2008 Q4 $ 7.00 $ 2.35 $ 4.15 5,211,775

100 King Street West

First Canadian Place

Suite 6900, P.O. Box 403

Toronto, On M5X 1E3

www.norandaincomefund.com

Tel: 416-775-1500

Fax: 416-775-1749

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2 3 4

Cover Photo Credits

Operator shipping zinc slab to customers

Instrumentation technician verifying equipment

Employees in the leach plant

Roaster and acid plant operator

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2

3

4

Documents

NIF NIF AR ENG final.pdf · Xstrata Canada Corporation (“Xstrata Canada”) under an agreement that will last until 2017. The Fund is paid a processing fee for refining the zinc,