Noranda Income Fund reports third quarter financial results



    TORONTO, Nov. 5 /CNW/ -

    Management's Discussion and Analysis

    This discussion and analysis of the financial position and results of
operations of the Noranda Income Fund (the "Fund") should be read in
conjunction with the unaudited interim consolidated financial statements of
the Fund for the three months and nine months ended September 30, 2007 and
with the audited consolidated financial statements of the Fund and the notes
thereto for the period ended December 31, 2006.
    This discussion is based on various assumptions (see "forward-looking
statements" below.) All dollar amounts are shown in Canadian dollars unless
otherwise specified.
    The management discussion and analysis has been prepared as of November
5, 2007. Additional information relating to the Fund, including the Fund's
annual information form is available on SEDAR at www.sedar.com.
    As further described under Summary of Quarterly Results, the Fund has
determined that certain adjustments are required to restate the unaudited
consolidated financial statements for the three months ended March 31, 2007
and the three and six months ended June 30, 2007. The Fund identified that it
did not properly account for the embedded derivatives related to provisional
pricing in its concentrate purchase contracts. Under the terms of this
contract, fixed prices are set on a specified future date after shipment (the
"quotational period") based on quoted market prices.

    Third Quarter Results

    The Fund reported net earnings of $6.4 million for the third quarter of
2007, compared to $15.6 million in the same quarter a year ago. The decrease
was due to lower zinc recovery, a mark-to-market loss relating to financial
instruments and hedges of $5.2 million, a lower volume of zinc metal sales and
a stronger Canadian dollar offset by higher zinc metal premiums.
    Net earnings of $13.7 million were reported for the first nine months
ending September 30, 2007 compared to $29.2 million in the first nine months
of 2006. The $15.5 million decrease was mainly due to the recognition of 
$14.6 million of future income tax expense recorded in the second quarter of
2007 resulting from the enactment of Bill C-52, lower zinc metal sales, lower
zinc recovery and higher interest expense offset by higher premiums and lower
amortization and reclamation costs.
    The outlook for 2007 and the estimate for production, sales, premiums and
byproduct revenue are subject to various risks and uncertainties. The
assumptions can be found in the "forward-looking statements" below.

    
    Q3 2007 Highlights

                                          Third Quarter            Year
                                         2007       2006      2007       2006
                                         ----       ----      ----       ----
    Zinc metal production (tonnes)     69,242     67,498   195,436    198,280
    Zinc metal sales (tonnes)          61,335     66,954   181,261    197,411
    Zinc metal premiums (US$/pound)     0.121      0.073     0.113      0.071
    Byproduct revenues ($ millions)       9.5        7.7      25.0       27.5
    Average US/Cdn. exchange rate       1.045      1.120     1.105      1.133

    -   Production for the quarter was 69,242 tonnes, a 3% improvement over
        2006
    -   Realized premiums for the quarter per pound were higher - 12.1 cents
        US in 2007 vs. 7.3 cents US in 2006.
    -   All of the monthly distributions were paid at the 8.5 cents per unit
        level.
    

    RESULTS OF OPERATIONS

    Consolidated Earnings (Third quarter 2007 compared to third quarter 2006)

    Revenues less raw material purchases ("Net Revenues") for the third
quarter of 2007 totalled $62.7 million, compared to $76.9 million in the same
period of 2006. The $14.2 million decrease was due to lower zinc metal sales
offset by higher premiums, byproduct revenue and processing fee. During 2007,
Net Revenues were negatively impacted by the strengthening of the Canadian
dollar (see foreign exchange gains below).
    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
to manage the Fund's liquidity position and credit exposure. In a market in
which zinc prices are falling, a portion of the Fund's revenues will benefit
from the higher zinc prices from the prior month. In a market where zinc
prices are rising, a portion of the Fund's revenues will lag behind the higher
zinc prices. In the third quarter of 2007, month prior pricing had a positive
impact of approximately $3.2 million on the Fund's Net Revenues, as the
average monthly zinc price decreased from US $1.63 per pound in June 2007 to
US $1.31 per pound in September 2007.
    Production costs in the third quarter of 2007 at $38.6 million were
comparable to $38.9 million recorded in the same quarter a year ago.
    SG&A costs for the third quarter of 2007 were $5.1 million compared to
$4.5 million in the third quarter of 2006.
    The foreign exchange gain in the third quarter of 2007 was $8.5 million.
The $8.5 million increase was due to the impact of a strengthening Canadian
dollar on the Fund's net monetary liability. The foreign exchange gain was
partially offset by a decrease in the value of in-process and finished
inventory. The decrease in the value of the inventory is realized in Net
Revenues as the metal is sold to customers (see Net Revenues above). The Fund
maintains cash and cash equivalents, accounts receivable and accounts payable
in US dollars.
    During the third quarter of 2007, the financial instruments loss was 
$5.2 million. Effective January 1, 2007, the Fund adopted new accounting
policies relating to financial instruments and hedging. During the quarter,
the change in the market value of the Fund's financial instruments resulted in
the loss being recorded.
    Amortization and reclamation costs in the quarter were $7.9 million, an
increase of $0.4 million from the same period in 2006. The increase was due in
part to higher capital spending over the last 12 months, which has resulted in
higher amortization.
    In the third quarter of 2007, net interest expense was $5.9 million
compared to $5.3 million in the third quarter of 2006 due to an increase in
interest rates and debt outstanding as a result of higher working capital
requirements, and higher interest expense related to delayed concentrate
payments.
    Minority interest in earnings in the third quarter of 2007 was
$2.1 million, down from $5.2 million in the third quarter of 2006 due to the
lower net earnings of the Fund.

    Consolidated Earnings (Nine months 2007 compared to nine months 2006)

    Revenues less raw material purchases ("Net Revenues") for the first nine
months of 2007 totalled $190.1 million, compared to $206.5 million in the same
period of 2006. The $16.4 million decrease was due to lower sales, and lower
byproduct revenue, offset by higher premiums and processing fee. During 2007,
this number was also negatively impacted by the strengthening Canadian dollar.
    Production costs in the first nine months of 2007 were $115.5 million,
compared to $120.0 million in the same period a year ago. The decrease is due
to the lower zinc metal sales and production.
    SG&A costs for the first nine months of 2007 were $15.1 million compared
to $13.9 million in the same period of 2006. During the first nine months of
2006, production costs were reduced by $0.6 million related to an insurance
settlement.
    The foreign exchange gain in the first nine months of 2007 of
$17.7 million compared to a foreign exchange gain of $0.5 million for the same
period in 2006. The $17.2 million increase was due to the impact of a
strengthening Canadian dollar on the Fund's net monetary liability. The
foreign exchange gain was partially offset by a decrease in the value of
in-process and finished inventory. The decrease in the value of the inventory
is realized in Net Revenues as the metal is sold to customers.
    Amortization and reclamation costs in the first nine months of 2007 were
$18.9 million, a decrease of $2.8 million from the same period in 2006. 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 site
restoration and reclamation liabilities. During the first quarter of 2007, the
Fund completed a review of the site restoration and reclamation expenditures
including work performed by a third party engineering firm. The reduction in
the present value resulted from the Fund identifying a source for one of the
main reclamation materials on its property, thereby significantly reducing the
cost of sourcing and transporting the material. In addition, the timing of
some of the expenditures was deferred based on the current expectations
relating to when the projects would be completed.
    In the first nine months of 2007, net interest expense was $17.8 million
compared to $12.5 million in the same period of 2006 due to an increase in
interest rates and debt outstanding as a result of higher working capital
requirements, and higher interest expense related to delayed concentrate
payments.
    On June 22, 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 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 legislation, the Fund now
estimates the effective tax rate on post 2010 reversal of these temporary
differences to be 31%. 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 September 30, 2007 that will remain outstanding
as of January 1, 2011 are approximately $60 million. The recording of this
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 $14.6 million during the second quarter of
2007, based on an effective tax rate of 31%. 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 (see also "Income Taxes").
    Minority interest in earnings (loss) in the first nine months of 2007 was
$9.5 million, down from $9.7 million in 2006 due to the lower earnings of the
Fund.

    PRODUCTION AND SALES
    ---------------------

    In the third quarter of 2007, zinc metal production was 69,242 tonnes,
compared to 67,498 tonnes in the same period of 2006. Zinc metal production in
the first nine months of 2007 was 1% lower than in the same period of the
previous year at 195,436 tonnes compared to 198,280 tonnes.
    Production recovered in the third quarter and work progressed in the
quarter to address higher zinc dust consumption within the operation.
Addressing this issue should help the Fund to improve its overall production.
The revised 2007 production forecast is 264,000 tonnes, 1,000 tonnes lower
than the previous forecast.
    Zinc metal sales in the quarter and the nine month period of 2007
totalled 61,335 tonnes and 181,261 tonnes respectively, compared to 66,954
tonnes and 197,411 tonnes in the same periods in 2006.
    Demand for zinc metal remained soft during the third quarter as North
American sheet steel producers continue to experience weak order levels from
housing, appliance and automotive markets in response to the credit driven
constraint in US consumer spending. Non-residential construction demand for
sheet steel for private and public construction remains steady and continues
to show positive growth. Management believes that inventory adjustments by
steel mills and their customers of sheet steel products have generally run
their course which should result in improved zinc metal order volumes once
consumer spending recovers.
    During the third quarter, spot sales continued to be made to offset
reduced contract orders from steel customers. A portion of these spot sales
that were concluded in the third quarter will be shipped during the fourth
quarter, as a result third quarter sales were less than third quarter
production. The expected improvement in contract order volumes in the fourth
quarter has not materialized; therefore, the target for 2007 sales has been
revised to 260,000 tonnes.
    The preceding targets for production and sales are subject to various
risks and uncertainties. The assumptions for them can be found in the
"Forward-Looking Statements" below.

    PREMIUMS
    --------

    For the third quarter of 2007, premiums rose to 12.1 cents US per pound
compared to 7.3 cents US per pound for the same period in 2006. The increase
in realized premiums reflects a significant increase in 2007 contract
premiums.
    The target for 2007 premiums is 10 cents US per pound, reflecting the
expected fourth quarter sales mix of contract sales and lower realization spot
sales.
    The Fund's target for premiums is subject to various risks and
uncertainties. The assumptions can be found in the "Forward-Looking
Statements" below.

    BYPRODUCTS
    ----------

    Byproduct revenues in the third quarter of 2007 were $9.5 million,
compared to $7.7 million in the third quarter of 2006. Both copper cake and
sulphuric acid revenues were higher during the quarter than a year ago. The
increase in copper cake revenues was in part due to higher shipments during
the quarter. Sulphuric acid netbacks were US $22 per tonne in the third
quarter of 2007, compared to US $14 per tonne in the third quarter of 2006.

    CAPITAL EXPENDITURES
    --------------------

    For 2007, capital spending is forecasted at $23.5 million; $17 million
will be spent on sustaining capital and $6.5 million will be for revenue
generating projects. The focus of these expenditures is to increase treatment
of zinc concentrate towards the maximum available concentrate supply under the
terms of the Supply and Processing Agreement with Xstrata Canada Corporation
("Xstrata Canada"). The Fund currently processes approximately 535,000 tonnes,
which is 15,000 tonnes below the Supply and Processing Agreement's maximum
level. Closing the gap to 550,000 tonnes will increase processing fees, and
revenue from zinc premiums and byproducts. The extra capital expenditures will
be allocated toward de-bottlenecking the plant to increase capacity,
potentially generating an additional $4 million in incremental cash flow
starting in 2008.
    In the third quarter of 2007, $5.9 million was spent on plant and
equipment, compared to $4.7 million in the third quarter of 2006.
    The Fund has been participating in Hydro-Québec's "Industrial Initiatives
Program for Major Customers". During the third quarter, the Fund received
$0.1 million in the form of incentives. The incentives have been recorded as a
reduction of property, plant and equipment as they relate to capital
expenditures incurred to reduce electricity consumption. A total of
$1.8 million has been received in 2007, and a further $0.2 million is expected
in the fourth quarter.
    The Fund's target for capital spending is subject to various risks and
uncertainties. The assumptions can be found in the "Forward-Looking
Statements" below.

    Cash Flows, Liquidity and Capital Resources

    For the third quarter of 2007, cash realized from operations, before
changes in non-cash working capital was $21.7 million compared to
$27.7 million for the same period in 2006. The $6.0 million decrease was due
to a reduction in earnings for the quarter. During the quarter, non-cash
working capital increased by $0.6 million.
    Year-to-date cash realized from operations, before changes in non-cash
working capital was $60.1 million compared to $60.6 million for the same
period in 2006. Year-to-date non-cash working capital has increased by
$21.3 million as the Fund used the cash realized from operations to reduce its
accounts payable balances.
    Year-to-date capital expenditures were $17.9 million compared to
$14.8 million in the prior year.
    Distributions paid to unitholders in the third quarter of 2007 were
$12.8 million, and year-to-date was $38.2 million unchanged from the same
period in 2006.
    Fluctuations in working capital balances as a result of operations are
generally funded by or used to repay the Revolving Facility. During the
quarter, $164.4 million of debt was drawn and $166.6 million was repaid
related to the fluctuations in working capital.
    In October 2007, the Fund completed an amendment with a syndicate of
Canadian chartered banks to its Revolving Facility. The amended Revolving
Facility has been extended to May 1, 2009. The amount available to be drawn on
the Revolving Facility will vary on a quarterly basis and will be 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 amount
available to be drawn based on the Fund's September 30, 2007 balance sheet is
$160 million. Prior to the amendment, the Revolving Facility was $100 million.
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, and vary based on certain financial ratios of the Fund. The Fund has
since drawn down on the amended Revolving Facility.
    As of September 30, 2007 the amount of the delayed payments owed to
Xstrata Canada was $44 million. With the completion of the amended Revolving
Facility in October, the Fund paid off all of the delayed amounts owed to
Xstrata Canada during the month of October.
    At September 30, 2007, the Fund's total debt was $246.5 million (net of
deferred financing fees of $0.8 million), up slightly from $244.5 million at
the end of December 2006.

    Distribution Policy

    The Fund makes monthly distributions at the discretion of the Trustees,
to its unitholders based on the monthly declarations of cash available for
distribution. The Fund's goal is to provide stable monthly distributions and
will seek to increase distributions through sustainable improvements, such as
operating efficiencies and revenue enhancing opportunities.

    The schedule below sets out the history of the Fund's cash distributions
for the past six months:

    

    -------------------------------------------------------------------------
    RECORD DATE           PAYMENT DATE                 DISTRIBUTION PER UNIT
    -------------------------------------------------------------------------
    October 31, 2007      November 26, 2007                   8.5 cents
    September 30, 2007    October 25, 2007                    8.5 cents
    August 31, 2007       September 25, 2007                  8.5 cents
    July 31, 2007         August 27, 2007                     8.5 cents
    June 30, 2007         July 25, 2007                       8.5 cents
    May 31, 2007          June 25, 2007                       8.5 cents
    -------------------------------------------------------------------------
    

    Cash Available for Distribution

    The computation and disclosure of cash available for distribution is, in
all material respects, in accordance with the revised Staff Notice 52-306
issued by the Canadian Securities Administrators ("CSA") in August 2006. The
CSA concluded that the most directly comparable measure calculated in
accordance with generally accepted accounting principles ("GAAP") for cash
available for distribution is cash flow from operating activities. We adopted
their recommendations retroactive to January 1, 2005 and have presented in the
table below a reconciliation of cash available for distribution to cash
realized from operations.
    On July 6, 2007, the CSA issued revised National Policy 41-201, Income
Trusts and Other Indirect Offerings. We have adopted their recommendations in
this third quarter press release.
    During the third quarter, the Canadian Performance Reporting Board of the
CICA also published an Interpretive Release titled Standardized Cash in Income
Trusts and Other Flow-Through Entities: Guidance on Preparation and
Disclosure. The Fund is currently reviewing the document to determine the
potential impact that the guidance may have on its disclosures.
    Cash available for distribution is not a measure defined by GAAP and
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, cash available for distribution is a useful
supplemental measure for evaluating the Fund's performance as it provides
investors with an indication of cash available for distributions and working
capital needs. Investors are cautioned, however, that cash available for
distribution 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
cash available for distribution for the purposes of this interim report may
differ from that used by other issuers and, accordingly, cash available for
distribution in this press release may not be comparable to cash available for
distribution used by others.

    A reconciliation of cash realized from operations to cash available for
distribution is provided below:

    
                                     Three      Three      Nine       Nine
                                     months     months     months     months
                                     ending     ending     ending     ending
                                    Sept.30,   Sept.30,   Sept.30,   Sept.30,
    ($ thousands)                     2007       2006       2007       2006
    -------------------------------------------------------------------------
    Cash realized from operations  $ 21,051   $(18,036)  $ 38,803   $ (8,145)

    Capital adjustments:
      Purchase of property plant
       and equipment                 (5,909)    (4,676)   (17,925)   (14,846)
      Hydro-Quebec incentives            87        468      1,832      1,781
      Proceeds on sale of assets          3        595         63        595
      Amortization of deferred
       financing fees                   (64)       (64)      (190)      (190)

    Other adjustments including
     discretionary items:
      Increase (decrease) in
       non cash working capital         631     45,785     21,321     68,710
    -------------------------------------------------------------------------
    Cash available for
     distribution for the period     15,799     24,072     43,904     47,905
    -------------------------------------------------------------------------
      Decrease in capital and
       site restoration reserve           -     (1,087)         -         87

      (Increase) decrease in
       operating reserve             (3,050)   (10,235)    (5,656)    (9,742)
    -------------------------------------------------------------------------
    Distributions declared to
     unitholders                   $ 12,749   $ 12,750   $ 38,248   $ 38,250
    -------------------------------------------------------------------------

    Weighed average number of
     units outstanding           49,997,975 50,000,000 49,997,975 50,000,000

    Distributions declared per
     unit                           $ 0.255    $ 0.255    $ 0.255    $ 0.255
    Payout ratio                         81%        53%        87%        80%
    -------------------------------------------------------------------------
    

    In the third quarter of 2007, cash available for distribution was
$15.8 million and distribution declared to unitholders was $12.8 million:
$9.6 million paid to Priority Unitholders and $3.2 million paid to Ordinary
Unitholders.
    We periodically review cash distributions taking into account our current
and prospective performance. Some of the factors considered in making
decisions related to distributions include cash amounts to service debt
obligations, maintenance capital expenditures, taxes, working capital
requirements and other items considered to be prudent.
    As we calculate the Fund's cash available for distribution, we take into
consideration our debt management strategy and our productive capacity
maintenance strategy. Cash available for distribution 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.

    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
cash available for distribution is greater than the distributions declared,
the notional reserve will increase. In a period in which cash available for
distribution is less than the distributions declared, the notional reserve
will decrease. The notional operating reserve provides flexibility so that the
Fund can maintain a stable, monthly distribution while adhering to the Fund's
trust indentures and debt covenants. During the third quarter of 2007, the
notional operating reserve increased by $3.1 million to $21.1 million
(December 31, 2006 - $11.1 million).
    While the operating reserve is now above the Fund's target three-month
payout level, the Fund's financial flexibility has been reduced. The
strengthening in the Canadian dollar and the continued softness for the demand
for zinc in the North American markets may negatively impact the Fund's
ability to generate cash in 2008. For these reasons, the Fund is not
considering any increase in distributions or a special distribution at this
time.
    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 September 30, 2007, the capital and site restoration reserve
was $5.0 million (December 31, 2006 - $5.0 million).

    The following table provides an analysis of cash distributions to
    unitholders in accordance with CSA National Policy 41-201:

    

                                     Three      Nine
                                     months     months     Year       Year
                                     ending     ending     ending     ending
                                    Sept.30,   Sept.30,    Dec.31,    Dec.31,
    ($ thousands)                     2007       2007       2006       2005
    -------------------------------------------------------------------------
    A. Cash realized from
        operations                 $ 21,051   $ 38,803   $ 20,255   $ 50,592

    B. Net earnings before
        minority interest             8,548     23,167     44,253     43,745
    C. Actual cash distributions
        paid or payable              12,749     38,248     51,000     51,000
       Excess (shortfalls) of
        cash realized from
        operations over cash
        distributions                 8,302        555    (30,745)      (408)

       Shortfalls of net
        earnings over cash
        distributions                (4,201)   (15,081)    (6,747)    (7,255)

    D. Percentage of excess
       (shortfall) of cash
       realized from operations
       over cash distributions           65%         1%       (60%)        -
    E. Shortfall of net earnings
        over cash distributions         (33%)      (39%)      (13%)     (14%)

    


    SHORTFALLS OF CASH REALIZED FROM OPERATIONS OVER CASH DISTRIBUTIONS
    -------------------------------------------------------------------

    In the year ending December 31, 2006, cash distributions paid or payable
were greater than cash realized from operations by $30.7 million. The main
reason for this was the $52.9 million increase in non-cash working capital.
The increase in working capital was mainly due to the significant increase in
zinc prices (average monthly LME price rose from US$0.83 per pound in December
2005 to $2.00 per pound in December 2006). The Fund was able to finance the
increase in working capital requirements by way of its Revolving Facility and
by delaying payments to Xstrata Canada.
    In the year ending December 31, 2005, cash distributions paid or payable
were greater than cash realized from operations by $0.4 million. The main
reason for this was the $24.0 million increase in non-cash working capital.
The increase in working capital was mainly due to the significant increase in
zinc prices (average monthly LME price rose from US$0.54 per pound in December
2004 to $0.83 per pound in December 2005). The Fund was able to finance the
increase in working capital requirements from its own cash, and by way of its
Revolving Facility.
    For both years, the Fund believes that using its Revolving Facility to
fund its working capital requirements did not represent an economic return of
capital as both its trust indenture and debt agreements allowed for this
funding to occur without limiting the Fund's ability to make distributions.

    SHORTFALLS OF NET EARNINGS OVER CASH DISTRIBUTIONS
    --------------------------------------------------

    Throughout the four periods presented, 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 have been higher than the
        Fund's cash used for investment activities.
    -   In the three month period ending September 30, 2007 there was a
        $5.1 million mark-to-market loss on Commodity financial instruments.
    -   In the nine month ending September 30, 2007 there was a $14.6 million
        non-cash future income tax expense relating to the enactment of
        Bill C-52.
    

    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 has provided an economic return of capital.

    Critical Accounting Policies and Estimates

    Our critical accounting policies and estimates remain substantially the
same as reported in our Management's Discussion and Analysis for the year
ended December 31, 2006, except as discussed in Changes in Accounting Policies
and in Income Taxes.

    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 waiting final pricing at
quarter-end could have a material effect on future revenues. As of September
30, 2007, there was $9.7 million in revenues waiting final pricing.
    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 where cash-in-advance terms have been negotiated as a way to
manage the Fund's liquidity position and credit exposure. In a market where
zinc prices are rising, a portion of the Fund's revenues will lag behind the
higher zinc prices; while in a market where 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 22, 2007, the Federal Government enacted its tax legislation
relating to the taxation of existing income and royalty trusts, at effective
rates similar to Canadian corporations commencing in 2011. The Fund estimates
that the unrecognized temporary differences outstanding as of September 30,
2007 that will remain outstanding as of January 1, 2011 are approximately
$60 million. The recording of this future tax liability related to these
temporary differences resulted in the Fund recording a future income tax
expense and an increase in long-term future tax liabilities of $14.6 million
during the second quarter of 2007, based on an effective tax rate of 31%.
    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 an RRSP or other tax deferred plan) are liable for income tax
at full personal tax rates on the taxable portion of 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 31% while taxable Canadian Unitholders will
receive the favourable tax treatment on distributions currently applicable to
qualifying dividends. As a result, there will be essentially no impact on
taxable Canadian Unitholders arising from these changes, as the new tax
payable by the Fund will be offset by the reduced rate of tax applicable to
dividends.
    At present, Canadian registered pension plans, RRSPs and RRIFs ("Canadian
Tax Exempt Entities") are not subject to current income tax on distributions
received from the Fund (their tax obligation is deferred). Under Bill C-52,
Canadian Tax Exempt Entities would receive distributions after provision by
the Fund for the new tax, as will investors located outside Canada.
    The new tax legislation will apply to the Fund and its Priority
Unitholders effective January 1, 2011. Cash distributions on Ordinary Units
are subordinate to distributions on Priority Units until 2017, except on the
occurrence of certain events. With respect to Bill C-52, the Fund expects that
the subordination will remain unchanged.

    
    SUMMARY OF QUARTERLY RESULTS
    ($ millions, except per-unit amounts and production amounts)

    2007(1) (unaudited)                         Q1      Q2      Q3
    Revenues                                 269.3   266.6   251.2
    Net earnings (loss)                       14.0    (6.7)    6.4
    Net earnings (loss) per Priority Unit
    (basic and diluted)                       0.37   (0.18)   0.17
    Production (tonnes)                     62,947  63,247  69,242

    2006 (unaudited)                            Q1      Q2      Q3      Q4
    Revenues                                 180.8   284.2   266.4   307.8
    Net earnings                               4.3     9.3    15.6     4.0
    Net earnings per Priority Unit
    (basic and diluted)                       0.12    0.25    0.41    0.11
    Production (tonnes)                     61,684  69,098  67,498  68,147

    2005 (unaudited)                            Q1      Q2      Q3      Q4
    Revenues                                 113.2   118.3   130.6   148.6
    Net earnings                               6.5     7.8     8.2    10.3
    Net earnings per Priority Unit
    (basic and diluted)                       0.17    0.21    0.22    0.28
    Production (tonnes)                     66,851  68,692  67,873  69,002

    (1) Q1 and Q2 2007 have been restated.
    

    On January 1, 2007, the Fund was required to separate and record at fair
value these embedded derivatives related to provisional pricing in concentrate
purchase contract. The Company should have recorded the embedded derivatives
in accounts payable for purchase concentrate contracts. In each period, the
provisionally priced concentrates should have been marked-to-market based on
the forward market price for the quotational period stipulated in the contract
until the quotational period expired. The Fund should have recorded the
mark-to-market adjustments (both gains and losses) in raw material purchase
costs for purchase concentrate contract. Given that the impact of not properly
accounting for the embedded derivatives were deemed to be material to the
first and second quarter of 2007, the Fund is restating these unaudited
consolidated financial statements.
    Under the new accounting rule, net earnings in any particular period will
have the potential to be negatively impacted by rising zinc prices or
positively impacted by falling zinc prices. This is a result of the accounts
payable being revalued, while the inventory remains at its historical cost.
This impact will be reversed in a subsequent period when the inventory is
sold.

    
    Outstanding Unit Data             As at November 5, 2007
    Priority Units                          37,497,975
    Ordinary Units                          12,500,000
    

    RELATED PARTY TRANSACTIONS

    As a result of the Supply and Processing Agreement, during the nine-month
period ending September 30, 2007 Xstrata Canada has sold $524.0 million of
concentrate (2006 - $599.0 million) and provided $1.1 million of sales agency
services (2006 - $1.0 million). The sales agency services are provided on a
cost recovery basis. As of September 30, 2007 the Partnership has a payable of
$65.6 million to Xstrata Canada (2006 - $112.1 million) 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
    -------------------------------------------------------------------------
    Nine months ending September 30 (000's)                   2007      2006
    -------------------------------------------------------------------------
    Salary and benefits                                     $5,693    $5,296
    Support services                                           855       921
    Research and technology costs                              180        38
    Operating and management agreement management fee          203       199
    -------------------------------------------------------------------------
    Total                                                   $6,931    $6,454
    

    During the nine month period ending September 30, 2007, the Fund's
production expenses included $46.4 million (2006 - $47.0 million) of salary
and benefits provided by the Manager.
    The administration, management and operating services are provided on a
cost recovery basis and an annual management fee of $0.3 million in 2007 (2006
- $0.3 million). The annual management fee is adjusted by 2% per annum at the
beginning of each calendar year.
    As of September 30, 2007 the Fund, Operating Trust and the Partnership
had a payable of $10.6 million (2006 - $9.0 million) 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 various other Xstrata Canada group companies and
divisions at terms that reflect market rates. The following table summarizes
the related party transactions for the period.

    
    -------------------------------------------------------------------------
    Period ended September 30                                 2007      2006
    -------------------------------------------------------------------------
    (000's)
    -------------------------------------------------------------------------
    Sales
    Sales of zinc metal                                   $114,556  $ 33,060
    Sales of byproducts                                     25,204    27,062

    Expenses
    Purchases of raw materials and operating supplies     $ 19,908  $  5,211
    Interest expense                                      $  5,455  $  2,546
    

    Included in the accounts receivable as at September 30, 2007 was $26.8
million (2006 - $15.1 million) of amounts due from sales of zinc metal and
by-products and all other receivables was $5.7 million (2006 - $0.6 million).
Included in accounts payable and accrued liabilities as at September 30, 2007
was $8.2 million (2006 - $1.7 million) 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,
except for the delayed concentrate payments, 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.

    CHANGES IN ACCOUNTING POLICIES

    Effective January 1, 2007, the Fund adopted section 3855, Financial
Instruments - Recognition and Measurement, section 3865, Hedges and section
1530, Comprehensive Income. Section 3855 contains comprehensive requirements
for recognition and measurement of financial instruments. Section 3865
introduces new requirements for hedge accounting. Section 1530 describes how
to report and disclose comprehensive income and its components.
    The Fund periodically uses forward contracts to hedge the effect of price
changes relating to its firm commitments on the commodities it sells. Hedge
accounting is used when there is a high degree of correlation between price
movements in the derivative instrument and the item designated as being
hedged. As of December 31, 2006, the hedge was effective at 99.4%. The initial
measurement of these contracts and the Fund's firm commitments resulted in an
unrealized gain of $21.2 million and an unrealized loss of $21.1 million,
respectively. As set out in the transitional provisions of the section, the
initial measurement of these contracts and the Fund's firm commitments
resulted in a reduction in the deficit by $100,000 and an increase in
interests of Ordinary Unitholders of $34,000.
    The Fund's commodity hedging program includes inventory management, which
hedges the purchases and sales of zinc metal. The Fund has determined that
these financial instruments do not meet the requirements for hedge accounting
under the new requirements. The fair market value of these positions was an
unrealized gain of $321,000, which pursuant to the transitional provisions of
the section, is reported as a reduction in the deficit by $241,000 and an
increase in interests in Ordinary Unitholders of $80,000. These contracts are
classified as financial assets when the fair value is positive and as
financial liabilities when the fair value is negative.
    The Fund has separated and recorded at fair value embedded derivatives
related to provisional pricing feature in the Supply and Processing Agreement.
Under the terms of this agreement, prices are set on a specified future date
after shipment based on quoted market prices ("quotational pricing"). Each
period, the provisionally priced metals are marked-to-market based on the
forward market price for the quotational period stipulated in the agreement
until the quotational period expires.
    The Fund records these mark-to-market adjustments (both gains and losses)
in raw material purchases costs. The initial measurement of the embedded
derivatives in quotational pricing using forward market zinc prices resulted
in a reduction in the accounts payable and accrued liabilities of $4.3
million, an increase in the interests of Ordinary Unitholders of $1.1 million
and a decrease in the opening deficit of $3.2 million.
    In accordance with the new sections the Fund reclassified its $1.0
million deferred financing fees from long-term assets to long-term debt as of
January 1, 2007.

    OTHER DEVELOPMENTS

    The Fund is negotiating a new labour contract with the United Steel
Workers of America, Local 6486 this fall. The current contract expired
October 31, 2007. Negotiations are continuing and management is expecting a
conclusion during the month of November. The plant continues to operate under
normal conditions.

    OUTLOOK

    The Fund's primary goal is to continue to provide stable monthly
distributions.

    
    The 2007 targets for the key drivers of the Fund are:
    Zinc metal production:                                 264,000 tonnes
    Zinc metal sales:                                      260,000 tonnes
    Processing fee:                                        37 cents per pound
    Zinc metal premiums:                                   10 cents US/pound
    Capital expenditures:                                  $23.5 million
    

    The Manager's ability to provide for stable monthly distributions and
meet the targets identified above is subject to the various risks and the
assumptions that can be found in the "forward-looking statements" below.

    Forward-Looking Statements

    This interim report contains Forward-Looking Statements concerning the
Noranda Income Fund's ("Fund") objectives and 2007 general business outlook,
zinc metal production and sales targets, estimated processing fee, zinc
premium target, capital expenditures forecast and cash flow projections.
Forward-Looking Statements can be identified by the use of words, such as "are
expected", "is forecast", approximately or variations of such words and
phrases or state that certain actions, events or results "may", "could",
"would", "might" or "will" be taken, occur or be achieved. Forward-Looking
Statements involve 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 Statements.
    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 impact of
new tax legislation; (4) the demand for zinc metal, sulphuric acid and copper
cake; (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 air emissions, discharges into
water, waste, hazardous materials and workers' health and safety, 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
the ability to refinance its existing debt obligations; and (17) reliance on
Xstrata Canada for the operation, maintenance and short-term financing of the
Processing Facility. Actual results and developments are likely to differ, and
may differ materially, from those expressed or implied in the forward-looking
statements contained herein.
    These Forward-Looking Statements represent our views as of the date of
this report. The Fund anticipates that subsequent events and developments may
cause the Fund's views to change. The Fund does not undertake to update any
forward-looking statements, either written or oral, that may be made from time
to time by or on behalf of the Fund subsequent to the date of this report.

    Noranda Income Fund is an income trust whose units trade on the Toronto
Stock Exchange under the symbol "NIF.UN". The Noranda Income Fund owns the
CEZinc processing facility and ancillary assets (the "CEZinc processing
facility") located in Salaberry-de-Valleyfield, Quebec. The CEZinc processing
facility is the second-largest zinc processing facility in North America and
the largest zinc processing facility in eastern North America, where the
majority of its customers are located. It produces refined zinc metal and
various by-products from zinc concentrates purchased from mining operations.
The Processing Facility is operated and managed by Canadian Electrolytic Zinc
Limited.

    Further information about the Noranda Income Fund can be found at
www.norandaincomefund.com



    

                             NORANDA INCOME FUND

                     INTERIM CONSOLIDATED BALANCE SHEETS

                                 (unaudited)
                                ($ thousands)


                                                        Sept. 30     Dec. 31
                                                            2007        2006
                                                        ---------    --------
    ASSETS

    Current assets:
    Cash and cash equivalents                              1,036      13,712
    Accounts receivable
      Trade                                               81,327     143,438
      Xstrata Canada                                      32,502      35,817
    Firm commitments                                       2,415           -
    Inventories                                          148,271     188,161
    Prepaids and other assets                              2,202       3,566
                                                        ---------    --------
                                                         267,753     384,694

    Deferred financing fees                                    -       1,009

    Property, plant and equipment                        315,696     324,063
                                                        ---------    --------
                                                         583,449     709,766
    LIABILITIES AND EQUITY

    Current liabilities:
    Accounts payable and accrued liabilities
      Trade                                               17,901      17,596
      Xstrata Canada                                      84,392     218,780
    Commodity financial instruments                        4,784           -
    Distributions payable                                  4,250       4,250
                                                        ---------    --------
                                                         111,327     240,626

    Future tax liability                                  14,636           -

    Future site restoration and reclamation               11,881      15,205

    Long-term debt                                       246,481     244,500

    Interests of Ordinary Unitholders                     53,445      52,363

    Unitholders' Interest:
    Unitholders' equity                                  191,273     191,273
    Deficit                                              (45,594)    (34,201)
                                                        ---------    --------
                                                         145,679     157,072
                                                        ---------    --------
                                                         583,449     709,766
                                                        ---------    --------



                             NORANDA INCOME FUND

           INTERIM CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT
                           AND COMPREHENSIVE INCOME

                                 (unaudited)
                                ($ thousands)

                                 Three months              Nine months
                              ended September 30        ended September 30
                           ------------------------  ------------------------
                               2007         2006         2007         2006
                           -----------  -----------  -----------  -----------

    Revenues
    Sales                     255,290      270,681      798,323      743,298
    Transportation and
     distribution costs        (4,053)      (4,253)     (11,234)     (11,844)
                           -----------  -----------  -----------  -----------
                              251,237      266,428      787,089      731,454
                           -----------  -----------  -----------  -----------
    Raw material purchase
     costs                    188,579      189,578      596,949      524,995
                           -----------  -----------  -----------  -----------
    Revenues less raw
     material purchase
     costs                     62,658       76,850      190,140      206,459
                           -----------  -----------  -----------  -----------
    Other expenses
    Production                 38,554       38,891      115,519      120,040
    Selling, general and
     administration             5,108        4,493       15,048       13,882
    Foreign exchange gain      (8,452)         (31)     (17,724)        (517)
    Commodity financial
     instruments loss           5,187            -        2,713            -
    Commodity hedging
     loss (gain)                  (41)           -          112            -
    Amortization and
     reclamation                7,897        7,504       18,886       21,674
                           -----------  -----------  -----------  -----------
                               48,253       50,857      134,554      155,079
                           -----------  -----------  -----------  -----------
    Earnings before
     interest, minority
     interest and income
     tax                       14,405       25,993       55,586       51,380

    Interest expense, net       5,857        5,246       17,783       12,480
                           -----------  -----------  -----------  -----------
    Earnings before
     minority interest
     and income tax             8,548       20,747       37,803       38,900

    Minority interest in
     earnings for Ordinary
     Unitholders                2,137        5,187        9,451        9,725
                           -----------  -----------  -----------  -----------
    Earning before income
     tax                        6,411       15,560       28,352       29,175

    Income tax expense              -            -       14,636            -
                           -----------  -----------  -----------  -----------
    Net earnings and
     comprehensive income       6,411       15,560       13,716       29,175
                           -----------  -----------  -----------  -----------
    Deficit as originally
     reported beginning
     of period                (42,443)     (34,651)     (34,201)     (29,141)
    Adjustment for
     derivatives (Note 3)           -            -        3,236            -
    Adjustment for
     financial instruments
     (Note 3)                       -            -          341            -
                           -----------  -----------  -----------  -----------
    Deficit after
     adjustment beginning
     of period                (42,443)     (34,651)     (30,624)     (29,141)
                           -----------  -----------  -----------  -----------
    Distributions to
     Priority Unitholders      (9,562)      (9,562)     (28,686)     (28,687)
                           -----------  -----------  -----------  -----------
    Deficit end of period     (45,594)     (28,653)     (45,594)     (28,653)
                           -----------  -----------  -----------  -----------


    Net earnings (loss)
     per Priority Unit
     (basic and diluted)  $      0.17  $      0.41  $      0.37  $      0.78

    Weighted average
     Priority Units
     outstanding           37,497,975   37,500,000   37,497,975   37,500,000



                             NORANDA INCOME FUND

                INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (unaudited)
                                ($ thousands)

                                 Three months              Nine months
                              ended September 30        ended September 30
                           ------------------------  ------------------------
                               2007         2006         2007         2006
                           -----------  -----------  -----------  -----------

    Cash realized from
     (used for)
     operations:
    Net earnings for the
     period                     6,411       15,560       13,716       29,175
    Items not affecting
     cash:
      Amortization              7,583        7,265       22,102       21,419
      Reclamation                 314          239       (3,216)         255
      Minority interest         2,137        5,187        9,451        9,725
      Mark-to-market loss
       on commodity
       financial
       instruments              5,146            -        2,825            -
      Future income tax
       expense                      -            -       14,636            -
      Amortization of
       deferred financing
       fees                        64           64          190          190
      Loss from sale of
       assets                      81         (152)         528          244
    Site restoration
     expenditures                 (54)        (414)        (108)        (443)
                           -----------  -----------  -----------  -----------
                               21,682       27,749       60,124       60,565
                           -----------  -----------  -----------  -----------
    Net change in non
     cash working capital
     items                       (631)     (45,785)     (21,321)     (68,710)
                           -----------  -----------  -----------  -----------
                               21,051      (18,036)      38,803       (8,145)
                           -----------  -----------  -----------  -----------
    Cash realized from
     (used for) investment
     activities:
    Purchases of property,
     plant and equipment       (5,909)      (4,676)     (17,925)     (14,846)
    Proceeds from Hydro
     Quebec - incentives           87          468        1,832        1,781
    Proceeds on sales of
     property, plant and
     equipment                      3          595           63          595
                           -----------  -----------  -----------  -----------
                               (5,819)      (3,613)     (16,030)     (12,470)
                           -----------  -----------  -----------  -----------
    Cash realized from
     (used for) financing
     activities:

    Distributions
      - Priority
       Unitholders             (9,562)      (9,562)     (28,686)     (28,687)
      - Ordinary
       Unitholders             (3,188)      (3,188)      (9,563)      (9,563)
    Long-term debt issued
     under the Revolving
     Facility                 164,400      198,000      467,500      400,100
    Long-term-debt repaid
     under the Revolving
     Facility                (166,600)    (154,400)    (464,700)    (331,200)
                           -----------  -----------  -----------  -----------
                              (14,950)      30,850      (35,449)      30,650
                           -----------  -----------  -----------  -----------
    Change in cash and
     cash equivalents
     during the period            282        9,201      (12,676)      10,035

    Cash and cash
     equivalents,
     beginning of
     period                       754        1,009       13,712          175
                           -----------  -----------  -----------  -----------
    Cash and cash
     equivalents, end
     of period                  1,036       10,210        1,036       10,210
                           -----------  -----------  -----------  -----------



                             NORANDA INCOME FUND
             NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                             September 30, 2007
                                 (UNAUDITED)

                 ($ thousands except as otherwise indicated)

    1.  Nature and Description of the Noranda Income Fund

    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 Quebec. The
    Processing Facility produces refined zinc metal and various by-products
    from zinc concentrates.

    As of September 30, 2005, Noranda changed its name to Falconbridge
    Limited ("Falconbridge") pursuant to a corporate amalgamation.

    Falconbridge was subsequently acquired by Xstrata plc ("Xstrata"), a
    major global diversified mining group, listed on the London and Swiss
    stock exchanges. The final share acquisition was completed on
    November 1, 2006 and Falconbridge is now a wholly-owned subsidiary of
    Xstrata. In October 2007, Falconbridge changed its name to Xstrata Canada
    Corporation ("Xstrata Canada").

    Significant Agreements

    Pursuant 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 2007 is $0.37 (2006 - $0.365) per pound.
    "Payable zinc metal" in respect of a quantity of concentrate will be
    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
    by-products and related hedging 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 services to the Fund and management services to
    the Operating Trust, respectively. The initial terms of these agreements
    ends 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 ends 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 Distributions

    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 working capital and capital expenditures as may be
    considered appropriate by the 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 cash distributions on a monthly
    basis in an amount that is equal to the monthly cash distributions 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 Priority Units in a month,
    the amount of the deficiency shall not accumulate and will not be paid to
    holders of 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 distributions deficiency related to the Ordinary Units will
    not be accrued by the Fund until such time excess cash available for
    distribution is available.

    2.  Accounting Policies

    These unaudited interim consolidated financial statements have been
    prepared following the accounting policies as set out in the 2006 annual
    consolidated financial statements, except as set out in Note 3. The
    unaudited interim consolidated financial statements have been prepared
    using disclosure standards appropriate for interim financial statements
    and do not contain all the explanatory notes, descriptions of accounting
    policies or other disclosures required by Canadian generally accepted
    accounting principles for annual financial statements. Accordingly, these
    unaudited financial statements should be read in conjunction with the
    Fund's audited annual consolidated financial statements and the
    accompanying notes included in the 2006 Annual Report.

    3.  Changes in Accounting Policies

    Effective January 1, 2007, the Fund adopted section 3855, Financial
    Instruments - Recognition and Measurement, Section 3865, Hedges and
    section 1530, Comprehensive Income. Section 3855 contains comprehensive
    requirements for recognition and measurement of financial instruments. An
    entity should recognize 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. For financial
    assets and liabilities not classified as held for trading, the initial
    value recorded should include transaction costs that are directly
    attributable to the acquisition or issuance of the financial asset or
    liability. 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 separated and recorded at fair value embedded derivatives
    related to provisional pricing in the Supply and Processing Agreement.
    Under the terms of this agreement, prices are set on a specified future
    date after shipment based on quoted market prices ("quotational
    pricing"). The Fund records the fair value embedded derivatives in
    accounts payable for the Supply and Processing Agreement. Each period,
    the provisionally priced metals are marked to market based on the forward
    market price for the quotational period stipulated in the agreement until
    the quotational period expires.

    The Fund records these mark-to-market adjustments (both gains and losses)
    in raw material purchases costs. The initial measurement of the embedded
    derivatives in quotational pricing using forward market zinc prices
    resulted in a reduction in the accounts payable and accrued liabilities
    of $4,315, an increase in the interests of Ordinary Unitholders of $1,079
    and a decrease in the opening deficit of $3,236.

    Section 3865 introduces new requirements for hedge accounting.
    Requirements for identifying hedging relationships, previously included
    in CICA Accounting Guideline 13 Hedging Relationships ("AcG 13"), are now
    incorporated into this new standard. However, certain hedging
    relationships will no longer qualify for hedge accounting under these new
    rules, despite their qualification under AcG 13. The Fund has determined
    that the derivatives it has contracted in connection with its inventory
    management hedging program do not meet the new requirements. As a result,
    these financial instruments have been recognized on the balance sheet as
    either financial asset or financial liability with the change in their
    fair value at each reporting period recognized as a gain or a loss.

    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 long-term debt are classified as other
    financial liabilities. The fair value of cash and cash equivalents,
    accounts receivable, accounts payable and distributions payable
    approximates their carrying values due to their short-term nature.

    The CICA has also issued Section 1530, Comprehensive Income. The section
    is effective for fiscal years beginning on or after October 1, 2006 and
    it describes how to report and disclose comprehensive income and its
    components. Comprehensive income is the change in a company's net assets
    that results from transaction, events and circumstances from sources
    other than the company's shareholders. It includes items that would not
    normally be included in net earnings such as: unrealized gains or losses
    on available for sale investments; and gains and losses on derivatives
    designated as cash flow hedges.

    The Fund periodically uses forward exchange contracts and forward
    contracts to hedge the effect of price changes relating to its firm
    commitments on the commodities it sells. Hedge accounting is used when
    there is a high degree of correlation between price movements in the
    derivative instrument and the item designated as being hedged. As at
    December 31, 2006, the hedge was effective at 99.4%. The initial
    measurement of these contracts and the Company's firm commitments
    resulted in an unrealized gain of $21,229 and an unrealized loss of
    $21,095, respectively. As set out in the transitional provisions of the
    section, the net gain of $100 is reported in the opening deficit and
    $34 as an adjustment to the interests of Ordinary Unitholders.

    The Processing Facility's commodity hedging program includes inventory
    management hedges which hedge purchases and sales of zinc metal. At
    December 31, 2006, the Processing Facility had sold forward approximately
    three million pounds of zinc. The fair market value of these positions
    was an unrealized gain of $241 which pursuant to the transitional
    provisions of the section, is reported as an adjustment to the opening
    deficit and $80 to the interests of Ordinary Unitholders. These contracts
    are classified as financial assets when the fair value is positive and as
    financial liabilities when the fair value is negative.

    In accordance with Section 3855, the Fund has accounted for transaction
    costs related to the issuance of financial instruments as a reduction of
    the related financial instruments. As a result, deferred financing in the
    amount of $819 are now presented as a reduction of the long-term debt
    balance.

    FUTURE CHANGES IN ACCOUNTING POLICIES

    Capital Disclosures

    The CICA issued a new accounting standard, Section 1535 Capital
    Disclosures, which requires the disclosure of both qualitative and
    quantitative information that provides users of financial statements with
    information to evaluate the entity's objectives, policies and processes
    for managing capital. This new section is effective for the Fund
    beginning January 1, 2008.

    Financial Instruments - Disclosure and Financial Instruments -
    Presentation

    Two new accounting standards were issued by the CICA, Section 3862
    Financial Instruments - Disclosures, and Section 3863 Financial
    Instruments -, Presentation. These sections will replace Section 3861
    Financial Instruments - Disclosure and Presentation once adopted. The
    objective of Section 3862 is to provide users with information to
    evaluate the significance of the financial instruments on the entity's
    financial position and performance, the nature and extent of risks
    arising from financial instruments, and how the entity manages those
    risks, The provisions of Section 3863 deal with the classification of
    financial instruments, related interest, dividends, losses and gains, and
    the circumstances in which financial assets and financial liabilities are
    offset. These new sections are effective for the Fund beginning January
    1, 2008.

    Inventories

    In June 2007, the CICA issued a new accounting standard - Section 3031
    Inventories, which replaces the existing standard for inventories,
    Section 3030. The main features of the new Section are as follows:

    -   Measurement of inventories at the lower of cost and net realizable
        value
    -   Consistent use of either first-in, first-out or a weighted average
        cost formula to measure cost
    -   Reversal of previous write-downs to net realizable value when there
        is a subsequent increase to the value of inventories.

    The new Section is effective for the Fund beginning January 1, 2008. The
    Fund is currently assessing the impact on the financial statements.

    4.  Long-Term Debt

    On October 5, 2007, 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 Revolving Facility has been extended to
    May 1, 2009. 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
    from the previous quarter-end. The maximum available to be drawn at any
    time is $200 million and the minimum available to be drawn is
    $55 million. The amount available to be drawn based on the Fund's
    September 30, 2007 balance sheet is $160 million. Prior to the amendment,
    the Revolving Facility was $100 million. 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, and
    vary based on certain financial ratios of the Fund. The Fund has since
    drawn down on the amended Revolving Facility.

    The Revolving Facility continues to be secured by all the assets of the
    Partnership and the Operating Trust, and continues to have covenants that
    are required to be complied with.

    5.  Future Site Restoration and Reclamation

    -------------------------------------------------------------------------
    Future Site Restoration and         Three     Three     Nine      Nine
     Reclamation Continuity             Months    Months    Months    Months
                                        ended     ended     ended     ended
                                       Sept.30,  Sept.30,  Sept.30,  Sept.30,
                                         2007      2006      2007      2006
    -------------------------------------------------------------------------
    Opening balance                    $11,621   $15,924   $15,205   $15,924
    Accretion of reclamation expense       271       240       846       736
    Site restoration and reclamation
     expenditures                          (54)     (414)     (108)     (443)
    Change in estimates                     43         -    (4,062)     (481)
    -------------------------------------------------------------------------
    Closing balance                    $11,881   $15,736   $11,881   $15,736
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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, and
    cost of restoration and reclamation and regulatory requirements. Although
    the ultimate amount to be incurred is uncertain, the liability for future
    site restoration on an undiscounted basis is estimated to be
    approximately $41 million. The cash flows required to settle the
    liability are expected to be incurred from now until 2045.

    6.  Derivative Instruments and Financial Risk

    Commodity Hedges

    The Fund purchases metal in zinc concentrate to be processed eventually
    into refined zinc metal for sale to customers. Due to the structure of
    the Fund's sales and purchase contracts, hedging of zinc price exposure
    other than that undertaken in response to customer requests for fixed
    pricing is generally not required to any material extent. 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 do not minimize
    exposure to changes in zinc prices.

    Certain customers request a fixed sales price instead of the LME average
    price in the month of shipment. Xstrata Canada enters into futures
    contracts (fixed forward price hedges) 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
    contract.

    At September 30, 2007, Xstrata Canada had futures contracts (fixed
    forward price hedges) hedging approximately 30 million pounds of zinc
    (2006 - 34 million pounds) to be sold pursuant to firm commitments at
    fixed prices and delivery dates related to the Fund. The change in fair
    value of these net positions representing the ineffective portion of the
    hedge position for the three-months ending September 30, 2007, was an
    unrealized gain of $41 which was recognized in the consolidated statement
    of earnings and comprehensive income in commodity hedging gain
    (2006 - mark-to-market value of the fixed forward prices hedges was an
    unrealized gain of $12,738 which was not recognized in the consolidated
    statement of earnings and comprehensive income).

    At September 30, 2007, the Processing Facility had sold forward
    approximately 30 million pounds of zinc (2006 - sold forward 4 million
    pounds). The change in fair value of these positions for the three months
    ending September 30, 2007 was an unrealized loss of $5,187 which was
    recognized in the consolidated statement of earnings and comprehensive
    income in commodity financial instruments loss (2006 - unrealized gain of
    $91 which was not recognized in the consolidated statement of earnings
    and comprehensive income).

    Currency Risk

    The Fund maintains cash and cash equivalents, accounts receivable, and
    accounts payable in foreign currencies, and is therefore exposed to
    currency risk on these funds.

    7.  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 22, 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 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
    legislation, the Fund now estimates the effective tax rate on post 2010
    reversal of these temporary differences to be 31%. 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 September 30, 2007 that will
    remain outstanding as of January 1, 2011 is approximately $60 million.
    The recording of this future tax liability related to these temporary
    differences resulted in the Fund recording a non-cash charge to future
    income tax expense and an increase in long-term future tax liabilities of
    $14,636 during the second quarter of 2007, based on an effective tax rate
    of 31%. 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.

    8.  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 the nine-month
    period ending September 30, 2007 Xstrata has sold $523,996 of concentrate
    (2006 - $598,977) and provided $1,065 of sales agency services
    (2006 - $1,030). The sales agency services are provided on a cost
    recovery basis. As of September 30, 2007 the Partnership has a payable of
    $65,575 to Xstrata Canada (2006 - $112,062) 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
    -------------------------------------------------------------------------
    Nine months ending September 30                           2007      2006
    -------------------------------------------------------------------------
    Salary and benefits                                     $5,693    $5,296
    Support services                                           855       921
    Research and technology costs                              180        38
    Operating and management agreement management fee          203       199
    -------------------------------------------------------------------------
    Total                                                   $6,931    $6,454

    During the nine-month period ending September 30, 2007, the Fund's
    production expenses included $46,402 (2006 - $46,950) of salary and
    benefits provided by the Manager.

    The administration, management and operating services are provided on a
    cost recovery basis and an annual management fee of $270 in 2007
    (2006 - $265). The annual management fee is adjusted by 2% per annum at
    the beginning of each calendar year.

    As of September 30, 2007 the Fund, Operating Trust and the Partnership
    had a payable of $10,584 (2006 - $8,953) 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 various other Xstrata Canada group companies
    and divisions at terms that reflect market rates.

    The following table summarizes the related party transactions for the
    period.

    -------------------------------------------------------------------------
    Period ended September 30                                 2007      2006
    -------------------------------------------------------------------------
    Sales
    Sales of zinc metal                                   $114,556   $33,060
    Sales of byproducts                                     25,204    27,062

    Expenses
    Purchases of raw materials and operating supplies      $19,908    $5,211
    Interest expense                                        $5,455    $2,546


    Included in the accounts receivable as at September 30, 2007 was $26,800
    (2006 - $15,121) of amounts due from sales of zinc metal and by-products
    and all other receivables was $5,701 (2006 - $639). Included in accounts
    payable and accrued liabilities as at September 30, 2007 was $8,232
    (2006 - $1,716) 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,
    except for the delayed concentrate payments, 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.

    9.  Economic Dependence

    The Processing Facility is dependent on key customers. The loss of a
    significant customer may have a material adverse effect on the Fund's
    financial position and results of operations.

    

    %SEDAR: 00017578EF




For further information:

For further information: Financial information: Michael Boone, Vice
President & Chief Financial Officer of Canadian Electrolytic Zinc Limited,
Noranda Income Fund's Manager, Tel: (416) 775-1561, mboone@xstrata.ca

Organization Profile

NORANDA INCOME FUND

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