Noranda Income Fund. Interim Condensed Consolidated Financial Statements June 30, 2016

Transcription

1 Noranda Income Fund Interim Condensed Consolidated Financial Statements 2016

2 NORANDA INCOME FUND CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands of dollars) (unaudited) December 31, Notes Assets Current assets Cash 1,826 1,878 Accounts receivable Trade and other receivables 78,311 66,201 Glencore Canada and affiliates 7,005 21,708 Inventories 3 173, ,086 Income taxes receivable 7,592 - Derivative financial assets Prepaids and other assets 2,203 1, , ,091 Non-current assets Property, plant and equipment 205, ,542 Deferred tax assets 5,257 2,653 Employee benefits - 3, , , , ,331 Liabilities Current liabilities Accounts payable and accrued liabilities Trade and other payables 29,087 35,239 Glencore Canada and affiliates 79,329 24,430 Income taxes payable - 2,443 Derivative financial liabilities 4 6,666 2,231 Distributions payable 937 1,562 Bank and other loans 5 50,664 92, , ,741 Non-current liabilities Residue ponds rehabilitation liabilities 6 27,921 28,494 Employee benefits 19,542 12,905 Deferred tax liabilities 1, ,628 42,056 Total liabilities excluding net assets attributable to Unitholders and Non-controlling interest 215, ,797 Net assets attributable to Unitholders and Non-controlling interest 265, ,534 Net assets attributable to: Priority Unitholders 7 207, ,068 Ordinary Unitholders 7 69,265 71, , ,119 Non-controlling interest (11,557) (4,585) 265, ,534 (See accompanying notes) 1

3 NORANDA INCOME FUND CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands of dollars) (unaudited) Three months ended Six months ended Notes Revenues Sales 8 160, , , ,428 Transportation and distribution costs (4,520) (5,082) (10,231) (8,595) 156, , , ,833 Raw material purchase costs 8 101, , , ,169 Revenues less raw material purchase costs 54,767 76, , ,664 Other expenses Production 44,406 52,413 93,916 88,116 Selling and administration 6,264 6,123 12,528 11,959 Foreign currency loss (gain) 1,467 (3,708) (11,985) 10,306 Derivative financial instruments (gain) loss 4 (4) (7,712) 4,184 (5,063) Depreciation of property, plant and equipment 6,331 8,708 13,911 15,207 Rehabilitation (recovery) expense 6 (1,388) (1,366) (798) 638 (Loss) earnings before finance costs and income taxes (2,309) 21,880 3,051 38,501 Finance costs, net ,486 1,910 2,752 (Loss) earnings before income taxes (3,219) 20,394 1,141 35,749 Current income tax (recovery) expense (1,296) 3,880 (964) 7,641 Deferred income tax expense (Loss) earnings attributable to Unitholders and Non-controlling interest (2,428) 16,037 1,459 28,077 Distributions to Unitholders 3,436 4,686 8,123 9,373 (Decrease) increase in net assets attributable to Unitholders and Non-controlling interest (5,864) 11,351 (6,664) 18,704 Other comprehensive (loss) gain Item not to be reclassified to earnings attributable to Unitholders and Non-controlling interest: Remeasurement (loss) gain on employee benefit plans (4,784) 3,380 (10,195) 1,568 Deferred income tax (recovery) expense (1,286) 909 (2,742) 422 (3,498) 2,471 (7,453) 1,146 Comprehensive (loss) income (9,362) 13,822 (14,117) 19,850 (Decrease) increase in net assets attributable to: Priority Unitholders (4,579) 8,408 (5,359) 13,819 Ordinary Unitholders (1,526) 2,804 (1,786) 4,608 (6,105) 11,212 (7,145) 18,427 Non-controlling interest (5,864) 11,351 (6,664) 18,704 Comprehensive (loss) income attributable to: Priority Unitholders (4,579) 8,408 (5,359) 13,819 Ordinary Unitholders (1,526) 2,804 (1,786) 4,608 (6,105) 11,212 (7,145) 18,427 Non-controlling interest (3,257) 2,610 (6,972) 1,423 (9,362) 13,822 (14,117) 19,850 (See accompanying notes) 2

4 NORANDA INCOME FUND CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS AND NON-CONTROLLING INTEREST (in thousands of dollars) (unaudited) Earnings Attributable Remeasurement Priority to Unitholders (Loss) Gain Units and and Non- Distributions on Employee Ordinary controlling to Benefits, Units interest Unitholders Net of Tax Total Balance at January 1, , ,034 (413,201) (9,389) 254,401 Comprehensive income (loss) - 28,077 (9,373) 1,146 19,850 Balance at , ,111 (422,574) (8,243) 274,251 Balance at January 1, , ,876 (431,947) (4,352) 279,534 Comprehensive income (loss) - 1,459 (8,123) (7,453) (14,117) Balance at , ,335 (440,070) (11,805) 265,417 Non- Priority Ordinary controlling Attributable to: Units Units interest Total Balance at January 1, ,817 66,300 (10,716) 254,401 Comprehensive income 13,819 4,608 1,423 19,850 Balance at ,636 70,908 (9,293) 274,251 Balance at January 1, ,068 71,051 (4,585) 279,534 Comprehensive loss (5,359) (1,786) (6,972) (14,117) Balance at ,709 69,265 (11,557) 265,417 (See accompanying notes) 3

5 NORANDA INCOME FUND CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (unaudited) Three months ended Six months ended Notes Operating activities (Loss) earnings before income taxes (3,219) 20,394 1,141 35,749 Adjustments to reconcile (loss) earnings before income taxes to cash (used) provided : Depreciation of property, plant and equipment 6,331 8,708 13,911 15,207 Net change in residue ponds rehabilitation liabilities 6 (1,388) (1,366) (798) 634 Derivative financial instruments loss (gain) unrealized (1,798) 4,934 (4,865) Change in fair value of embedded derivatives 4 3,066 (9,186) 14,230 (5,454) Finance costs, net ,486 1,910 2,752 Loss on sale of assets Net change in employee benefits (257) (115) (513) (231) Working capital adjustments: (Increase) decrease in accounts receivable and other assets (10,657) (23,443) 2,109 (15,072) (Increase) decrease in inventories (28,796) 30,411 (2,024) (49,365) Increase (decrease) in accounts payable, accrued liabilities and distributions payables 24,056 (17,720) 35,293 7,043 Interest paid (1,028) (1,789) (1,559) (2,108) Income taxes (paid) received (3,719) 1,724 (9,070) (1,031) Distributions to Unitholders (3,436) (4,686) (8,123) (9,373) Cash (used in) provided by operating activities (17,658) 2,829 51,760 (25,511) Investing activities Purchase of property, plant and equipment (5,761) (7,973) (9,992) (12,641) Proceeds from sale of property, plant and equipment Cash used in investing activities (5,514) (7,532) (9,430) (12,100) Financing activities Proceeds from bank loans 210, , , ,383 Repayment of bank and other loans (188,167) (204,648) (364,753) (314,046) Cash provided by (used in) financing activities 22,281 3,040 (42,382) 37,337 Net decrease in cash (891) (1,663) (52) (274) Cash at beginning of period 2,717 3,015 1,878 1,626 Cash at end of period 1,826 1,352 1,826 1,352 (See accompanying notes) 4

6 Notes to the Interim Condensed Consolidated Financial Statements NOTE 1. CORPORATE INFORMATION Noranda Income Fund (the Fund ) is an income trust established under the laws of the province of Ontario, Canada and its Priority Units are publicly traded on the Toronto Stock Exchange (the TSX ). The registered office is located at 100 King Street West, First Canadian Place, Suite 6900, P.O. Box 403, Toronto, Ontario, Canada, M5X 1E3. The Fund was created in 2002, initially to acquire from Noranda Inc., indirectly through the Noranda Operating Trust (the Operating Trust ) and the Noranda Income Limited Partnership (the Partnership ), the CEZinc Processing Facility (the Processing Facility ). The Processing Facility produces refined zinc metal and various byproducts from zinc concentrates and is located in Salaberry-de-Valleyfield, Québec. On 2005, Noranda Inc. changed its name to Falconbridge Limited ( Falconbridge ) pursuant to a corporate amalgamation. Falconbridge subsequently changed its name to Xstrata Canada Corporation ( Xstrata Canada ) after being acquired by Xstrata plc ( Xstrata ). On December 7, 2012, the Fund completed an internal reorganization. Upon completion of the reorganization, the Operating Trust owns all the shares of a newly-formed company, Ontario Inc. ( Ontario Inc. ). Ontario Inc. in turn owns the Partnership s Class A Partnership Units that were previously owned by the Operating Trust. On May 2, 2013, Xstrata merged with Glencore International plc ( Glencore International ) with the combined company now called Glencore plc ( Glencore ). Glencore is an integrated producer and marketer of commodities and is listed on the London, Hong Kong and Johannesburg stock exchanges. On July 30, 2013, Xstrata Canada changed its name to Glencore Canada Corporation ( Glencore Canada ). Supply and processing agreement Pursuant to a 15-year Supply and Processing Agreement ( SPA ) signed on May 3, 2002 between Glencore Canada and the Partnership, Glencore 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. Starting in 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-overyear percentage change in average cost of electricity per megawatt hour for the Processing Facility. Payable zinc metal in respect of a quantity of concentrate is equal to 96% of the assayed zinc metal content of the concentrate under the SPA. The processing fee for 2016 was $0.410 ( $0.405) per pound. Under the SPA, Glencore Canada acts as the exclusive agent for the Partnership to arrange the sale of zinc metal and by-products and related hedging and derivative arrangements. The initial term of the SPA will end on May 2, 2017 and will automatically renew for a five-year term thereafter, unless Glencore Canada provides the Partnership with written notice to the contrary at least 180 days prior to the expiry of the applicable term (by November 3, 2016). Under any renewal, Glencore Canada would act as agent for the Partnership for the purchase of zinc concentrate and Partnership would pay the market terms, rather than the price currently being paid under the SPA. Glencore Canada would also act as exclusive agent for the sale of zinc metal and by-products and related hedging and derivative arrangements. Under the terms of an administration agreement between the Fund and Canadian Electrolytic Zinc Limited (the Manager ), a wholly-owned subsidiary of Glencore Canada, a management services agreement between the Operating Trust and the Manager and an operating and management agreement between the Partnership and the Manager, the Manager provides administrative services to the Fund and management services to the Operating Trust and the Partnership, respectively. The initial term of these agreements will end on May 2, 2017 and will automatically renew for a five-year term thereafter, unless Glencore Canada provides the Partnership with written notice to the contrary at least 180 days prior. Upon the termination of the operating and management agreement, the Partnership is required to acquire the Manager from Glencore Canada. 5

7 NOTE 2. BASIS OF PRESENTATION AND CHANGES IN ACCOUNTING POLICIES Basis of presentation The interim condensed consolidated financial statements for the three and six months ended 2016 have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting ( IAS 34 ). The same accounting policies and methods of computation were followed in the preparation of these interim condensed consolidated financial statements as were followed in the preparation of the consolidated financial statements for the year ended December 31, 2015 except for the adoption of new standards, interpretation and amendments effective January 1, These interim condensed consolidated financial statements do not include all of the information required for annual financial statements and should be read in conjunction with the annual financial statements for the year ended December 31, These interim condensed consolidated financial statements were approved by the Board of Trustees of the Operating Trust (the Board of Trustees ) on July 25, Basis of consolidation The interim condensed consolidated financial statements comprise the financial statements of the Fund and its wholly-owned subsidiaries and the Manager, a structured entity as at All intra-group balances, income and expenses, unrealized gains and losses, and dividends resulting from intra-group transactions are eliminated in full. Non-controlling interests represent the portion of net assets attributable to the Manager. Losses within a subsidiary are attributable to the non-controlling interests even if that results in a deficit balance. The financial statements of the subsidiaries are prepared using the same reporting period and same accounting policies as the Fund. Judgments Going concern assumption When preparing the interim condensed consolidated financial statements, management is required to make an assessment of the Fund s ability to continue as a going concern. When management is aware, in making this assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the Fund s ability to continue as a going concern, the Fund shall disclose those uncertainties. In assessing whether the going concern assumption is appropriate, management has taken into account all available information about the future, which is at least, but not limited to, twelve months from the statement of financial position date. The main challenges facing the Fund are (a) the continued supply of zinc concentrate and (b) the ability for the Processing Facility to continue to operate profitably after the expiry of the initial term of the SPA between the Partnership and Glencore Canada on May 2, The continued sourcing of zinc concentrate is key for the Fund to be able to either extend its asset-based revolving credit facility (the ABL Facility ) (Note 5) or enter into a new credit facility. The Independent Committee of the Operating Trust has been actively working to ensure a continuous supply of zinc concentrate to the Processing Facility beyond the potential expiry date of May 2, 2017 which is expected to be at market terms. Concurrently with ongoing negotiations regarding a long-term concentrate agreement, the Fund has secured Glencore Canada s commitment to provide a comprehensive feed plan for the Processing Facility for the entire 2017 calendar year. This commitment will ensure adequate uninterrupted supply of zinc concentrate to December 2017, giving the Fund additional time to secure zinc concentrate beyond that date. The commitment for the period from May 2, 2017 to December 31, 2017 will be on the basis of market terms, which have not yet been agreed. The Fund has terminated its discussions (through the Independent Committee and its advisors) with Glencore Canada on the negotiation of an amended and restated supply agreement. The Fund (through the Independent Committee and its advisors) had been in discussions with Glencore Canada since April 2014 regarding the supply of zinc concentrate following expiry of the SPA on May 2, The Fund now faces two distinct scenarios: either (i) Glencore Canada does not provide the Fund with the written notice referred to above and the relationship continues for the next five years, from May 2, 2017 to May 2, 2022, 6

8 with Glencore Canada acting as Agent to the Fund in securing the required zinc concentrate and in selling the finished products or (ii) such a written notice is provided and the relationship and the related agreements terminate on May 2, The Fund would then be on its own and would need to establish the commercial infrastructure required to procure the zinc concentrate it needs to operate and to sell the finished products. Should this scenario arise, the Fund would know by November 3, 2016 and would quickly proceed accordingly. The risks arising from this latter scenario are mitigated by the fact that, regardless of the decision Glencore Canada reaches, as previously announced, the Fund has secured Glencore Canada s commitment to provide a comprehensive feed plan for the Processing Facility for the entire 2017 calendar year. This commitment should ensure adequate uninterrupted supply of concentrate to December 2017, giving the Fund additional time to secure zinc concentrate beyond that date. The commitment for the period from May 2, 2017 to December 31, 2017 will be on the basis of market terms, which have not yet been agreed to but are expected to represent a significant change from the stable processing fee the Fund has enjoyed since its inception. The Independent Committee remains hopeful that the parties will reach an agreement for the zinc concentrate supply for the period between May 2, 2017 to December 31, 2017 based on the best terms and conditions available in the market. Management expects to repay its Senior Secured Notes (the Notes) (Note 5) on December 28, However, in order to finance its purchase of concentrate, the Fund will require a credit facility once the ABL Facility matures on April 3, Management believes that it is able to either extend the ABL Facility or enter into a new credit facility when the ABL Facility matures and that this is dependent on the Fund s ability to have continued supply of zinc concentrate. As a result of Glencore Canada s commitment to supply concentrate to December 31, 2017 and other options available to the Fund, the Fund has concluded that there are no material uncertainties related to events or conditions that may cast significant doubt upon the Fund s ability to continue as a going concern for the next twelve months. However, significant judgment was involved in this assessment. New standards, interpretations and amendments adopted by the Fund The nature and the impact of the new standard, interpretation and amendment adopted by the Fund on January 1, 2016 are described below: IAS 34 Interim Financial Reporting The amendment clarifies that the required interim disclosures must either be in the interim financial statements or incorporated by cross-reference between the interim financial statements and wherever they are included within the interim financial report (e.g., in the Management Discussion and Analysis). The other information within the interim financial report must be available to users on the same terms as the interim financial statements and at the same time. The amendment must be applied retrospectively and was effective for annual periods beginning on or after January 1, The adoption of this amendment did not have an impact on the Fund s interim condensed consolidated financial statements. NOTE 3. INVENTORIES Inventories were as follows: December 31, Spare parts 9,031 8,837 Raw materials 79,844 95,170 Work-in-process 15,295 13,332 Finished products 69,014 53, , ,086 7

9 NOTE 4. DERIVATIVES AND HEDGES The derivatives financials instruments (gain) loss were as follow: The Fund s derivatives were as follow: Three months ended Six months ended Derivative financial instruments (gain) loss: Inventory management program (4) (7,712) 4,184 (5,063) (4) (7,712) 4,184 (5,063) December 31, Assets Derivative financial assets: US dollar overnight transactions Liabilities Derivative financial liabilities: US dollar overnight transactions Inventory management program 6,472 2,231 6,666 2,231 Inventory management program The Fund purchases zinc concentrate to be processed into refined zinc metal for sale to customers. As agent of the Fund, Glencore 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 interim condensed consolidated statements of financial position as either a derivative financial asset or liability with the change in their fair value at each reporting period date recognized as a gain or a loss on derivative financial instruments. As at June 30, 2016, the Fund had sold forward approximately 85 million pounds of zinc (December 31, 2015 sold forward 83 million pounds of zinc). During the three months and six months ended 2016, the Fund recorded in sales a loss of $8,340 and $17,454 respectively representing the realized portion of the inventory management program ( 2015 a gain of $1,962 and $7,803 respectively) in the interim condensed consolidated financial statements. During the three months and six months ended 2016, the change in fair value of these derivatives was a gain of $4 and a loss of $4,184 respectively which was recognized in earnings attributable to Unitholders and noncontrolling interest on the interim condensed consolidated statements of comprehensive (loss) income in derivative financial instruments (gain) loss ( derivative financial instruments gain of $7,712 and $5,063 respectively). As at 2016, the fair value of these positions, as determined with reference to Level 1, quoted market prices, was a current derivative financial liability of $6,472 (December 31, current derivative financial liability of $2,231). Embedded derivatives For the three months and six months ended 2016, the Fund recorded an increase of $3,066 and $14,230 respectively, 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 ( 2015 decrease of $9,186 and of $5,454, respectively). 8

10 US dollar overnight transactions The Fund also has exposure to the US dollar for its cash, accounts receivable, inventory, accounts payable and accrued liabilities and bank debt. The Fund attempts to manage the overall economic exposure to US dollar fluctuations by matching US dollar assets to US dollar liabilities. This currency exposure is managed in part through US dollar overnight transactions. As at 2016, the Fund had sold forward US dollars with a notional amount of US$108,000 (December 31, 2015 US$109,700) and bought forward dollars with a notional amount of $140,303 (December 31, 2015 $152,324). An unrealized loss of $194 related to these open positions was recorded in current derivative financial liability as at 2016 (December 31, 2015 current derivative financial asset of $499). NOTE 5. BANK AND OTHER LOANS Bank and other loans were as follows: December 31, Senior secured notes 15,000 22,500 ABL revolving facility 35,877 70,759 Total bank and other loans 50,877 93,259 Less: unamortized deferred financing fees (213) (423) Less: current portion (50,664) (92,836) Long-term portion - - Senior secured notes On July 28, 2011, the Operating Trust closed its private placement of Notes, for an aggregate principal amount of $90 million, bearing interest at 6.875%. Commencing on December 28, 2011, the Notes were amortized by an amount of $7.5 million on a semi-annual basis on June 28 and December 28 of each year. As at 2016, the balance on the Notes was $15.0 million repayable on December 28, The Notes are redeemable at the option of the Operating Trust, in whole or in part, at any time at 100% of the principal amount; plus, accrued and unpaid interest to the redemption date. The prepayment options are considered to be closely related to the Notes and are therefore not considered to be an embedded derivative. ABL revolving facility On March 1, 2016 the Operating Trust extended the maturity of the initial agreement of 5-year ABL Facility providing availability of up to $175 million to April 3, The terms of the ABL Facility remain substantially the same, except in the circumstances where the SPA is not renewed on terms and conditions satisfactory to the lenders. In that circumstance the following amendment would become effective on the earlier of i) the earlier of a) the date of the deemed non-renewal (or termination) of the SPA and b) the date that is five days following receipt by the Operating Trust of notice by Glencore Canada of such non-renewal (or termination) of the SPA and ii) November 3, 2016: ABL Facility availability would be reduced from $175 million to $150 million An additional reserve of $17.5 million would be required by the lenders for purposes of the borrowing base Distributions to Unitholders would only be permitted with lenders consent Applicable margins for interest would be at the upper levels of the range. The above amendments would no longer be in effect if one or more alternate zinc concentrate supply agreements (including an amendment to the SPA) is entered into by the Fund on terms and conditions satisfactory to the lenders. The ABL Facility is an asset-based credit facility and the loans thereunder are made available to the Operating Trust based on a borrowing base test with the maximum amount available thereunder to be the lesser of (a) $175 million and (b) the aggregate of (i) 85% of eligible accounts receivable (90% in the case of insured accounts receivable or that are owed by qualified investment grade account debtors) plus (ii) the lesser of (A) 70% of the lower of cost or fair market value of eligible inventory, and (B) 85% of the appraised net orderly liquidation value of eligible inventory, minus customary priority payables and reserves. The borrowing base is tested on a monthly basis so long as excess availability is equal to or greater than $15 million and on a weekly basis if excess availability over the most recent 45-day period is less than $15 million. 9

11 The borrowing base on the ABL Facility was $167,931 based on the Fund s working capital position as at As at 2016, there was $53,516 drawn on the facility including letters of credit of $17,639, leaving an excess availability of $114,415. NOTE 6. RESIDUE PONDS REHABILITATION LIABILITIES Residue ponds rehabilitation liabilities were as follows: The Fund has recognized a rehabilitation liabilities solely related to the residue ponds within the Processing Facility. The rehabilitation liabilities do not include other site rehabilitation costs that would be required if the Processing Facility was decommissioned. The Fund has determined the fair value of this rehabilitation liabilities as at 2016, by using a discount rate of 1.44% (December 31, %). The liabilities accrete to their future value until the obligations are completed. The estimated rehabilitation expenditures may vary based on changes in operations, cost of rehabilitation activities, and legislative or regulatory requirements. NOTE 7. PRIORITY AND ORDINARY UNITHOLDERS Priority and Ordinary Unitholders were as follows, for the six months ended June 30: December 31, Balance at beginning of period 28,494 26,618 Accretion of rehabilitation liabilities Site rehabilitation expenditures - (339) Change in estimates (798) 1,711 Balance at the end of period 27,921 28, (units) (units) ($) ($) Priority Units Beginning of the period 37,489,975 37,489, , ,817 Comprehensive (loss) income - - (5,359) 13,819 Ending of the period 37,489,975 37,489, , ,636 Ordinary Units and Special Fund Units Beginning of the period 12,500,000 12,500,000 71,051 66,300 Comprehensive (loss) income - - (1,786) 4,608 Ending of the period 12,500,000 12,500,000 69,265 70,908 As at 2016, the Fund had 37,489,975 Priority Units outstanding. Priority Unitholders can redeem their units at a present formula price, to a maximum of $50 per month, subject to the Fund s banking covenants. Pursuant to the Fund s trust indenture as amended and restated (the Trust Indenture ), an unlimited number of Priority Units are issuable. Each Priority Unit is transferable and represents an equal, undivided beneficial interest in the Fund and entitles the holder thereof to participate equally in distributions of the Fund and to one vote. As at 2016, the Partnership also had 12,500,000 ordinary units (the Ordinary Units ) outstanding, which are exchangeable into Priority Units on a one-for-one basis only after May 2, 2017, or earlier upon the occurrence of certain events. Each Ordinary Unit is entitled to receive a cash distribution on a monthly basis in an amount that is equal to the monthly cash distribution paid to each Priority Unit, provided each Priority Unit is first paid an amount that is equal to the monthly cash distribution of not less than $ per Priority Unit (the Base Distribution ) before any amount is paid to holders of Ordinary Units (note 10). The 12,500,000 outstanding special voting units of the Fund (the Special Fund Units ) provide voting rights in respect of the Fund to the holder of Ordinary Units and vote with the Priority Unitholders as one class. All Ordinary Units and Special Fund Units are held by a wholly-owned subsidiary of Glencore Canada. 10

12 NOTE 8. RELATED PARTIES The interim condensed consolidated financial statements include the financial statements of the Fund and the subsidiaries listed in the following table: % Equity Interest Country of December 31, Name Incorporation Subsidiaries: Noranda Income Limited Partnership 1 Canada 81% 81% Ontario Inc. Canada 100% 100% Noranda Operating Trust Canada 100% 100% Structured Entity: Canadian Electrolytic Zinc Limited Canada 0% 0% 1 Represents percentage of taxable income allocated to the Fund s subsidiaries. The Fund entered into the following transactions in the ordinary course of business with Glencore Canada and its subsidiaries and affiliates as follows: Three months ended Six months ended Sales of zinc metal ,050 48,984 50,070 Sales of by-products 5,330 8,676 11,622 16,257 Purchases of zinc concentrate 124,419 96, , ,850 Purchases of plant equipment, raw materials and operating supplies 1,466 12,241 3,052 16,335 Support services ,222 1,009 Sales agency services , Except for the purchase of zinc concentrate governed by the SPA, the sales to and purchases from related parties are made at terms equivalent to those that prevail for arm s length transactions. All amounts due to and from related parties are non-interest bearing and are due in the ordinary course of business. NOTE 9. FINANCE COSTS, NET Finance costs were as follows: Three months ended Six months ended Interest on bank and other loans 701 1,163 1,481 2,133 Amortization of deferred financing fees Interest income and other - (1) (6) (4) Accretion of rehabilitation liabilities ,486 1,910 2,752 11

13 NOTE 10. DISTRIBUTIONS TO UNITHOLDERS When not restricted (see Note 5), and as may be considered appropriate by the Board of Trustees of the Operating Trust, the Fund s policy is to make monthly distributions to Unitholders, equal to the distributable cash flows from operations, before variations in working capital and after permanent debt reductions and such reserves as may be considered appropriate by the board. The Fund determines the cash available for distribution, if any, on a monthly basis for the Unitholders of record of the Fund on the last business day of each calendar month and these distributions are to be paid on or about 25 days thereafter. The Fund, as a specified investment flow-through ( SIFT ) entity, is subject to tax on its "non-portfolio earnings" (as defined in the Income Tax Act (Canada) ( ITA ) (the "NPE") at the same rate as a Canadian corporation provided it distributes a sufficient portion of such earnings to Unitholders. The Fund is required by its Trust Indenture to distribute each year amounts equal to the sum of its non-npe and a specified percentage of its NPE for the period so as, to the extent possible, minimize its liability for tax under the ITA in the period. Such distributions are to be made in cash, unless the Fund is restricted from distributing cash or sufficient cash is not available, in which case such distributions are to be satisfied in whole or in part by the issuance of additional Priority Units having a value equal to the amount of cash which is unavailable for distribution. Following such an in-kind distribution, the Priority Units are automatically consolidated such that each certificate representing a number of units prior to the in-kind distribution of additional units is deemed to represent the same number of units after the distribution of additional units and the consolidation. Cash distributions on Ordinary Units of the Partnership are subordinated to distributions on Priority Units of the Fund until May 2017 except upon the occurrence of certain events. Each Ordinary Unit is entitled to receive a cash distribution on a monthly basis in an amount equal to the monthly cash distribution paid to each Priority Unit, provided each Priority Unit is first paid an amount that is equal to the monthly cash distribution of not less than $ per Priority Unit (the Base Distribution ) before any amount is paid to the holder of the Ordinary Units. If, notwithstanding the subordination of the Ordinary Units, the cash available for distribution is not sufficient to make the Base Distribution on the Priority Units in a month, the amount of the deficiency does not accumulate and is not paid to holders of the Priority Units. However, if the cash available for distribution in a month is not sufficient to make a distribution on the Ordinary Units that is equal to the distribution on the Priority Units, the amount of the deficiency does accumulate and is to be paid to the holder of the Ordinary Units if and when there is excess cash available for distribution, above the Base Distribution amount, in a subsequent month (the Deficiency Amount ). Any accumulated Deficiency Amount related to the Ordinary Units is not accrued by the Fund until excess cash is available for distribution above the Base Distribution amount and a cash distribution is approved by the Board of Trustees. If at any time there is an accumulated Deficiency Amount owing on the Ordinary Units, any distributions on the Ordinary Units must be declared on the last business day of the month on which the Partnership has distributable cash flow in that month in excess of any amount required to be paid by the Partnership to the holders of the Ordinary Units so as to ensure the declaration of the Base Distribution by the Fund to the holders of Priority Units for that month together with a declaration of an amount equal to the Base Distribution by the Partnership to the holders of Ordinary Units for that month, until the Deficiency Amount is paid in full. As at 2016 and July 25, 2016, the accumulated Deficiency Amount was $32,294 and $32,607 respectively (December 31, $29,586). The accumulated Deficiency Amount to the Ordinary Units is accrued and payable by the Fund only when excess cash flow is available for distribution above the Base Distribution and a cash distribution above the Base Distribution is approved by the Board of Trustees. In the event of an exchange of Ordinary Units on a one-to-one basis for Priority Units on or after May 2, 2017 or earlier upon the occurrence of an early exchange event, the holder of Ordinary Units has the right to receive any distributions declared and not paid on the Ordinary Units as of that time and a promissory note in the amount of the outstanding accumulated Deficiency Amount. Subsequent to an exchange the promissory note reflecting the remaining outstanding accumulated Deficiency Amount continues, however, there is no further accumulation of the accumulated Deficiency Amount. Any Deficiency Amount related to the promissory note is not accrued by the Fund until such time as excess cash flow is available for distribution above the Base Distribution and a cash distribution above the Base Distribution is approved by the Board of Trustees. 12

14 NOTE 11. COMMITMENTS AND CONTINGENCIES Litigation In August 2004, the Manager was served with a motion to institute a class action before the Québec Superior Court, following 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 Manager was served a new motion to institute a class action. On March 19, 2012, the Québec Superior Court authorized the motion to institute a class action against the Manager. In August 2012, the class action statement of claim was served upon the Manager and was filed in Court, and the class representative made a motion to add the Fund as a mis en cause (interested party) and add Xstrata and Glencore Canada as co-defendants with the Manager. The motion to add Xstrata Limited and Glencore Canada was dismissed by the Court on March 28, On April 25, 2014, the plaintiff appealed the decision. On December 8, 2014, the appeal was dismissed. On February 6, 2015, the plaintiff filed an application for leave to appeal to the Supreme Court of Canada the judgment rendered on December 8, On June 4, 2015, the Supreme Court of Canada dismissed the application for leave to appeal. As of July 25, 2016, the merits of the class action suit have not been considered by the courts. The Manager continues to maintain that the claims are not justified and that the class action suit is unfounded. The Manager intends to vigorously defend itself against the claim. NOTE 12. EMPLOYEE BENEFITS The Manager participates in two defined benefit pension plans managed and administered by Glencore Canada. There is one plan for unionized workers and a second plan for staff. The plan for staff has been closed to new entrants since The benefit obligation represents the obligations for those employees who have worked for the Manager since the Fund s inception in May The Manager also participates in unfunded post-retirement benefit plans that are managed and administered by Glencore Canada, for a number of current and former employees. The benefit obligation represents the obligations for those employees who are working for the Manager as of the reporting period or who have retired while working for the Manager. The benefit obligation and plan assets for pre-may 2002 would only revert to the Fund upon the termination of the administration agreement between the Manager and the Fund and establishment of a pension plan by the Manager and will be subject to regulatory approval. The Fund has determined the fair value of this employee benefit liability as at 2016, by using a discount rate of 3.30% for the pension plans and 3.35% for the post-retirement benefit plans (December 31, % and 3.90% respectively). NOTE 13. RECLASSIFICATION OF COMPARATIVE FIGURES Certain comparative amounts in the condensed consolidated statements of cash flows have been reclassified to conform to the presentation adopted in the current period. Gains or losses during the three months and six-months ended 2016 and 2015 were reclassified from Increase (decrease) in accounts payable, accrued liabilities and distributions payables to Change in fair value of embedded derivatives, resulting in no change in Cash (used in) provided by operating activities. This change better presents the impact of the quotational pricing feature in the Fund s zinc concentrate payables. 13