2014 OVERVIEW LETTER FROM THE CEO. Operations. Financial Metrics. Zinc metal production was 262,049 tonnes, in line with revised annual guidance.

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1 NIF.UN Noranda Income Fund Annual Report 2014

2 IFC About Noranda Income Fund Overview and Letter from the CEO 02 Letter from the Chairman 03 Management s Discussion and Analysis 36 Management s Statement of Responsibility 37 Independent Auditors Report 38 Financial Statements 42 Notes to Financial Statements IBC Corporate Information Noranda Income Fund (the Fund ) is an income trust whose units trade on the Toronto Stock Exchange under the symbol NIF.UN. The Fund owns an electrolytic zinc processing facility and its ancillary assets (the Processing Facility ) located in Salaberry-de-Valleyfield, Québec. This Processing Facility is the second-largest zinc processing facility in North America and the largest in eastern North America, where the majority of zinc customers are located. It produces refined zinc metal and various by-products from sourced zinc concentrates. The Processing Facility is operated and managed by Canadian Electrolytic Zinc Limited, a wholly-owned subsidiary of Glencore Canada Corporation ( Glencore Canada ). Zinc concentrate is supplied to the Processing Facility by Glencore Canada under a supply and processing agreement (the Agreement ) which supports 100% of the plant s production requirements and through which the Fund is paid a fixed processing fee for converting the zinc concentrate into zinc metal. The Agreement, the initial term of which expires on May 2, 2017, will automatically renew for a five-year term thereafter unless Glencore Canada provides written notice to the contrary at least 180 days prior. After May 2, 2017, whether the Agreement is renewed or not, the Fund will be required to purchase zinc concentrate at market terms, instead of the current fixed processing fee. Annual Meeting of Unitholders Will be held at 2:00 p.m. on May 12, 2015 at the TSX Broadcast & Conference Centre Gallery Room, The Exchange Tower, 130 King Street West, Toronto, Ontario M5X 1J2.

3 2014 OVERVIEW Financial Metrics Earnings before income taxes was $34.5 million for the year, excluding a $40.5 million non-cash impairment charge, compared to $65.0 million in Including the non-cash impairment charge, the Fund recorded a loss before income taxes of $6.0 million for the year. Cash available for distributions before reserves was $15.2 million while the Fund issued a total of $18.7 million in cash distributions to Priority Unitholders in Zinc premiums were $11.6 million higher than in In 2014, $15 million in senior secured notes were repaid as per the amortization schedule. Overall, the Fund s debt increased by $27.6 million (net of deferred financing fees), reflecting an increase in working capital requirements. Operations Zinc metal production was 262,049 tonnes, in line with revised annual guidance. The Processing Facility continued to successfully introduce and process an increasingly diversified zinc concentrate feed mix with 40% of concentrate consumed in 2014 from overseas compared to 30% in 2013, and 12% in Completion and commissioning of the two-year silica removal capacity project in 2014, for a total cost of $20 million. Completion of four-year rehabilitation project to replace cell-house liners in 2014, for a total cost of $17.4 million. New collective agreement reached in early 2015, effective until November 30, LETTER FROM THE CEO Adapting to a changing zinc concentrate market In 2014, the Fund continued to make important strides towards favourably positioning our Processing Facility for the future. Much of our work was and continues to be focused on increasing our ability and flexibility to process varying and higher-impurity zinc concentrates. While we faced challenges in the first half of the year from an operational and feed supply perspective, we nonetheless exceeded our revised production target of 260,000 tonnes. With over 40% of the concentrate consumed in 2014 from overseas compared to only 12% two years prior, our operations team have adjusted to new market realities. We expect this trend to continue in 2015 and beyond so we are pleased with the completion of the silica removal capacity and cell-house liner replacement projects which were delivered on budget. With our increased operational flexibility, we can now focus on maximizing tonnage and cost improvements, to ensure our competitive position as a favourably located facility. In 2015, we will strive to produce and sell 270,000 tonnes of zinc at a fixed processing fee of $0.405 a pound. Capital spending is expected to be $27 million, mainly focused on sustaining operations, operational flexibility and environmental compliance. Finally, we were pleased to ratify a new collective labour agreement earlier this year. Our employees at every level and in every department play a crucial role in our success and in ensuring that we are well positioned for the future. We continue to aim for best-in-class health, safety and environmental performance and I wish to thank personally the whole team for their continued hard work and dedication. I also thank our unitholders for their continued support. Eva Carissimi President and Chief Executive Officer Canadian Electrolytic Zinc Limited Noranda Income Fund s Manager Noranda Income Fund Annual Report

4 LETTER FROM THE Chairman Considering all scenarios in the best interest of unitholders Throughout 2014, the Processing Facility s team worked hard to improve the processing flexibility and capacity of the plant, including the completion of important capital investment projects. For its part, the Board and its Independent Committee continued to review diligently the Fund s options leading up to the expiration of the initial term of its supply and processing agreement with Glencore Canada on May 2, During 2015, the Board and the Processing Facility s team will continue to move forward in their respective areas while aiming to achieve a successful transition by The Fund faces two main challenges after the expiry of the agreement, which the Board and its Independent Committee are monitoring closely. The first is the continued supply of zinc concentrate, and the second is the Processing Facility s ability to continue to operate profitably. After May 2017, we will be purchasing concentrate on market terms, which vary depending on supply and demand; instead of at the current fixed processing fee. This will represent a new reality for the Fund. If the Fund had been operating under market terms in recent years, cash flow generation would have been lower. Under such terms, our results will be subject to more volatility, which may have both positive and negative impacts over time. During the past several months, discussions have been held with potential concentrate suppliers for the supply of zinc concentrate following May 2, These discussions will continue. However, there is no assurance that they will result in continued supply on terms that allow the Fund to continue profitable operations. While the Independent Committee s work is focused on assuring continuity of the Processing Facility in Valleyfield, it is also the Board s fiduciary responsibility to prepare for all scenarios. As a result, we continue to closely evaluate the expected future cash flows needed and required reserves. If necessary, the Board will augment the Fund s reserves, which in turn could have an impact on cash available for distributions, whether in the short, medium or long term. The Board is prioritizing solutions in which the facility will continue to operate profitability and regular monthly distributions can be sustainable. But there is no assurance at this time that such a scenario will materialize or that no interruptions to distributions will occur. The monthly distributions paid to unitholders in each of the twelve months of 2014 totalled $18.7 million. Distribution continued during the first three months of We assure unitholders that we are very much focused on ensuring the continued success and sustainability of the Fund and will opt for a conservative approach to cash management in order to prioritize the creation of long-term value for all stakeholders. The Board and the Processing Facility s team remain optimistic that a solution in which the Fund will continue to operate profitably will be reached. I would like to thank the Manager, the employees and the Board for their respective contributions. I also wish to thank unitholders for their continued support as we prepare for the next phase in the evolution of the Noranda Income Fund. John J. Swidler, FCPA, FCA Chairman of the Board 02 Annual Report 2014 Noranda Income Fund

5 Management s Discussion and Analysis MANAGEMENT S DISCUSSION AND ANALYSIS This Management s Discussion and Analysis ( MD&A ) of the financial position and results of operations of Noranda Income Fund (TSX: NIF.UN) is the responsibility of management and has been prepared as at March 10, The board of trustees of Noranda Operating Trust carries out its responsibility by reviewing this disclosure principally through its audit committee and it approves this disclosure prior to its publication. This MD&A provides a review of the consolidated financial position, results of operations and performance of Noranda Income Fund (the Fund ), Noranda Operating Trust (the Operating Trust ), Ontario Inc. ( Ontario Inc. ), Canadian Electrolytic Zinc Limited (the Manager and alternatively, the Administrator ) and the Noranda Income Limited Partnership (the Partnership ) for the years ended December 31, 2014 and The Partnership owns an electrolytic zinc plant and processing facility (the Processing Facility ). The Fund has prepared audited consolidated financial statements and notes to those statements for the years ended December 31, 2014 and 2013 in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). The MD&A should be read in conjunction with these statements. All amounts are expressed in Canadian dollars, the Fund s reporting currency, except where indicated. Additional information regarding the Fund, including the Fund s Annual Information Form dated March 24, 2014, is available on SEDAR at This MD&A contains forward-looking information and forward-looking statements within the meaning of applicable securities laws. See Forward Looking Information below Highlights Loss before income taxes was $6.0 million compared to earnings before income taxes of $65.0 million in 2013 due to an asset impairment charge of $40.5 million, an increase in the reclamation expense, lower volume of zinc metal sales and by-product revenues and higher costs, partly offset by higher zinc metal premiums. Zinc premiums averaged 10.0 cents US per pound (11.0 cents Cdn) compared to cents US per pound (8.7 cents Cdn). Overall premiums were $11.6 million higher than in Zinc metal production was 262,049 tonnes compared to 265,242 tonnes in Declared monthly cash distribution of $ per unit to Priority Unitholders in each of the twelve months of 2014 ($ per unit or $18.7 million for the year). The silica removal capacity was completed and commissioned during the year. The completion of the project provides the Processing Facility with the ability to treat a wider range of zinc concentrates. In 2014, 60% of the concentrate consumed was from domestic sources compared to 70% in The Fund remains committed to reduce debt. In 2014, the senior secured notes continued to be repaid with $15 million being repaid as per the amortization schedule. Overall, the Fund s debt increased by $27.6 million (net of deferred financing fees), reflecting an increase in working capital requirements. Noranda Income Fund Annual Report

6 Management s Discussion and Analysis OVERVIEW Business and Agreement Overview The Fund is an unincorporated open-ended trust, established under the laws of Ontario, whose priority units (the Priority Units ) trade on the Toronto Stock Exchange ( TSX ) under the symbol NIF.UN. The Manager, a wholly-owned subsidiary of Glencore Canada Corporation ( Glencore Canada ), operates and manages the Operating Trust and the Partnership, and administers the Fund. The board of trustees of the Operating Trust (the Board or the Trustees ), the majority of whom are independent from Glencore Canada (the Independent Committee ), oversees the Fund. The Fund is, in turn, the sole unitholder of the Operating Trust. The Fund was created to acquire the Processing Facility, located in Salaberry-de-Valleyfield, Québec, from Noranda Inc. 1 in Concurrently with the creation of the Fund and the acquisition of the Processing Facility, the Manager entered into various 15-year agreements with the Fund and/or the Operating Trust relating to the management, administration and operation of the Fund, the Operating Trust, the Partnership and the Processing Facility. The initial term of the agreements will expire on May 2, 2017 and will automatically renew for a five-year term thereafter, unless terminated in accordance with the terms. Upon the termination of the operating and management agreement, the Partnership is required to acquire the Manager from Glencore Canada. The agreements include: a) An administration agreement dated April 18, 2002 between the Fund and the Administrator (the Administration Agreement ) pursuant to which Computershare Trust Company of Canada, the sole trustee of the Fund (the Sole Trustee ), has delegated all of its power and authority to the Administrator, and the Administrator provides administrative and support services to the Fund. b) A management services agreement dated April 18, 2002 between the Operating Trust and the Manager (the Management Services Agreement ) pursuant to which the Manager provides management services to the Operating Trust. c) An operating and management agreement dated May 3, 2002 between the Manager and the Partnership (the O&M Agreement ) pursuant to which the Manager operates and maintains on an ongoing basis, the Processing Facility owned by the Partnership and provides management services to the Partnership. d) The supply and processing agreement dated May 3, 2002 between Glencore Canada and the Partnership (the Supply and Processing Agreement ) under which Glencore Canada is obligated, except in certain circumstances, to sell to the Partnership until May 2017 all of its zinc concentrate requirements up to 550,000 tonnes of zinc concentrate per year at a concentrate price based on the price of zinc metal on the London Metal Exchange ( LME ) for the payable zinc metal contained in the concentrate, less a fixed, escalating processing fee (calculated in Canadian dollars). Pursuant to the Supply and Processing Agreement, Glencore Canada acts as exclusive agent for the Partnership to arrange for purchases of any additional zinc concentrate in excess of the 550,000 tonne amount described above, and for sales of zinc metal and by-products and related hedging and derivative arrangements. 1 On June 30, 2005, Noranda Inc. changed its name to Falconbridge Limited ( Falconbridge ) following a corporate amalgamation. Falconbridge subsequently changed its name to Xstrata Canada Corporation ( Xstrata Canada ) after being acquired by Xstrata plc. In May 2013, Glencore International plc completed its merger with Xstrata plc with the combined company now called Glencore plc ( Glencore ). Xstrata Canada changed its name to Glencore Canada Corporation following the merger. Since then, the Manager is a wholly-owned subsidiary of Glencore Canada. 04 Annual Report 2014 Noranda Income Fund 2

7 Management s Discussion and Analysis The initial term of the Supply and Processing Agreement 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 (by November 2016). Under any renewal, Glencore Canada would act as exclusive agent for the Partnership for the purchase of zinc concentrate and the Partnership would be required to purchase zinc concentrate on market terms, rather than the price currently being paid under the agreement. Glencore Canada would also act as exclusive agent for the purchase of zinc concentrate and the sale of zinc metal and by-products and related hedging and derivative arrangements. Further details concerning these arrangements relating to the management, administration and operation of the Fund and its subsidiaries, and the supply and processing of concentrate at the Processing Facility are described under Transactions with Related Parties below. The Processing Facility produces refined zinc metal and various by-products from zinc concentrate purchased from mining operations and sells refined zinc products to customers in the open market. The Fund earns a processing fee for transforming zinc concentrate into zinc metal and it earns additional revenue from premiums, by-product revenues and metal gains. The Processing Facility is located along major transportation networks which connect it to its principal markets in the United States and Canada. Zinc is central to our daily lives. Its main use is to galvanize steel for the construction and automotive industries. Zinc is also used in the production of die-castings and brass. Zinc powders, oxide and dust are used in the manufacture of batteries, rubber tires, pigments and various creams. Outlook for the Fund The main challenges facing the Fund are (a) the continued source of zinc concentrate after May 2, 2017 and (b) the ability for the Processing Facility to continue to operate profitably after the expiry of the initial term of the Supply and Processing Agreement on May 2, 2017, at which time the Fund expects that it will be required to purchase concentrate on market terms, including market treatment charges, whether or not Glencore Canada extends the contract, instead of the current fixed processing fee. According to industry analysts such as Wood Mackenzie and CRU Group, the zinc concentrate market was well supplied in However, it is generally expected that the market will tighten in the future, as a result of several large mines closing, coupled with strong global demand for zinc concentrate. If the zinc concentrate market does tighten, purchase conditions will be less favorable for the Processing Facility and other Western custom zinc smelters. In particular, it will likely be more challenging to source zinc concentrates in the required quantities and qualities. Even if zinc concentrate is available, the Fund s financial results could differ materially from those achieved under the Supply and Processing Agreement, which provides stable treatment charges for concentrate that are currently above market. There has been an industry trend whereby more of the concentrate is being purchased on spot terms 2 which have recently been below benchmark terms 3. For the year ended December 31, 2014, the realized average benchmark treatment charge was US$236 per dry metric tonne of concentrate processed, while the average spot treatment charge of US$165 per dry metric tonne of concentrates processed. If this trend continues, it may be difficult for the Processing Facility to achieve financial results similar to those achieved under the Supply and Processing Agreement. 2 Spot treatment charge refers to the price paid by smelters for prompt purchase of zinc concentrate. Source: Wood Mackenzie 3 Benchmark treatment charge is negotiated annually between major miners and smelters. Source: Wood Mackenzie 3 Noranda Income Fund Annual Report

8 Management s Discussion and Analysis The following table provides a comparison of the Fund s Adjusted EBITDA (as defined below) under the Supply and Processing Agreement and the estimated Adjusted EBITDA that would have been realized had the Processing Facility purchased all of the feed using the annual benchmark or the spot treatment terms, taking into account only certain market assumptions and assuming the same feed mix for the year ended December 31, 2014: Adjusted EBITDA All concentrate processed based on: 4 (millions) Supply and Processing Agreement $79.7 Benchmark Treatment Charge $60.6 Spot Treatment Charge $21.9 In addition, the Processing Facility may realize an annual treatment charge that represents a mix of benchmark and spot. For every US$10 per tonne reduction in realized treatment charge from the annual benchmark treatment charge, the Fund s Adjusted EBITDA for the year ended December 31, 2014, would have been reduced by $5.5 million. The Fund s results under benchmark and spot treatment terms could be impacted by other factors as well, which could have a material effect on the Fund s financial results. See Key Performance Drivers - Adjusted Earnings before Distributions to Unitholders, Finance Costs, Income Taxes, Depreciation and Amortization below on how the Fund calculates Adjusted EBITDA. The Fund s results under market terms will be subject to more volatility than under the current Supply and Processing Agreement. The volatility will be driven by variations in treatment charges, zinc prices and the Canadian/US exchange rate. See Key Performance Drivers Net Revenues Under Market Conditions. Over the last several months, discussions have been held with various potential counterparties regarding the supply of zinc concentrate following May 2, These discussions will continue; however, there is no assurance that they will result in continued supply on terms that allow the Fund to continue profitable operations. The Independent Committee is being assisted in its work by an industry consultant, Steve Hayes, whom the Independent Committee retained in December 2012 to advise it with regards to the zinc concentrate market. In May 2014, TD Securities was engaged as financial advisor to the independent trustees. As a result of the above noted changes and concerns, the Board is evaluating the expected future cash flows in a variety of potential scenarios, as well as required reserves under those scenarios. Given the uncertainty of future pricing and market conditions for zinc concentrate, and that several potential scenarios are being considered, including the discontinuation of operations following the expiry of the initial term of the Supply and Processing Agreement, the Board is carefully reviewing and, if required, will augment the Fund s reserves. An increase in reserves could have an adverse effect on cash available for distributions. The Fund s distribution policy and practices are impacted by various risks, uncertainties and other factors, which are discussed in greater detail in this section and in the sections entitled Distribution Policy, Liquidity and Capital Resources and Forward-Looking Information below. 4 Market terms and assumptions used for these calculations: Zinc price US$0.98; Cdn/US exchange rate 1.10; realized benchmark charge US$236 per dmt of concentrate; spot treatment charge of US$165 per dmt of concentrate; Market payable metal in concentrates 85%; Zinc metal sales 258,160; Zinc metal recovery 97.3% 06 Annual Report 2014 Noranda Income Fund 4

9 Management s Discussion and Analysis RESULTS OF OPERATIONS Asset Impairment Impairment exists when the carrying value of a non-financial asset or cash-generating unit ( CGU ) exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The Fund has only one CGU. As at December 31, 2014, management concluded that an indicator of impairment existed relating to its CGU. As a result of the estimated recoverable amount, an impairment loss of $40.5 million was recorded as a reduction in the Fund s property plant and equipment. The $40.5 million non-cash asset impairment charge is primarily as a result of: i) the Fund s anticipated sourcing of zinc concentrate on market terms instead of at current fixed processing fee following the expiry of the initial term of the Supply and Processing Agreement in May 2017, which in recent years would have resulted in lower cash flow generation for the Fund; ii) the increase in the Fund s carrying amount in 2014 relating to fluctuations in the price of zinc and foreign exchange rates; and iii) a sustained increase in the sourcing of concentrates from overseas resulting in higher inland freight and feed acquisition costs. This non-cash charge is not expected to have an impact on the Fund s borrowing facilities. See below Critical Accounting Estimates and Judgments Property, Plant and Equipment for more information. Selected Financial Highlights ($ millions, except per-unit amounts) Sales $ $ $ Revenues less raw material purchase costs (Loss) earnings before income taxes (6.0) (Decrease) increase in net assets atttributable to Unitholders (21.2) Total assets Bank and other loans Cash distributions declared per Priority Unit Distributions declared per Ordinary Unit $ - $ - $ - Loss before income taxes was $6.0 million in 2014, compared to earnings before income taxes of $65.0 million in The $71.0 million difference is due to asset impairment charge of $40.5 million, increase in reclamation expense, lower volume of zinc metal sales and by-product revenues and higher costs, partly offset by higher zinc metal premiums. In 2014, sales were $712.8 million or 14% higher than the $626.5 million which was recorded in The main factors explaining this increase include: Zinc metal revenues in 2014 were 16% higher because of a 21% increase in zinc price converted into Canadian dollars. This was partially offset by a 4% reduction in the volume of zinc metal sold. Zinc premiums were $11.6 million higher than in 2013 as higher premiums were partially offset by lower volume of zinc metal sold. The results were partially offset by lower by-product revenues from sulphuric acid and copper in cake. In 2014, zinc premiums rose to 10.0 cents US per pound (11.0 cents Cdn), up from 8.4 cents US per pound in 2013 (8.7 cents Cdn). The increase in realized premiums compared to 2013 reflected the impact of improved annual contract and spot premiums in North America. Transportation and distribution costs in 2014 of $17.8 million were higher than the $17.1 million recorded in The increase in costs was in part due to higher zinc metal warehousing costs from higher volumes of zinc metal in inventory, partially offset by the lower transportation costs from a lower volume of zinc metal being sold. 5 Noranda Income Fund Annual Report

10 Management s Discussion and Analysis Raw material purchase costs in 2014 were $388.8 million compared to $294.5 million in The increase was due to the 21% increase in the zinc price converted into Canadian dollars, higher inland freight costs due to the increase in seaborne concentrates and additional costs incurred to obtain lower silica feeds, partially offset by the lower volume of zinc metal sold. Revenues less raw material purchase costs ( Net Revenues ) in 2014 were $306.3 million compared to $314.9 million in The $8.6 million decrease was mainly due to lower volume of zinc metal sales and by-product revenues, higher inland freight costs from the purchase of seaborne concentrate, partially offset by higher premiums. Production costs before change in inventory in 2014 were $192.7 million compared to $180.6 million recorded in The $12.1 million increase was due to higher energy resulting from higher natural gas consumption, higher contractor costs in part due to unplanned maintenance outages and a $4.3 million increase in labour costs related to additional pension benefits and early retirement provisions for the new collective agreement. Production Cost Breakdown For the year ended December 31 Increase ($ millions) (Decrease) Labour $ 62.9 $ 59.9 $ 3.0 Energy Operating supplies Other Production cost before change in inventory Change in inventory (3.4) 2.1 (5.5) $ $ $ 6.6 Selling and administration costs in 2014 were $22.9 million compared to $21.8 million in The increase is primarily due to a $1.3 million allowance for bad debt that was recorded in The foreign exchange loss in 2014 was $14.0 million compared to a loss of $7.4 million in The foreign exchange loss in 2014 was primarily a result of the impact of the weakening Canadian dollar on the Fund s net US dollar monetary liabilities. The foreign exchange loss was largely offset by an increase in the value of in-process and finished inventory. The increase in the value of inventory is realized in Net Revenues as the metal is sold to customers (thereby increasing the Net Revenue recorded by the Fund). The Fund s main US dollar denominated balances are comprised of cash and cash equivalents, accounts receivable, accounts payable and a portion of its debt. In 2014, the gain on the derivative financial instruments was $1.6 million. In 2013, the gain on the derivative financial instruments was $1.1 million. During these periods, the change in the market value of the Fund s financial instruments resulted in these amounts being recorded. In 2014, depreciation was $36.6 million, consistent with the $36.4 million recorded in In 2014, the rehabilitation expense was $5.3 million compared to the $3.7 million recovery recorded in In 2014, $1.8 million of the expense resulted from an updated closure estimate for the residue ponds. In addition, the decrease in the risk-free interest rate used to discount the liabilities resulted in a $3.5 million increase in the liabilities. The recovery in 2013 was due to an increase in the risk-free interest rate used to discount the liabilities, resulting in a decrease in the liabilities. In 2014, net finance costs were $5.3 million compared to $6.4 million in The decrease was due to lower average debt outstanding during the year and a lower average interest rate due to the continued amortization of the senior secured notes. 08 Annual Report 2014 Noranda Income Fund 6

11 Management s Discussion and Analysis Income Tax (Recovery) Expense For the year ended December 31 ($ millions) Current income tax expense $ 10.2 $ 13.4 Deferred income tax (recovery) expense (11.1) 0.8 (Loss) income tax expense before distributions (0.9) 14.2 Current income tax recovery on distribution of non-portfolio earnings (0.7) (0.6) $ (1.6) $ 13.6 The income tax recovery was $1.6 million in 2014 compared to expense of $13.6 million in The Fund, as a specified investment flow-through ( SIFT ), 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 current income tax of $10.2 million in 2014 was lower than the $13.4 million recorded in 2013 due to the overall lower earnings before income taxes for the Fund. The current tax recovery on distribution of NPE amounted to $0.7 million in 2014 compared to $0.6 million in 2013 because the NPE earnings in the Fund in 2014 were slightly higher than in Summary of Quarterly Results The following table provides a summary of quarterly results for the two years ended December 31, 2014 and 2013: Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Revenues $214.6 $175.1 $151.0 $154.3 $148.3 $148.5 $162.5 $150.1 (Decrease) increase in net assets attributable to Unitholders ($23.7) $5.8 ($6.8) $3.5 $2.6 $5.9 $6.1 $17.3 Production (tonnes) 71,207 68,653 62,645 59,544 67,212 61,331 68,286 68,413 * 1 tonne = 2, pounds Consolidated Earnings attributable to Unitholders (Comparing the three months ended December 31, 2014 to the three months ended December 31, 2013) The Fund reported loss before income taxes of $27.9 million in the three months ended December 31, 2014 compared to earnings before income taxes of $9.3 million in the same period a year ago. The $37.2 million decrease is due to the asset impairment charge of $40.5 million and a $4.3 million increase in pension expense related to additional pension benefits and early retirement provisions for the new collective agreement, partially offset by higher Net Revenues resulting from higher zinc sales volumes and premiums. Net Revenues in the three months ended December 31, 2014 were $94.9 million, up from the $72.7 million recorded in the same period of Much of this increase was due to a higher volume of zinc metal sales, higher premiums and the higher copper in cake sales volume and the weaker Canadian dollar, partially offset by lower by-product prices. The foreign exchange loss in the three months ended December 31, 2014 was $6.5 million compared to a loss of $2.4 million in The foreign exchange loss in 2014 was primarily a result of the impact of the weakening Canadian dollar on the Fund s net US dollar monetary liabilities. The foreign exchange loss was largely offset by an increase in the value of in-process and finished inventory. The decrease in the value of inventory is realized in Net Revenues as the metal is sold to customers (thereby increasing the Net Revenue recorded by the Fund). 7 Noranda Income Fund Annual Report

12 Management s Discussion and Analysis The following table provides a summary of the performance of these key drivers for the three months ended December 31, 2014 and 2013: Three months ended December Zinc concentrate processed (tonnes) 125, ,302 Zinc secondary feed processed (tonnes) 4,530 - Zinc grade (%) Zinc recovery (%) Zinc metal production (tonnes) 71,207 67,212 Zinc metal sales (tonnes) 74,483 65,248 Processing fee (cents/pound) Zinc metal premium (US cents/pound) By-product revenues ($ millions) Copper in cake production (tonnes) Copper in cake sales (tonnes) Sulphuric acid production (tonnes) 96,263 99,232 Sulphuric acid sales (tonnes) 98,424 95,966 Average LME copper price (US$/pound) Sulphuric acid netback (US$/tonne) Average LME zinc price (US$/pound) Average US/Cdn. exchange rate * 1 tonne = 2, pounds In the three months ended December 31, 2014, zinc metal production was 71,207 tonnes compared to 67,212 tonnes in the same period of Zinc recoveries in the three months ended December 31, 2014 were 97.5% compared to 97.1% in the same period of In the three months ended December 31, 2014 sales were 74,483 tonnes compared to 65,248 tonnes in the same period of Zinc metal premiums were 9.6 cents US per pound in the three months ended December 31, 2014 compared to 8.7 cents US per pound in the same period of 2013, primarily due to higher premiums realized on contract sales. In the three months ended December 31, 2014, the Fund generated $8.6 million in revenue from the sale of its copper in cake and sulphuric acid compared to $8.9 million achieved for the same period of Revenues from the sale of sulphuric acid were $5.6 million in the three months ended December 31, 2014, a decrease of $1.4 from $7.0 million in the same period of Sulphuric acid sales totalled 98,424 tonnes in the three months ended December 31 of 2014, compared to 95,966 tonnes for the same period of In the three months ended December , sulphuric acid netbacks were US$51 per tonne compared to US$69 per tonne for the same period of 2013 due to lower contract pricing in 2014 compared to Copper in cake revenues were $3.0 million in the three months ended December 31, 2014 compared to $1.9 million for the same period of The volume of copper produced and sold is dependent on the copper content in the zinc concentrates that are consumed during the year. Copper in cake sales volumes in the three months ended December 31, 2014 totalled 796 tonnes compared to 338 tonnes in the corresponding period of Cash provided from operating activities in the three months ended December 31, 2014 was $13.6 million, including a negative $1.9 million increase in non-cash working capital due to an increase in accounts receivable and a decrease in accounts payable, partially offset by a decrease in inventory. In the same period of 2013, cash provided by operating activities was $21.7 million, which was positively impacted by a $7.6 million decrease in non-cash 10 Annual Report 2014 Noranda Income Fund 8

13 Management s Discussion and Analysis working capital due to an increase in accounts payable, partially offset by an increase in inventories and an increase in accounts receivable. Capital expenditures in the three months ended December 31, 2014 were $7.8 million, compared to $14.4 million for the same period of During the three months ended December 31, 2014, $1.4 million was spent on acid plant and roaster equipment, $0.9 million purchases of anodes, $1.0 million on the silica project, while sustaining capital accounted for most of the remaining expenditures. Cash distributions paid to Priority Unitholders during the three months ended December 31, 2014 totalled $4.7 million, unchanged from the same period of KEY PERFORMANCE DRIVERS The principal factor affecting the Fund s performance is the processing of zinc concentrates into zinc metal. This activity results in the Fund earning a processing fee. In 2014, the processing fee accounted for 72% of the Fund s Net Revenues ( %). A second key factor affecting the performance of the Fund is the premiums that are realized on the sale of zinc products to customers. Zinc metal is sold to customers on the basis of an LME zinc price plus a premium that is negotiated between the buyer and seller. Premiums can vary according to various factors including product form, quantity, quality and payment terms. In 2014, product premiums accounted for 16% of the Fund s Net Revenues ( %). By-product revenues (copper in cake and sulphuric acid) and zinc metal recovery gains generated 9% and 3%, respectively, of the Fund s Net Revenues in 2014 ( % and 2%). The Canada/US exchange rate also impacts the Fund s performance through premiums, by-product revenues and zinc recovery gains which, collectively, represented 28% of the 2014 Net Revenues ( %). As the processing fee is earned in Canadian dollars, 72% of the Fund s Net Revenues are not exposed to currency risk. Two other performance drivers that impact the Fund are managing costs and a disciplined use of capital. Net Revenues under Market Conditions As noted in the section titled Overview above, the Fund expects to pay market prices for the zinc concentrate that it purchases after the expiry of the initial term of the Supply and Processing Agreement. As a result, the Fund expects the make-up of Net Revenues to be different going forward. The principal factor affecting the Fund s performance will continue to be the processing of zinc concentrates into zinc metal. This change to market prices will result in the Fund earning treatment charges which are similar to the processing fees currently being earned. However, unlike the current processing fees, these treatment charges will fluctuate with market conditions and will most likely be priced in US dollars, instead of Canadian dollars. Treatment charges are also expected to make up a smaller portion of Net Revenues compared to the current processing fee. The second key factor affected by the move to market terms will be zinc metal recovery gains. Under market terms, the Fund expects to pay for approximately 85% of the contained zinc in the concentrate instead of 96% under the current Supply and Processing Agreement. As a result, the zinc metal recovery gain is expected to be larger for the Fund under market terms. The zinc metal recovery gain will most likely be sold to customers based on the LME zinc price and in US dollars resulting in increased sensitivity to both zinc metal prices and the Canadian/US exchange rate. The premiums realized on the sale of zinc metal products to customers and by-product revenues are expected to be similar under market terms as they are today under the Supply and Processing Agreement with Net Revenues being impacted by volumes sold and prices. Under market terms, the Canada/US exchange rate is expected to impact all of the Fund s expected sources of Net Revenues including treatment charges, zinc metal recovery gains, premiums and by-product revenues. As a result, the Fund is expected to have much greater sensitivity to the Canadian/US exchange rate, with a weaker Canadian dollar having a positive material impact on Net Revenues. 9 Noranda Income Fund Annual Report

14 Management s Discussion and Analysis The Fund provides annual guidance for a number of its key performance drivers, including production, sales, processing fees and capital expenditures. Guidance for 2015 key drivers can be found in Outlook below. The following table provides a summary of the performance of these key drivers for the years ended December 31, 2014 and The discussion of key performance drivers that follows is subject to various risks and uncertainties, some of which are discussed under Risks and Uncertainties and Forward-Looking Information below, which investors are encouraged to read carefully. For the year ended December Zinc concentrate processed (tonnes) 497, ,209 Zinc secondary feed processed (tonnes) 16,819 - Zinc grade (%) Zinc recovery (%) Zinc metal production (tonnes) 262, ,242 Zinc metal sales (tonnes) 258, ,807 Processing fee (cents/pound) Zinc metal premium (US cents/pound) By-product revenues ($ millions) Copper in cake production (tonnes) 2,432 1,821 Copper in cake sales (tonnes) 2,218 1,937 Sulphuric acid production (tonnes) 391, ,993 Sulphuric acid sales (tonnes) 396, ,235 Average LME copper price (US$/pound) Sulphuric acid netback (US$/tonne) Average LME zinc price (US$/pound) Average US/Cdn. exchange rate * 1 tonne = 2, pounds Zinc Metal Production Capacity The amount of zinc metal produced in any given year is a function of four main factors: (a) volume of zinc concentrate processed; (b) grade of the zinc concentrate processed; (c) zinc recovery; and (d) changes to work-inprocess inventory levels. a) In 2014, 497,013 tonnes of zinc concentrate was processed compared to 506,209 tonnes in The Fund s 2014 production was limited in the first quarter by its silica removal capacity and in the second quarter by an unplanned maintenance outage and equipment failures. In addition, the Fund processed 16,819 tonnes of secondary feed material in The secondary feed provides an additional source of zinc and increases the Processing Facility s operating flexibility. The Fund continues to introduce new sources of zinc concentrate into the production process. In 2014, approximately 60% ( %) of the feed consumed by the Processing Facility was sourced from mines located in Québec and Ontario (Bracemac-McLeod, Langlois and Kidd Creek) and 40% ( %) was seaborne concentrate. b) In 2014, the average concentrate and secondary feed grade consumed was 52.8% compared to 53.1% in Annual Report 2014 Noranda Income Fund 10

15 Management s Discussion and Analysis c) Under the Supply and Processing Agreement, the Fund pays for 96% of the zinc in the concentrate it purchases; therefore, any recovery over 96% results in additional revenue for the Fund. In 2014, zinc recovery was 97.3% compared to 97.2% in d) Work-in-process inventories increased in 2014, while they were reduced in Zinc metal production in 2014 was 262,049 tonnes, compared to 265,242 tonnes in Production was 1% lower than the prior year due to lower volumes of zinc concentrate processed, lower zinc grade in the concentrate and an increase in work-in-process inventory during the year, partially offset by the consumption of secondary feed material. Zinc metal production in 2015 is expected to be 270,000 due to an increase in zinc concentrate being processed. The annual zinc metal production capacity of the Processing Facility, under normal operating conditions, is 270,000 tonnes of zinc. The Fund continues to believe that the Supply and Processing Agreement will provide sufficient concentrate to run the Processing Facility at its productive capacity until the expiry of its initial term in While future feeds are expected to remain within the specifications set out in the Supply and Processing Agreement, the Processing Facility may experience an increase in its costs, working capital requirements and/or capital expenditures as a result of being required to treat a more varied feed quality stream. Higher levels of impurities may also negatively impact the volume of zinc concentrate that can be processed, resulting in a lower overall production. Concentrate inventory levels are expected to continue to be variable, due to large and irregular seaborne deliveries of concentrate and the requirement to mix feed qualities to maximize the Processing Facility s production. The targets for annual zinc metal production, future expected annual production capacity, operating costs, level of working capital, capital expenditures, the level of impurities in the concentrate and the level of the zinc concentrate inventory are subject to various risks and uncertainties, some of which are set out under Forward-Looking Information below. Sales Zinc metal is used in a wide range of industries. Its major use is in the production of galvanized steel. Sales in 2014 were 258,160 tonnes compared to 269,807 tonnes in During the year, zinc metal inventories increased by approximately 3,900 tonnes. Processing Fee In 2014, the processing fee was $0.400 per pound ($882 per tonne), compared to $0.395 per pound ($871 per tonne) in The processing fee under the Supply and Processing Agreement is 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. Based on the annual 1% increase and the average increase in electricity costs, the processing fee for 2015 is expected to be $0.405 per pound ($893 per tonne). Premiums Zinc metal premiums averaged 10.0 cents US per pound (11.0 cents Cdn) in 2014 compared to 8.4 cents US per pound (8.7 cents Cdn) in The increase in 2014 compared to 2013 reflected the impact of improved annual contract and spot premiums in North America. By-products The Fund produces copper in cake and sulphuric acid as by-products from refining zinc concentrate. In 2014, the Fund generated $31.1 million in revenue from the sale of its copper in cake and sulphuric acid compared to $38.7 million in Copper in Cake Copper in cake revenues in 2014 were lower at $8.8 million compared to $9.2 million in Lower copper prices were offset by higher sales volumes. In 2014, copper prices were $3.11 per pound, compared to $3.32 per pound in The copper in cake sales volumes increased to 2,218 tonnes in 2014 from 1,937 tonnes in the prior year. 11 Noranda Income Fund Annual Report

16 Management s Discussion and Analysis Sulphuric Acid Revenues from the sale of sulphuric acid fell to $22.3 million in 2014 from $29.5 million in Sulphuric acid netbacks in 2014 fell to US$51 per tonne from US$71 per tonne in Sales volumes were lower in 2014 at 396,624 tonnes compared to 401,235 tonnes in the previous year. Exchange Rate In 2014, the average Canadian dollar weakened to $1.10 per US dollar compared to an average of $1.03 per US dollar in The weaker Canadian dollar has a positive impact on the Fund s financial results. In 2014, a one-cent Canadian weakening in the average Canadian/US exchange rate positively impacted the Fund s earnings before finance costs and income taxes by approximately $0.8 million. See also Risks and Uncertainties below. Costs Production costs before change in inventory in 2014 were $192.7 million compared to $180.6 million recorded in The increase in costs in 2014 was mostly due to higher energy and contractor costs and a $4.3 million increase in pension expenses related to additional pension benefits and early retirement provisions for the new collective agreement. Capital Expenditures During the year, two major capital projects were completed: The four-year rehabilitation project to replace the liners in the cell house was completed in the first quarter and on budget. The project to increase the Processing Facility s silica removal capacity was completed in the second quarter, on time and on budget. Capital spending was $35.1 million in 2014 compared to $33.4 million in Most of the annual 2014 capital investment was spent on sustaining the Fund s operations, including $8.2 million on replacement anodes for the cell house, $4.5 million on major roasting and acid plant equipment and $1.9 on electrical infrastructure. Investment in the silica removal project totalled $9.5 million in The capital expenditures for 2015 are expected to be $27 million. The target for capital expenditures is subject to various risks and uncertainties, some of which are set out under Forward-Looking Information below. Adjusted Earnings before Distributions to Unitholders, Finance Costs, Income Taxes, Depreciation and Amortization ( Adjusted EBITDA ) Adjusted EBITDA is used by the Fund as an indication of cash generated from operations. Adjusted EBITDA is not a recognized measure under IFRS and therefore the Fund s method of calculating Adjusted EBITDA is unlikely to be comparable to methods used by other entities. The Fund s Adjusted EBITDA is calculated by starting from earnings before finance costs and income taxes and adjusting for all of the non-cash items such as depreciation, derivative financial instrument gain or loss, changes in fair value of embedded derivatives and gain or loss on the sale of assets. In addition, an adjustment is made to reflect the net change in the rehabilitation liability (reclamation (recovery) expense less site restoration expenditures) and the net change in employee benefits (non-cash employee benefit expenses less employer contributions). A reconciliation of Adjusted EBITDA for the years ended December 31, 2014 and 2013 is provided below: 14 Annual Report 2014 Noranda Income Fund 12

17 Management s Discussion and Analysis Adjusted EBITDA ($ thousands) (Loss) earnings before finance costs and income taxes $ (700) $ 71,393 Depreciation of property, plant and equipment 36,560 36,351 Impairment of non-financial assets 40,500 - Net change in residue ponds rehabilitation liability 5,050 (4,098) Derivative financial instruments gain (1,431) (5,761) Change in fair value of embedded derivatives (3,006) 2,309 Gain on sale of assets (219) (457) Net change in employee benefits 2,961 (771) $ 79,715 $ 98,966 The Fund s Adjusted EBITDA is currently supported by the pricing under the Supply and Processing Agreement. It is expected that the Fund s Adjusted EBITDA will be more sensitive to market prices after May 2017, whether the Supply and Processing Agreement is renewed or not. See above Overview Long-Term Strategy for more information on the impact of the termination of the Supply and Processing Agreement. OPERATING CASH FLOWS Cash used in operating activities in 2014 was $7.0 million, including a negative $53.7 million increase in non-cash working capital due mainly to an increase in inventories and a reduction in accounts payable and accrued liabilities. In 2013, cash provided by operating activities was $91.2 million, including the benefit of a $28.6 million reduction in non-cash working capital due to a decrease in accounts receivable and inventories and an increase in accounts payable and accrued liabilities. For the year ended December 31, 2014, non-cash working capital increased by $53.7 million primarily due to: Inventories were up by $40.7 million due to an 7,600 tonne increase in concentrate inventory, a 3,900 tonne increase in zinc metal inventory and a higher zinc price. Accounts payable and accrued liabilities decreased by $8.5 million reflecting the timing of concentrate receipts and payments, partially offset by an increase in the price of zinc. DISTRIBUTION POLICY Distribution Policy When not restricted, and as may be considered appropriate by the Board, 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 Trustees. 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. In 2014, the Board approved monthly cash distributions of $ per Priority Unit in each of the twelve months of the year. In determining whether there shall be a distribution and the level thereof, the Board periodically reviews the Fund s financial performance, business environment and prospects, and determines the appropriate levels of reserves. The Board also continues to evaluate on a monthly basis the expected future cash flows of the Fund as well as the reserves that may be required in the future. There is no assurance that monthly distributions will continue in the future; nor is there any assurance that, if they do continue, the level of such distributions will not vary from the level of the most recent monthly cash distribution. See Overview Outlook for the Fund Cash distributions on the Ordinary Units of the Partnership held indirectly by Glencore Canada are subordinated to distributions on Priority Units of the Fund until May 2017, except upon the occurrence of certain events. 13 Noranda Income Fund Annual Report

18 Management s Discussion and Analysis As a result of Glencore Canada s subordination, no distributions have been declared to the Ordinary Units since January The accumulated distribution deficiency amount was $23.3 million as at December 31, 2014 and $24.4 million as at March 10, For further details on the terms of the subordination, reference should be made to the Fund s Partnership Agreement dated May 1, 2002, which is available on SEDAR at In the event of an exchange of Ordinary Units on a one-for-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 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 that excess cash is available for distribution above the monthly cash distribution of $ per Priority Unit, and a cash distribution above $ is approved by the Board. The Fund, as a SIFT, is subject to tax on its 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 (2014 and %) for the year so as, to the extent possible, minimize its liability for tax under the ITA in the year. Such distributions are to be made in cash, unless the Fund is restricted from distributing cash or sufficient cash is not available, in which case such distributions are to be satisfied in whole or in part by the issuance of additional Priority Units having a value equal to the amount of cash which is unavailable for distribution. Following such an in-kind distribution, the Priority Units are automatically consolidated such that each certificate representing a number of units prior to the in-kind distribution of additional units is deemed to represent the same number of units after the distribution of additional units and the consolidation. The Fund s distribution policy and practices are impacted by various risks, uncertainties and other factors, which are discussed in greater detail in this section and in the sections entitled Liquidity and Capital Resources and Forward-Looking Information below. Cash Available for Distribution Cash available for distribution is used by the Fund as an indication of cash generated from operations that is available for distribution to Unitholders. Cash available for distribution is not a recognized measure under IFRS and therefore the Fund s method of calculating cash available for distribution is unlikely to be comparable to methods used by other entities. Cash available for distribution is calculated by taking cash provided by operating activities before distributions to Unitholders and changes in non-cash working capital, and by subtracting purchases of property, plant and equipment, debt financing cost and permanent debt repayments, cash provided by the Manager s operating activities and amounts retained for reserves. Cash available for distribution per Priority Unit and Ordinary Unit is calculated as cash available for distribution divided by the number of Priority and Ordinary Units outstanding, respectively, at the end of the year. Reserves reflect amounts that may be required to pay for potential closure costs at the Processing Facility and other amounts as considered necessary by the Board. The closure costs include estimated severance payments, pension and retirement benefit plans and site rehabilitation costs based on management s assumptions on how the Processing Facility would be decommissioned. Should these assumptions need to be modified due to changing circumstances, the amount of the necessary reserves may increase or decrease, with a corresponding effect on cash available for distribution. See Overview Outlook for the Fund. The Fund is also subject to the Operating Trust maintaining a minimum excess availability of cash per the assetbased revolving credit facility (the ABL Facility ) and other customary restrictions pursuant to the terms of both its ABL Facility and the senior secured notes ( the Notes ) (as discussed under Liquidity and Capital Resources below). The reserves that have been generated since the Fund s refinancing in 2011 have been used to reduce the balance on the Fund s ABL Facility, consistent with the Fund s desire to reduce its debt as it approaches the end of the initial term of the Supply and Processing Agreement. 16 Annual Report 2014 Noranda Income Fund 14

19 Management s Discussion and Analysis A reconciliation of cash provided by operations to cash available for distribution for the years ended December and 2013 is provided below: ($ thousands) Cash (used) provided by operating activities $ (6,981) $ 91,195 Capital adjustments: Purchase of property, plant and equipment (35,078) (33,395) Other adjustments: Distributions declared to Priority Unitholders 18,748 18,750 Scheduled debt repayment (15,000) (15,000) Increase/(decrease) in non-cash working capital 53,749 (28,561) Elimination of the Manager's cash provided by operating activities (209) (210) Total other adjustments 57,288 (25,021) Distributable Cash before reserve 15,229 32,779 (Decrease)/increase in reserve (3,519) 14,029 Distributable Cash $ 18,748 $ 18,750 Weighted average number of Priority Units outstanding (basic and diluted) 37,492,912 37,497,975 Distributable cash per Priority Unit $ $ Distributions declared per Priority Unit $ $ Weighted average number of Ordinary Units outstanding (basic and diluted) 12,500,000 12,500,000 Distributions declared per Ordinary Unit $ - $ - Tax Pools The Fund has certain tax pools available to shelter taxable income. The largest of these tax pools are capital cost allowance ( CCA ) deductions. These pools are available to the Unitholders in proportion to their respective interest in the Partnership. As at December 31, 2014, the CCA tax pools available were as follows: ($ thousands) Class Federal Québec Rate 1 $ 7,844 $ 7,843 4% 1 10,621 10,621 6% % % % % % % , ,043 25% Total $ 137,191 $ 141, Noranda Income Fund Annual Report

20 Management s Discussion and Analysis LIQUIDITY AND CAPITAL RESOURCES The Fund remains committed to reduce debt as it prepares for the expiry of the initial term of the Supply and Processing Agreement. As at December 31, 2014, the Fund s debt was $79.0 million (net of deferred financing fees), up from $51.3 million at the end of December The Fund s cash as at December 31, 2014 totalled $1.6 million. Senior Secured Notes During 2014, the Notes were reduced by $15 million ( $15 million). As at December 31, 2014, the Operating Trust had $37.5 million of Notes outstanding. The Notes are being amortized by an amount of $7.5 million on a semi-annual basis on June 28 and December 28 of each year until December 28, 2016, at which time the remaining $15 million principal balance will be repayable. Under the Notes governing trust indenture, the Fund is permitted to distribute excess cash flows to its Unitholders subject to compliance with certain financial covenants and other customary restrictions. The Notes trust indenture lists events that constitute an event of default, should they occur. They include the nonpayment by the Operating Trust of principal, interest or other obligations of the Operating Trust in respect of the Notes and a breach of any covenant pursuant to the ABL Facility credit agreement (discussed below), subject to customary cure periods where applicable. If any event of default occurs under the Notes trust indenture, the holders of the Notes may require the Operating Trust to repay any outstanding obligations pursuant to the Notes trust indenture, which would, among other things, negatively impact the Operating Trust s ability to make cash distributions. ABL Facility The Operating Trust s ABL Facility provides availability of up to $150 million with a maturity date of July 28, Under the credit agreement entered into in connection with the ABL Facility, the Fund is permitted to distribute excess cash flows to its Unitholders subject to maintaining a minimum excess availability and other customary restrictions. The borrowing base is tested on a monthly basis so long as excess availability is equal to or greater than $15 million and on a weekly basis if excess availability over the most recent 45-day period is less than $15 million. As at December 31, 2014, the borrowing base on the ABL Facility based on the Fund s working capital position was $98.2 million: $43.0 million was drawn (including $0.9 million letters of credit), leaving an excess availability of $55.2 million. The ABL Facility credit agreement lists events that constitute an event of default, should they occur. They include the non-payment by the Fund of principal, interest or other obligations of the Fund in respect of the ABL Facility credit agreement, a default under the Notes trust indenture that permits, or has resulted in, the acceleration of the obligations owing to the holders of Notes, and a breach of any covenant pursuant to the ABL Facility credit agreement, subject to the customary cure periods where applicable. If any event of default occurs under the ABL Facility credit agreement, the ABL Facility lenders will be under no further obligation to make advances to the Fund and may require the Fund to repay any outstanding obligations pursuant to the ABL Facility credit agreement, which would, among other things negatively impact the Fund s ability to make cash distributions. The Notes and the ABL Facility are fully and unconditionally guaranteed, on a senior secured basis (subject to the terms of an intercreditor agreement with the lenders under the ABL Facility), by the Fund, the Manager, the Partnership and NILP General Partner Ltd., the Partnership s general partner. Financial Security In 2013, the Québec government amended the Mining Act regulation, which affects the amount of financial security to be posted by the Fund. In January 2015, the Partnership received approval of the updated residue pond cost estimate by the government of Québec. As of December 31, 2014, the Fund has posted $0.9 million of financial security, in the form of letters of credit under the Mining Act regulation. The financial security requirements will increase by $10.8 million in April 2015, $5.9 million in January 2016 and $5.9 million in January 2017 for a total of $23.5 million. 18 Annual Report 2014 Noranda Income Fund 16

21 Management s Discussion and Analysis The Fund currently expects to meet its financial security obligations by posting letters of credit, thereby reducing the excess availability on the ABL Facility. The Fund has provided certain forward-looking information regarding the Notes, the ABL Facility and financial security under the Mining Act, which are subject to various risks and uncertainties. Some of the risks, uncertainties and assumptions underlying this information can be found in the section entitled Forward-Looking Information below. OUTSTANDING UNITS Outstanding Unit Data As at March 10, 2015 Priority Units 37,489,975 Ordinary Units and Special Fund Units 12,500,000 As noted above, a wholly-owned subsidiary of Glencore Canada holds 12,500,000 Ordinary Units of the Partnership, which represent all of the outstanding Ordinary Units of the Partnership, and which are exchangeable for Priority Units on a one-for-one basis only after May 2, 2017, or earlier upon the occurrence of certain events. The 12,500,000 outstanding special voting units of the Fund listed above (the Special Fund Units ) provide voting rights in respect of the Fund to the holder of Ordinary Units. Further details concerning the rights, privileges and restrictions attached to the Fund s outstanding Priority Units and Special Fund Units and the outstanding Ordinary Units of the Partnership, are contained in the Fund s Annual Information Form under the section entitled General Description of the Capital Structure. A copy is available on SEDAR at CONTRACTUAL OBLIGATIONS The following table shows the Fund s contractual obligations schedule and the payment by years from 2015 to 2019 and beyond: ($ millions) 2019 Contractual Obligations Total and beyond Bank and other loans $ 79.7 $ 15.0 $ 64.7 $ - $ - $ - Operating leases Purchase commitments Capital leases Residue ponds rehabilitation liabilities (1) Total $ $ 26.9 $ 65.3 $ 3.0 $ 0.5 $ 35.2 (1) assumes Processing Facility continues to operate beyond the expiry of the initial term of the Supply and Processing Agreement TRANSACTIONS WITH RELATED PARTIES In addition to those arrangements described elsewhere in the MD&A, the Fund entered into the following transactions with related parties. Pursuant to the O&M Agreement, the Manager is responsible for the ongoing operation and management of the Processing Facility and provides management services to the Partnership in exchange for a management fee and reimbursement of certain specified costs incurred by the Manager in the course of performing its duties. These services include, among other things, preparing annual operating and maintenance plans and capital improvement plans for approval by the directors of the general partner of the Partnership, reporting to the general partner of the Partnership on the operation of the Processing Facility and the business of the Partnership, providing accounting and record keeping services including coordination and management of accounting, cash management, treasury and other systems and preparing financial statements and other reports on operations. 17 Noranda Income Fund Annual Report

22 Management s Discussion and Analysis Pursuant to the initial term of the Supply and Processing Agreement, Glencore Canada is obligated, except in certain circumstances, to sell to the Partnership a maximum of up to 550,000 tonnes of zinc concentrate per year at a concentrate price based on the zinc metal price on the LME for the payable zinc metal contained in the concentrate, less a fixed, escalating processing fee ($0.400 per payable zinc metal in 2014). Additionally, the Supply and Processing Agreement provides that Glencore Canada will act as exclusive agent for the Partnership to arrange for purchases of any additional zinc concentrate in excess of the 550,000 tonnes described above, and for sales of zinc metal and by-products, and related hedging and derivative arrangements. The termination of the Supply and Processing Agreement will result in a concurrent termination of the O&M Agreement. If the Supply and Processing Agreement terminates and is not replaced with a similar agreement providing for a contracted supply source of zinc concentrate, the Partnership will need to seek out alternative zinc concentrate supply relationships. See also Overview above and Risks and Uncertainties Supply of Zinc Concentrate below. Under the terms of an Administration Agreement, the Administrator provides administrative services to the Fund and management services to the Operating Trust. Pursuant to the Administration Agreement, Computershare Trust Company of Canada, the sole trustee of the Fund, has delegated all of its power and authority to the Administrator and the Administrator provides certain administrative and support services to the Fund, including to: (i) ensure compliance by the Fund with continuous disclosure obligations under applicable securities legislation; (ii) provide investor relations services; (iii) provide or cause to be provided to Unitholders all information to which Unitholders are entitled under the Fund s Trust Indenture including relevant information with respect to income taxes; (iv) call, hold and distribute materials, including notices of meetings and information circulars, in respect of all meeting of Unitholders; (v) compute, determine and make distributions to Unitholders; (vi) determine the amount of cash flow of the Fund, distributable cash flow, income, net realized capital gains, redemption income and redemption gains pursuant to the Fund s Trust Indenture; (vii) attend to all administrative and other matters arising in connection with any redemption of units; (viii) ensure compliance with the Fund s limitations on non-resident ownership; and (ix) undertake all matters required by the Fund s Trust Indenture to be performed by the sole trustee. All costs relating thereto are for the account of the Fund. Pursuant to the Management Services Agreement, the Manager provides management services to the Operating Trust. These services include assisting the Operating Trust in: (i) developing, implementing and monitoring a strategic plan; (ii) developing an annual business plan which may include operational and capital expenditures budgets when appropriate; (iii) developing acquisition strategies, investigating potential acquisitions and analyzing the feasibility of potential acquisitions; (iv) carrying out acquisitions or dispositions and related financings required for such transactions; (v) assisting in connection with any financing of the Operating Trust or the Fund; (vi) computing, determining and making distributions to unitholders of distributions properly payable by the Operating Trust; (vii) providing technical and evaluation services on equipment, processes and techniques relating to the operations of the business; (viii) supervising the operation of the Operating Trust s business; and (ix) preparing, planning and co-ordinating management and Trustees meetings. In consideration for providing the services under the Management Services Agreement, the Manager is entitled to reimbursement of its direct and indirect costs and expenses incurred in connection with its duties under the Management Services Agreement. For further details concerning the above agreements, reference is made to the Management Information Circular of the Fund dated April 4, 2014, the Fund s Annual Information Form dated March 24, 2014 (under the headings Xstrata Canada Corporation Major Agreements and The Administrator and Manager ), and the notes to the Audited Consolidated Financial Statements of the Fund for the year ended December 31, Copies are available on SEDAR at Any agreements entered into by Glencore Canada as exclusive agent on behalf of the Partnership with any party related to Glencore Canada, and which are material to the Partnership, must be on terms that are, collectively, no less favourable to the Partnership than those available at the time from a reputable, non-related party. These agreements must be reviewed and approved by the majority of the independent Trustees of the Operating Trust. In addition, Glencore Canada and the Manager have entered into various agreements and provided certain consents in connection with providing credit support in respect of the Operating Trust s existing ABL Facility. 20 Annual Report 2014 Noranda Income Fund 18

23 Management s Discussion and Analysis During the year ended December 31, 2014, Glencore Canada sold to the Partnership $388.1 million of zinc concentrate (2013 $277.8 million) and provided $1.6 million in sales agency services (2013 $2.0 million). The sales agency services are provided on a cost recovery basis. The administration, management and operating services provided by the Manager are provided on a cost recovery basis and for a management fee of $0.3 million per annum, adjusted upward annually by 2%. As a result of the Administration Agreement between the Fund and the Administrator, the Management Services Agreement between the Operating Trust and the Manager and the O&M Agreement between the Partnership and the Manager, the Manager has been paid the following amounts for administration, management and operating services with respect to the Fund, its subsidiaries and its assets for the years ended December 31: Services provided by Glencore Canada ($ millions) Salary and benefits 1 $68.6 $69.7 Support services O&M Agreement management fee Total $70.9 $ This represents all amounts paid in respect of salaries and benefits for all of the employees of the Manager in connection with the operation of the Processing Facility and the services provided to the Fund, the Operating Trust and the Partnership. In addition, the Fund undertakes other transactions with Glencore Canada and affiliated companies, at terms that reflect market rates. The table below summarizes sales and purchases that were transacted with Glencore Canada and affiliated companies for the years ended December 31: Sales and Purchases ($ millions) Sales Sales of zinc metal $ $ 59.8 Sales of by-products Purchases Purchases of plant equipment, raw materials and operating supplies $ 34.9 $ 6.0 FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS Due to the structure of the Processing Facility s purchase and sale contracts, the Fund has the ability to manage some of its exposure to fluctuations in zinc market prices while zinc concentrate is being converted to zinc metal. Zinc metal products are generally sold approximately two months after the concentrate from which they are made is delivered. As a result, by pricing the payable zinc metal contained in zinc concentrate at the LME zinc reference price in the second month following its delivery, and by pricing the processing fee in Canadian dollars, the Supply and Processing Agreement seeks to limit the exposure to zinc metal price fluctuations during the period in which the concentrate is transformed into zinc metal. This results in matching the timing of pricing of the purchase of zinc concentrate with the expected timing of sales of the refined zinc metal produced from that concentrate. The Fund, through Glencore Canada, enters into hedges ( inventory management program ) to the extent that the natural hedge does not fully minimize exposure to fluctuations in zinc prices. As at December 31, 2014, the Fund had sold forward approximately 60 million pounds of zinc, related to the inventory management program hedges. The fair value of these positions as at December 31, 2014 was a gain of $2.3 million and it was recognized as a current derivative financial asset on the Fund s consolidated statements of financial position. In addition, some customers request a fixed sales price (instead of the LME average price in the month of shipment) in order to lock in the price of their zinc purchases for a future period of time, generally not exceeding one year. These arrangements, referred to as fixed forward sales contracts, are made available on a select basis to certain customers who request them and who meet the Fund s credit criteria for such contracts. When entering into a fixed forward sales contract, the Fund, through its exclusive sales agent, Glencore Canada, offsets this price risk by 19 Noranda Income Fund Annual Report

24 Management s Discussion and Analysis hedging with appropriate futures contracts with maturities and quantities which will match those which the customer has contracted to purchase the metal. These futures contracts typically allow the Fund to receive the LME price plus a premium in the month of shipment, while customers pay the agreed-upon price plus a premium. In the event that the futures contracts have to be terminated early, due to the customer cancelling a fixed price order, Glencore Canada, on behalf of the Fund has the right to charge the customer with the cost of settling the LME contract. The Fund has not applied hedge accounting to its fixed forward sales contracts in The change in the fair value of the commodity hedge is recorded in the consolidated statement of comprehensive income as a derivate financial instrument gain or loss. The Fund does not enter into any hedging contracts for the purposes of speculation. The Fund has separated and recorded at fair value, embedded derivatives resulting from the provisional pricing feature in the Supply and Processing Agreement. Under the terms of this agreement, final prices for purchases of concentrate ( quotational pricing ) are based on the LME price prevailing on a specified future date after shipment ( quotational period ). The Fund accounts for changes in the fair value of unsettled concentrate payable amounts resulting from quotational pricing with reference to forward LME rates for the remaining quotational period through gains or losses recorded in raw material purchases costs and corresponding adjustments in accounts payable and accrued liabilities. During the year ended December 31, 2014, the Fund recorded a decrease of raw material purchase costs of $3.0 million related to the change in fair value of the embedded derivatives resulting from the quotational pricing feature of its zinc concentrate payables (2013 an increase of $2.3 million). The Fund 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 the US dollar by matching US dollar assets to US dollar liabilities. This currency exposure is managed in part through US dollar overnight transactions. As at December 31, 2014, the Fund had sold forward US dollars with a notional amount of US$96.0 million and bought forward dollars with a notional amount of $111.3 million. An unrealized loss of $0.1 million related to these open positions was recorded as at December 31, CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Reference should be made to the Fund s Audited Consolidated Financial Statements and the notes thereto for the year ended December 31, A copy is available on SEDAR at Property, Plant and Equipment Included in the $458.0 million of assets as at December 31, 2014 ($467.1 million as at December 31, 2013) were property, plant and equipment with a carrying value of $228.9 million (2013 $272.3 million). This amount represented 50% ( %) of the book value of the asset base. As such, the estimates used in accounting for property, plant and equipment and the related amortization charges are critical and have a material impact on the Fund s financial condition and earnings. Property, plant and equipment are recorded at cost and the amortization is based on estimated service lives of the assets, calculated on a straight line basis. Assets under construction are not amortized until put into use. Impairment exists when the carrying value of a non-financial asset or cash-generating unit ( CGU ) exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The Fund has only one CGU. As at December 31, 2014, management concluded that an indicator of impairment existed relating to its CGU. As a result of the estimated recoverable amount, an impairment loss of $40.5 million was recorded as a reduction in the Fund s property plant and equipment. Management uses the value in use calculation to determine the recoverable amount which is based on a discounted cash flow model with cash flows expected to be generated from the Processing Facility over its remaining useful life and a terminal value. Cash flows do not include restructuring activities, if any, that the Fund is not yet committed to or significant future investments that may enhance the non-financial assets performance of the CGU being tested. The recoverable amount is based on detailed budgets and forecasts and requires estimates and assumptions that a market participant may take into account. 22 Annual Report 2014 Noranda Income Fund 20

25 Management s Discussion and Analysis The indicators for impairment were primarily i) the end of the initial term of the Supply and Processing Agreement in May 2017 and the expected move to purchase zinc concentrate on market terms, which in recent years would have resulted in lower cash flow being generated by the Fund; ii) the increase in the Fund s net asset carrying amount in 2014 relating to fluctuations in the price of zinc and foreign exchange rates; iii) a sustained increase in the souring of concentrates from overseas resulting in higher inland freight costs and feed acquisition costs; and iv) the carrying amount of the net assets of the Fund was higher than its market capitalization. The determination of value in use is most sensitive to the following key assumptions: Continued supply of concentrate after the initial term of the Supply and Processing Agreement Market treatment charges after the end of the initial term of the Supply and Processing Agreement based on industry forecasts and treatment charge rates as a proportion of the associated purchase price Price of zinc, copper and sulphuric acid and zinc premium based on industry forecasts Remaining useful life of the assets and terminal value Sustaining capital expenditures Production volumes (including recoverable quantities) Estimated production costs Discount rates Foreign exchange rates Rehabilitation expenditures Therefore, there is a possibility that changes in circumstances, in particular the availability of concentrate beyond the term of the Supply and Processing Agreement, may impact the recoverable amount calculated by management. In calculating the value in use, a real post-tax discount rate of 9.8% was applied to the post-tax cash flows expressed in real terms. This discount rate is derived from the Fund s post-tax weighted average cost of capital (WACC), with appropriate adjustments made to reflect the risks specific to the CGU and to determine the pre-tax rate. The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by the Fund s investors. The cost of debt is based on its interest-bearing borrowings the Fund is obliged to service. Segment-specific risk is incorporated by applying individual beta factors. The beta factors are evaluated annually based on publicly available market data. See above Results of Operations Asset Impairment for more information. Consolidation of a Structured Entity The Manager was incorporated in the province of Québec on December 14, Since May 3, 2002, the Manager has been operating as a management company that provides management and administrative services to the Fund and its subsidiaries. Upon the termination of the O&M Agreement, the Partnership is required to acquire the Manager from Glencore Canada and set up a pension plan for the employees of the Manager. The Manager is considered to be controlled by the Fund even though the Fund has no voting rights. This is because the sole purpose of the Manager is to provide operating and management services to the Fund. In addition, the contractual arrangements between the Fund and the Manager result in the Fund being exposed to the variability of returns from its involvement with the Manager. The Fund also has the ability to direct the Manager through the approval of relevant activities such as the annual operating plans by the board of trustees which affects the Fund s returns. Accordingly, the Fund has consolidated the Manager within its consolidated financial statements. Income Taxes Income tax expense comprises current and deferred tax. Current income tax and deferred income tax are recognized in earnings attributable to Unitholders and non-controlling interest except to the extent that it relates to a business combination, or items recognized directly in other comprehensive income (loss), in which case the current and/or deferred tax is also recognized directly in other comprehensive income. To determine the extent to which deferred income tax assets can be recognized, management must estimate the amount of probable future taxable profits that will be available against which deductible temporary differences. Such estimates are made as part of the budgets by tax jurisdiction on an undiscounted basis and are reviewed at each reporting date. Management exercises judgment to determine the extent to which realization of future taxable benefits is probable, considering factors such as the number of years to include in the forecast period and the history of taxable profits. 21 Noranda Income Fund Annual Report

26 Management s Discussion and Analysis Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the range of business relationships and the long-term nature of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to income taxes already recorded. The Fund establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities. Employee Benefits The cost of defined benefit pension plans and other post-retirement benefits and the present value of the pension obligation are required to be determined annually using actuarial valuations. An actuarial valuation involves making various estimates and assumptions including the determination of the future returns on each different type of asset, discount rate, future salary increases, employee attrition rates, mortality rates, expected remaining periods of service of employees and future pension increases. Due to the complexity of the valuation, the underlying assumptions, and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rate spreads of corporate bonds in Canada with at least AA rating or government bonds with similar maturities. As Canada is not considered to have a deep market in long-term corporate bonds, the government rate on bonds with similar maturities is used taking into consideration the interest rate spread on the short and medium-term corporate bonds, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The underlying bonds are further reviewed for quality, and those having excessive credit spreads are removed from the population of bonds on which the discount rate is based, on the basis that they do not represent high quality bonds. The Manager participates in defined benefit pension plans administered by Glencore Canada. Assets are allocated to the Manager based upon the Pension and Benefits Agreement with Glencore Canada. The mortality rate is based on publicly available mortality tables for Canada. Future salary increases and pension increases are based on expected future inflation rates for Canada, average wage growth and historical information and future expectations. Residue Ponds Rehabilitation Liabilities The Fund has recognized a rehabilitation liabilities related to the residue ponds on the Processing Facility site as the Fund is legally required to rehabilitate these ponds under the Mining Act. The Fund assesses its rehabilitation provision at each reporting date. Significant estimates and assumptions are made in determining the provision for rehabilitation as there are numerous factors that will affect the ultimate amount payable. These factors include estimates of the extent and costs of reclamation of the residue ponds and the expected timing of those costs, technological changes, regulatory changes, cost increases as compared to the inflation rates and changes in discount rates. These uncertainties may result in future actual expenditures differing from amounts currently provided. To the extent the actual costs and timing of expenditures differ from these estimates, adjustments will be recorded in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income (loss). The provision at the reporting date represents management s best estimate of the present value of the future rehabilitation costs required. The Fund s operations are affected by federal, provincial, and local laws and regulations concerning environmental protection. The Fund s provisions for rehabilitation are based on known requirements. It is not currently possible to estimate the impact on operating results, if any, of future legislative or regulatory developments. The Fund has determined that the fair value of this rehabilitation liabilities was $26.6 million as at December 31, 2014, by using a discount rate of 2.12% (December 31, %). The liabilities accrete to its future value until the obligation is completed. The estimated rehabilitation expenditures may vary based on changes in operations, cost of rehabilitation activities, and legislative or regulatory requirements. Although the ultimate amount to be incurred is uncertain, the liabilities for rehabilitation on an undiscounted basis is estimated to be $39.4 million. The cash flows required to settle the liabilities are expected to be incurred from now until Annual Report 2014 Noranda Income Fund

27 Management s Discussion and Analysis The estimate for the rehabilitation of the residue ponds impacts upon the amount of reclamation expense that is incurred on the statement of comprehensive income, and the balance of the residue ponds rehabilitation found in the long-term liabilities section of the balance sheet. Actual residue ponds rehabilitation expenditures reduce the Fund s cash provided by operations. Inventories Zinc and by-product related inventories as at December 31, 2014 and 2013 included the following balances: ($ millions) Raw materials $ 59.9 $ 36.5 Work-in-process Finished products $ $ 70.7 Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated future selling price the Fund expects to realize when the product is produced and sold, less estimated costs to complete production and bring the product to sale. As at December 31, 2014 and 2013, all of the above inventories were recorded at cost. Stockpiles are measured by estimating the number of tonnes added and removed from the stockpile, the number of contained pounds is based on assay data, and the estimated recovery percentage is based on the expected processing method. Stockpile tonnages are verified by periodic surveys. NEW STANDARDS, INTERPRETATIONS AND AMENDMENTS ADOPTED The nature and the impact of each new standard/amendment are described below: IFRIC Interpretation 21 Levies (IFRIC 21) IFRIC 21 provides guidance on the accounting for levies within the scope of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014 and applied retrospectively. IFRIC 21 did not have material financial impact on the Fund s condensed consolidated financial statements. IAS 39 Novation of Derivatives and Continuation of Hedge Accounting Amendments to IAS 39 These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments were effective for annual periods beginning on or after January 1, The Fund has not novated its derivative financial instruments during the current period. However, these amendments would be considered for future novations. Amendments to IAS 36 Impairment of Assets IAS 36, Impairment of Assets (IAS 36) was amended by the IASB in March The amendments require the disclosure of the recoverable amount of impaired assets when an impairment loss has been recognized or reversed during the period and additional disclosures about the measurement of the recoverable amount of impaired assets when the recoverable amount is based on fair value less costs of disposal, including the discount rate when a present value technique is used to measure the recoverable amount. This amendment to IAS 36 was effective for the Fund on January 1, 2014 and must be applied retrospectively. Annual Improvements Cycle In the annual improvements cycle, the IASB issued seven amendments to six standards, which included an amendment to IFRS 13 Fair Value Measurement. The amendment to IFRS 13 clarifies in the Basis for Conclusions that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This amendment to IFRS 13 was effective for the Fund on January1, 2014 and was applied retrospectively and it did not have material financial impact on the Fund s condensed consolidated financial statements. 23 Noranda Income Fund Annual Report

28 Management s Discussion and Analysis NEW STANDARDS ISSUED BUT NOT YET EFFECTIVE The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Fund s consolidated financial statements are disclosed below. The Fund intends to adopt these standards, if applicable, when they become effective. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. The Fund is currently assessing the impact of IFRS 9 and plans to adopt the new standard on the required effective date. IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognising revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after January 1, 2017 with early adoption permitted. The Fund is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date. Amendments to IAS 19 Defined Benefit Plans: Employee Contributions IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of services, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the services is rendered, instead of allocating the contribution of the periods of services. This amendment is effective for annual periods beginning on or after July 1, The adoption of this amendment is expected to have no impact on the Fund s consolidated statements. COMMITMENTS AND CONTINGENCIES Manager s Employee Benefit Plans The Manager participates in two defined benefit pension plans managed and administered by Glencore Canada. The defined benefit obligations recorded by the Fund represents the obligations for those employees who are working for the Manager since the Fund s inception in May Assets are allocated to the Manager based upon the Pension and Benefits Agreement with Glencore Canada, based on the Manager s share of the defined benefit obligations and its share of contributions made. The first plan is for staff employees ( Staff Plan ) and is a final salary plan based on a set formula. The Staff Plan is entirely funded based upon funding requirements of the plan as determined by the actuarial valuations and the Pension and Benefits Agreement between the Manager and Glencore Canada and has been closed to new entrants since The second plan is for unionized employees ( Unionized Plan ) and membership is based on defined periods of continuous employment and pension benefit rates are determined by negotiated labour agreements. Contributions are made by the employer with no contributions from employees. Contributions are based upon funding requirements of the plan as determined by actuarial valuations and the Pension and Benefits Agreement between the Manager and Glencore Canada. The normal retirement date is the first day of the month coincident with or next following the member s 65th birthday. A member who retires at normal retirement date is entitled to a monthly pension equal to the member s total year of credited service calculated in accordance with the plan text multiplied by the member s effective negotiated rate at the time of retirement. 26 Annual Report 2014 Noranda Income Fund 24

29 Management s Discussion and Analysis Both pension plans are registered in Québec with each plan s assets being held within a registered pension trust. Each of the pension plans has established a separate Pension Committee. The role of these Pension Committees, with the input from expert advisors, is to closely monitor the status of all aspects of the plans (i.e. assets and liabilities) to make sure they are prudently managed and in compliance with regulatory requirements. Currently the mix of the pension plan portfolio is approximately 43% in equity and 57% in debt instruments. The Manager s funding policy for the two defined benefit pension plans is to contribute amounts sufficient to meet minimum funding requirements as set forth by the Pension and Benefits Agreement with Glencore Canada plus such additional amounts as the Manager may determine to be appropriate. 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 recorded by the Fund 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. As at December 31, 2014, the estimated liabilities and assets of the Manager s share of the pension plan was $85.4 million (2013 $68.2 million) and $80.9 million (2013 $68.8 million). The estimated liabilities of the pension plans covering the pension obligation of the Manager s employees prior to May 2, 2002 was approximately $96.1 million as at December 31, 2014 (December 31, $89.8 million). There was approximately $97.0 million of assets within the pension plan as at December 31, 2014 (December 31, $92.0 million). 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. 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 an interested party and add Xstrata Limited 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, As of this date, 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. Guarantees Some of the Fund s agreements, specifically those related to the acquisition of the Processing Facility and the debt, include an indemnification provision where the Fund may be required to make payments to Glencore Canada or lenders for breach of fundamental representations and warranty terms in the applicable agreement. As at December 31, 2014, the Fund does not believe these indemnification provisions would require any material cash payment by the Fund. The Fund indemnifies its Trustees and officers against claims reasonably incurred and resulting from the performance of their services to the Fund and the Operating Trust, and maintains liability insurance for its Trustees and officers. 25 Noranda Income Fund Annual Report

30 Management s Discussion and Analysis EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As at December 31, 2014, an evaluation of the effectiveness of the issuer s disclosure controls and procedures (as such term is defined under the rules adopted by the Canadian securities regulatory authorities) was carried out by management, under the supervision of, and with the participation of, the Manager s chief executive officer ( CEO ) and chief financial officer ( CFO ). Based upon that evaluation, the CEO and CFO concluded that as at such date, the Fund s disclosure controls and procedures were appropriately designed and were operating effectively such that information relating to the Fund required to be disclosed by the Fund in the reports which the Fund files or submits to such regulatory authorities, (a) is recorded, processed, summarized and reported within the time periods specified under applicable securities laws, and (b) is accumulated and communicated to the Fund s management, including the CEO and CFO, to allow timely decisions regarding disclosure. Although the Fund s disclosure controls and procedures were operating effectively as at December 31, 2014, there can be no assurance that the Fund s disclosure controls and procedures will detect or uncover all failures of persons within the Fund and its subsidiaries to disclosure material information otherwise required to be set forth in the annual regulatory filings. INTERNAL CONTROLS OVER FINANCIAL REPORTING During 2014, the Fund assessed the design and effectiveness of its internal controls over financial reporting. The design of internal controls over financial reporting was evaluated as defined in Multilateral Instrument Certification of Disclosure on Issuers Annual and Interim Filings. Based on the results of this evaluation, the CEO and CFO concluded that as at December 31, 2014, the internal controls over financial reporting were appropriately designed and were operating effectively to provide reasonable assurance that the Fund s financial reporting is reliable and that its consolidated financial statements were prepared in accordance with IFRS and no material weaknesses were identified through their evaluation. Management also concluded that during the year ended December 31, 2014, no changes were made to internal controls over financial reporting that would have materially affected, or would be reasonably likely to materially affect those controls. RISKS AND UNCERTAINTIES Where appropriate, the Fund has included comments on risks and uncertainties throughout the MD&A. The following are additional risks and uncertainties that have not been included elsewhere in the document. The Fund is also subject to certain risks and uncertainties that are common in the zinc processing industry and the market environment generally and that may affect future performance, events, results and operations. The risks and uncertainties included here are not exhaustive. The Fund operates in a very competitive and rapidly changing environment. New risk factors may emerge from time to time and it is not possible for the Fund to predict all such risk factors, nor can it assess the impact of all such risks factors on the Fund s business. In addition, historical trends discussed elsewhere in this MD&A should not be used to anticipate events, performance, results or trends in future periods. Supply of Zinc Concentrate The Processing Facility is dependent upon the continuing supply of zinc concentrate. Currently, Glencore Canada is obligated, except in certain circumstances, to supply zinc concentrate based on the terms set out in the Supply and Processing Agreement. During the occurrence of an event of force majeure, the obligations of Glencore Canada will be suspended to the extent that such obligations cannot be performed as a result of such force majeure. If the Fund is not able to secure a supply of zinc concentrate on favourable terms because of the termination of the Supply Agreement in 2017, or because the agreement is renewed on terms that require the Fund to pay market prices, the Fund s results could be adversely affected. In addition, if Glencore Canada fails to fulfill all of its obligations under the Supply and Processing Agreement (including as a result of a force majeure), the Fund s cash realized from operations would decline, which could in turn have a material adverse effect on the Fund s results. 28 Annual Report 2014 Noranda Income Fund 26

31 Management s Discussion and Analysis The global zinc market has fundamentally changed in recent years. Factors that have the potential to positively and/or negatively impact the Fund s business in the future include: the increasing influence of demand from China and India as industrialization and urbanization continues in their economies; the growth in low-cost smelting capacity in China; the decline in zinc mine production from traditional North American sources that may see North American smelters increasingly dependent on seaborne zinc concentrate for their supply and, the need for the zinc industry to raise and invest significant capital to finance the development of new mine projects in a timely fashion to meet market demand for concentrate resulting from several large mines closing. The Fund must be prepared to adjust to these changes and, in particular, their impact on the availability of feed sources and market treatment charges upon the termination of the Supply and Processing Agreement. The Fund s failure or inability to adjust to such changes, or to do so in a manner that is satisfactory or successful, may have a material adverse effect on the Fund s business, results of operations and financial condition. With the expiry of the initial term of the Supply and Processing Agreement, the Fund will be subject to market prices (market treatment charges, zinc metal price and Canada/US exchange rate) for converting zinc concentrate into metal. These market prices have historically been very volatile and there is reason to believe this will continue in the future. The Fund s failure or inability to create a more stable stream of revenue as existed in the Supply and Processing Agreement when the market treatment charges are low is expected to have a material adverse effect on the Fund s results of operations, financial condition and ability to pay cash distributions. See above Overview Outlook for the Fund and Key Performance Drivers Net Revenues under Market Conditions for more information on the impact of the market treatment charges versus the Supply and Processing Agreement. Electricity Costs At normal operating levels, the Processing Facility purchases approximately 1,200 million kilowatt hours per year from Hydro-Québec at the market price charged to industrial users. During 2014, the Fund s electricity costs were approximately $55.1 million (2013 $53.3 million). Increases in energy costs could adversely affect cash realized from operations. Under the Supply and Processing Agreement, changes in the Processing Facility s electricity costs are partially offset by adjustments to the processing fee in the following year. After the initial term of the Supply and Processing Agreement expires, there can be no assurance that a material increase in electricity costs can be offset by an adjustment to the processing fees it receives. In addition, an interruption or a period where electricity is unavailable could have a material adverse impact upon the operations of the Processing Facility, which could in turn have a material adverse effect on the business, cash flows and results of operations of the Fund. Other Business Risks Demand for the Processing Facility s products is a function of world industrial production growth, the development of new uses and markets, and substitution. Demand for our products is also impacted by general business and economic conditions and the condition of financial and credit markets. Sulphuric acid is a by-product of zinc processing. The Fund has a fixed storage capacity for sulphuric acid at the Processing Facility of approximately 37,000 tonnes compared to an average annual production of approximately 400,000 tonnes. The availability of storage facilities outside of the Processing Facility is limited due to the special material requirements for sulphuric acid storage. In a market where sulphuric acid sales have significantly slowed and the Fund is not able to secure additional storage capacity, the Fund s ability to produce sulphuric acid and, therefore, zinc is expected to be reduced. In March 2013, Xstrata Canada closed the Brunswick Mine located in the Province of New Brunswick. This mine was a major supplier to the Processing Facility for most of the fifty years that the Processing Facility has operated. With the closure of Brunswick Mine, the feed mix to the Processing Facility is expected to contain an increased level of impurities. While future feeds are expected to still be within the specifications set out in the Supply and Processing Agreement, the Processing Facility may experience an increase in its operating costs, working capital requirements and/or capital expenditures in order to treat a more varied feed quality stream. Higher amounts of impurities may also negatively impact the volume of zinc concentrate that can be processed, resulting in a lower overall production. Any increase in costs or reduction in production could adversely affect future cash realized from operations. It is also expected that future feeds will be from mines located offshore. The additional cost associated with procuring the concentrate and moving the concentrate from the port of unloading to the Processing Facility is borne by the Fund. 27 Noranda Income Fund Annual Report

32 Management s Discussion and Analysis The Processing Facility is dependent upon key customers that are relatively close to the Processing Facility. In 2014, the Processing Facility s 10 largest customers accounted for approximately 76% ( %) of its direct or indirect sales (on a volume basis), with its largest customer accounting for 23% ( %). The loss of a significant customer may have a materially adverse effect on the Fund s financial position and cash realized from operations. The Fund s major exposure to credit risk is in respect of trade receivables. Trade receivable credit risk is mitigated through established credit monitoring activities. These include conducting financial and other assessments to establish and monitor a customer s creditworthiness, setting customer limits, monitoring exposure against these limits, and in some instances moving the customer to cash-in-advance terms. The Fund does not hold collateral as security. As at December 31, 2014 two customers (including Glencore Canada and affiliates) represented 44% of the accounts receivable balance (December 31, 2013 two customers (including Glencore Canada and affiliates) represented 46% of the accounts receivable balance). A portion of the Processing Facility s Net Revenues results from the premiums paid for value-added products, such as zinc shapes, shot and granulated zinc. Changes in the supply and demand for these products can cause premiums to fluctuate, impacting upon the Fund s cash realized from operations. In 2014, each US$0.01 change in the zinc premium impacted the Fund s annualized sales and cash realized from operations by US$5.7 million (2013 US$5.9 million). See also Forward-Looking Information below. In 2014, the Processing Facility sold more than 99% (2013 more than 99%) of its zinc to customers in the United States and Canada. If the Processing Facility lost certain customers in the United States and Canada, there is a risk that it would be forced to find alternative markets. This could increase distribution costs, thereby adversely affecting future cash realized from operations. The Processing Facility is dependent upon local transportation companies to supply concentrate to the Processing Facility and to deliver its product to its customers. Changes in the rates charged to make these deliveries or a major disruption in service, could increase transportation and distribution costs or adversely impact the Processing Facility s ability to satisfy its obligations to its customers, thereby adversely impacting cash realized from operations and potentially exposing the Fund and its business to additional liabilities. A portion of the Processing Facility s Net Revenues results from the sale of by-products, such as sulphuric acid and copper in cake, as well as from the sale of zinc metal. Changes in the demand and supply of these products can cause them to fluctuate, impacting upon the Fund s cash, results of operations and business. Borrowing and Credit Risks As at December 31, 2014, the Fund had approximately $79.7 million of indebtedness (excluding finance leases). The Fund has credit in the form of an ABL Facility, as well as through proceeds received upon its private placement of Notes, both of which mature in As at December 31, 2014, there was $37.5 million owing on the Notes and $43.0 million drawn on the ABL Facility (including letters of credit of $0.9 million), leaving an excess availability of $55.2 million. Although the Fund currently believes that its existing cash combined with its future anticipated cash flow and credit facility will be adequate to satisfy its working capital needs for the foreseeable future, there is no guarantee that the Fund s anticipated cash flow will be adequate or that its existing credit facility will continue to be available or sufficient in the event of unforeseen contingencies. Material factors that could result in the Fund being unable to fund its working capital needs and long-term strategies include: (i) a material default or breach of a covenant under its outstanding indebtedness; (ii) decreases in sales; (iii) deterioration of economic, market or industry conditions; (iv) any material disruption to the Processing Facility s production or operations; and (v) a material change in the Fund s working capital requirements and anticipated capital expenditures or in its business strategy or activities. The Fund is also subject to the risks associated with its long-term indebtedness, including the risks that cash flow from operations will be insufficient to meet required payments of principal and interest under the Notes and the ABL Facility, and the risk that the existing ABL Facility will not, if necessary, be able to be refinanced or that the terms of any such refinancing will not be as favourable to the Fund. In addition, the Fund is subject to the risk that its interest expense may increase on its current ABL Facility that bears interest at floating rates if interest rates increase, which could have a material adverse effect on the results of operations of the Fund. 30 Annual Report 2014 Noranda Income Fund 28

33 Management s Discussion and Analysis The Fund s ABL Facility and Notes contain certain covenants and representations and warranties, the breach of which could result in a default and the acceleration of their maturity. The Fund and several of its subsidiaries and affiliates, as well as the Manager, have granted security interests over all of their assets to secure indebtedness owing under the ABL Facility and Notes. If the Fund is not able to meet its debt service obligations, it risks the loss of some or all of its assets. For further details concerning the Fund s Notes and ABL Facility and the risks and uncertainties relating thereto, see Liquidity and Capital Resources above. Reliance on the Fund Administrator and Manager The Fund is dependent upon Glencore Canada for the operation and maintenance of the Processing Facility. The Fund is also dependent upon the Manager, a subsidiary of Glencore Canada, for administration and management of the Fund, the Operating Trust and the Partnership. The failure of Glencore Canada, the Manager or their affiliates to perform their obligations pursuant to and in accordance with the Administration Agreement, Management Services Agreement, O&M Agreement, or the Supply and Processing Agreement, or the termination or expiration of any of such agreements, is likely to have a material adverse impact on the Fund and its business, operations and financial condition. Cash Distributions Are Not Guaranteed and May Fluctuate with the Fund s Performance Even in the absence of contractual restrictions, cash distributions are not guaranteed and will fluctuate with the Fund s performance. The Fund depends on income generated from the processing fee for processing zinc concentrate into zinc metal and additional revenue it earns from premiums, by-product revenues and metal gains to make such distributions. There can be no assurance regarding the amount of revenue that may be generated by the Fund. The amount of distributable cash will depend upon numerous other factors, including the profitability of the business, fluctuations in working capital, debt levels and debt repayments, interest rates, capital expenditures, actual and contingent liabilities, including environmental remediation and closure obligations, and other factors which may be beyond the control of the Fund. After the expiry of the initial term of the Supply and Processing Agreement in May 2017 the Fund will face the risk of sourcing zinc concentrate and the volatility of market terms (see Supply of Zinc Concentrate above). If the Trustees determine that it would be in the best interests of the Fund, they may reduce or suspend cash distributions to the Unitholders. Impact of the US/Canadian Dollar Exchange Rate The average annual Canada/US exchange rate impacts the Fund s performance through premiums, by-product revenues and zinc recovery gains. In 2014, they collectively represented 28% of the Net Revenues. As the processing fee is earned in Canadian dollars, 72% of the Fund s Net Revenues were not exposed to currency risk. Since the inception of the Fund, the Canadian dollar has generally strengthened against the US dollar, negatively impacting the Fund s earnings before finance costs and income taxes. However in 2014, the Canadian dollar weakened to US$1.10 against the US dollar ( US$1.03), positively impacting the Fund s operating results. In 2014, a one-cent Canadian dollar weakening positively impacted the Fund s earnings before finance costs and income taxes by approximately $0.8 million (2013 $0.8 million). Further weakening of the Canadian dollar relative to the US dollar may have a positive effect on the Fund s earnings before finance costs and income taxes. Employee Relations Good labour relations are fundamental to the Fund s ongoing success. The Processing Facility has 574 employees, 377 of whom are represented by the United Steel Workers of America, Local The last labour disruption was in Improved labour relations have translated into ten consecutive collective agreements without a strike. The current collective agreement expires on November 30, A labour disruption, such as a strike or lockout, could have a negative material effect on the Fund s financial position, cash realized from operations and its business. In addition, the Fund is reliant upon the efforts and abilities of its current senior management team, namely the CEO and CFO, and its Trustees. If the Fund were to lose the benefit of these senior managers or Trustees experience and skills, the Fund could be adversely affected. 29 Noranda Income Fund Annual Report

34 Management s Discussion and Analysis Employee Benefits The Manager participates in defined benefit pension plans administered by Glencore Canada. Assets are allocated to the Manager based upon the Pension and Benefits Agreement with Glencore Canada, based on the Manager s share of the benefit obligation and its share of contributions made. The cost of defined benefit pension plans and other post-retirement benefits and the present value of the pension obligation are required to be determined annually using actuarial valuations. An actuarial valuation involves making various estimates and assumptions including discount rate, future salary increases, mortality rates, expected remaining periods of service of employees and future pension increases. Due to the complexity of the valuation, the underlying assumptions, and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. Environment, Health and Safety The Processing Facility s operations are subject to stringent laws governing air emissions, discharges into water, waste, hazardous materials and workers health and safety, among other things. As such, there is a significant risk of environmental, health and safety liabilities. The Processing Facility has obtained the necessary permits and other approvals relating to the protection of the environment and workers health and safety. Compliance with applicable laws and future changes to them is material to the Processing Facility s operation. Future legislation and regulations could necessitate additional expenditures and commitments, capital expenditures, financial assurance and restrictions on the operation of the Processing Facility, the extent of which cannot be predicted. The Fund has a comprehensive environmental management system, which consists of an environmental policy, as well as implementation codes and procedures including codes of practice, job descriptions, operating procedures, rules and responsibilities, employee training, public and employee communications, emergency preparedness, hazard analysis and audits. Interest Rates As at December 31, 2014, $42.2 million of the Fund s indebtedness bears interest at floating rates (December 31, 2013 $0.2 million), which exposes the Fund to financial risks as a result of interest rate fluctuations and the potential volatility of these rates. The Manager s pension liabilities are sensitive to changes in interest rates, with a 1% decrease in interest rates resulting in a $14.3 million increase in pension liabilities. Hedging Activities The Fund attempts to manage its exposure to fluctuations in zinc market prices through hedging (as discussed above under Financial Instruments and Other Instruments ). Although hedging activities may protect the Fund against fluctuations in commodity prices, they can also limit the price that can be realized on zinc or zinc by-products. In such forward sales and call options, where the market price of zinc exceeds the price in a forward sale or call option contract, this reduces the potential revenue stream for the Fund. In addition, the Fund s ability to hedge against such fluctuations may also be limited by factors outside of its control, such as pursuant to any covenants that may be required in connection with its long-term indebtedness. There can be no assurance that the Fund s hedging activities will be successful or will protect the Fund against possible adverse effects resulting from fluctuations in the price of zinc concentrate and by-products. Legal Proceedings The nature of the Fund s business subjects it to regulatory investigations, claims, lawsuits and other proceedings in the ordinary course of business. The nature or results of these legal proceedings cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on the business or results of operations in any future period, and a substantial adverse judgment could have a material adverse impact on the Fund s business, financial condition, liquidity and results of operations. For further information concerning legal proceedings, see the section entitled Commitments and Contingencies Litigation above. 32 Annual Report 2014 Noranda Income Fund 30

35 Management s Discussion and Analysis Price and Volatility of Priority Units The market price and liquidity of Priority Units of the Fund has experienced fluctuations which may not necessarily be related to the operating performance, underlying asset values or prospects of the Fund. It may be anticipated that any market for Priority Units will be subject to market trends generally and changes or disruptions in securities markets or credit markets generally, and the value or liquidity of the Priority Units on the TSX may be adversely affected by such volatility. Restrictions on Certain Unitholders and Liquidity of Units The Trust Indentures of the Fund and the Operating Trust impose restrictions on non-resident Unitholders who are prohibited from beneficially owning more than 49% of the Units. This restriction may limit the rights of certain Unitholders, including non-residents of Canada, to acquire Units, to exercise their rights as Unitholders and to initiate and complete take-over bids in respect of the Units. As a result, these restrictions may limit the demand for Units from certain Unitholders and thereby adversely affect the liquidity and market value of the Units held by the public. Redemption Right It is anticipated that the redemption right attached to Units will not be the primary mechanism for holders of Units to liquidate their investments. Notes which may be distributed in specie to Unitholders in connection with redemption will not be listed on any stock exchange. No established market is expected to develop in such notes and they may be subject to resale restrictions under applicable securities laws. Insurance Coverage and Compliance While the Fund maintains insurance against certain risks, the nature of these risks is such that liability could exceed policy limits or could be excluded from coverage. There are also risks against which the Fund cannot insure or that it may elect not to insure for various reasons. The potential costs associated with any liabilities not covered by insurance, or in excess of insurance coverage, or compliance with applicable laws and regulations may cause substantial delays and require significant capital outlays, adversely affecting the future business, assets, prospects, financial condition and results of operations of the Fund. Disclosure Controls and Internal Controls Disclosure controls and procedures and internal controls over financial reporting are procedures designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation. Any failure in the Fund s disclosure controls and procedures and/or internal controls over financial reporting may have a material adverse impact on the Fund, its financial condition or its results of operations. PRODUCTION AND SALES OUTLOOK The US Purchasing Manager s Index reading for February 2015 fell to 52.9 from 55.1 in December 2014 and is the lowest reading since the 51.3 recorded in January A reading above 50.0 is generally considered to be indicative of an expanding economy. US light vehicle sales in 2014 were 16.4 million units, up 5.8% from 2013, the highest annual sales since The seasonally adjusted annual sales rate in the fourth quarter of 2014 was 16.9 million units, while January 2015 seasonally adjusted annual sales declined to 16.5 million units. The outlook for US spending on construction is mixed with US non-residential construction spending expected to see little to no growth in the first quarter of 2015 before expanding over the balance of the year, while US residential constructing spending is expected to benefit from consumer sentiment, higher employment and pent up demand. 31 Noranda Income Fund Annual Report

36 Management s Discussion and Analysis The Fund s current estimates for 2015 production, sales, processing fee and capital expenditures are as follows: Production: Sales: Processing fee: Capital expenditures: 270,000 tonnes 270,000 tonnes 40.5 cents per pound $27 million The Fund s ability to meet the targets identified above is subject to various risks, uncertainties and assumptions, some of which are discussed under Risks and Uncertainties above and can be found in the Forward-Looking Information below. FORWARD-LOOKING INFORMATION This MD&A, including sections entitled Overview, Results of Operations, Key Performance Drivers, Distribution Policy, Liquidity and Capital Resources, Contractual Obligations, Transactions with Related Parties, Critical Accounting Estimates and Judgments, Commitments and Contingencies, Risks and Uncertainties and Production and Sales Outlook, contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. Forward-looking statements can generally be identified by the use of words such as anticipates, believes, plans, intends, estimates, expects, is forecast, approximately or variations of such words and phrases, or statements that certain actions, events or results may, could, would, might or will be taken, occur or be achieved, or words and expressions of similar nature. Amongst others, the Fund has made forward-looking statements for 2015 expected targets and performance, production, sales, the processing fee and capital expenditures, the Fund and the Operating Trust s future business plans and operation of the Processing Facility, future liabilities and obligations of the Fund (including capital expenditures), the ability of the Fund to operate profitably after the expiry of the initial term of the Supply and Processing Agreement in May 2017, the dependence upon the continuing supply of zinc concentrates and competition relating thereto, the ability of the Processing Facility to treat a more varied feed quality stream, anticipated trends in zinc concentrate supply and demand, smelting capacity, sulphuric acid market demand and supply, zinc concentrate treatment charges, the anticipated financial and operating results of the Fund and distributions to Unitholders. The Fund provides this information because they are the key drivers of the business. Readers are cautioned that this information may not be appropriate for other reasons. These statements and information are based, among others, on the Fund s current assumptions, expectations, estimates, objectives, plans and intentions regarding projected revenues and expenses, the economic and industry environments in which the Fund operates or which could affect the Fund s activities, the Fund s ability to attract and retain clients and consumers as well as the Fund s operating costs, raw materials and energy supplies which are subject to a number of risks and uncertainties. Forward-looking information involves known and unknown risks, uncertainties and other factors, which may cause the actual events, results or performance to be materially different from any future events, results or performance expressed or implied by the forward-looking information. As a result, the Fund cannot guarantee that any forwardlooking statements will materialize. Assumptions, expectations and estimates made in the preparation of forwardlooking statements and risks that could cause the Fund s actual events, results or performance to differ materially from the Fund s current expectations are discussed throughout this document and in our other continuous disclosure materials available on SEDAR at Examples of such risks, uncertainties and other factors include, but are not limited to: (1) the Fund s ability to operate at normal production levels; (2) the dependence upon the continuing supply of zinc concentrates and the terms of the Supply and Processing Agreement; (3) the demand for zinc metal, sulphuric acid and copper in cake; (4) the ability to manage sulphuric acid inventories; (5) changes in future zinc concentrate, zinc grade and impurity levels and their potential impact on capital expenditure and working capital requirements, operating costs, production and recoveries; (6) changes to the supply and demand for specific zinc metal products and the impact on the Fund s realized premiums; (7) reliance on Glencore Canada and certain of its affiliates for the management, operation and maintenance of the Processing Facility, the Fund and the Operating Trust and credit support in connection with the ABL Facility and Notes; (8) the ability of the Fund to continue to service customers in the same geographic region; (9) general business and economic conditions and the condition of financial and credit markets; (10) legislation governing the operation of the Fund including, without limitation, air emissions, discharges into water, waste including residue ponds, hazardous materials, workers health and safety, and many other aspects of the Fund s operations, as well as the impact of current legislation and regulations on expenses, capital expenditures, taxation and restrictions on the operation of the Processing Facility; (11) loan default 34 Annual Report 2014 Noranda Income Fund 32

37 Management s Discussion and Analysis and refinancing risk associated with the ABL Facility and Notes; (12) the impact of costs and liabilities related to the closure, decommissioning, reclamation and rehabilitation of the Processing Facility and surrounding lands, including employee severance, pensions, and environmental and reclamation and rehabilitation liabilities if an acceptable replacement arrangement is not put in place after the expiration of the Supply and Processing Agreement; (13) the sensitivity of the Fund s Net Revenues to reductions in realized zinc metal prices including premiums, copper prices, sulphuric acid prices; and the strengthening of the Canadian dollar vis-à-vis the US dollar; (14) the impact of month prior pricing; (15) 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, and the sensitivity of the Fund s interest expense to increases in interest rates; (16) potential negative financial impact from a labour disruption, regulatory investigations, claims, lawsuits and other proceedings; and (17) the other general risks and uncertainties set out in the Fund s continuous disclosure documents on file with the Canadian Securities Regulatory Authorities. Forward-looking information contained in this MD&A is based on management s current estimates, expectations and assumptions, which management believes are reasonable as of the current date. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. Except as required by law, the Fund does not undertake to update these forward-looking statements, whether written or oral, that may be made from time to time by the Fund or on the Fund s behalf. Noranda Income Fund is an income trust whose units trade on the Toronto Stock Exchange under the symbol NIF.UN. Noranda Income Fund owns the electrolytic zinc processing facility and ancillary assets (the Processing Facility ) located in Salaberry-de-Valleyfield, Québec. The 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 zinc customers are located. It produces refined zinc metal and various by-products from sourced zinc concentrates. The Processing Facility is operated and managed by Canadian Electrolytic Zinc Limited, a whollyowned subsidiary of Glencore Canada Corporation. Further information about the Noranda Income Fund can be found at 33 Noranda Income Fund Annual Report

38 Management s statement of responsibility The accompanying consolidated financial statements of the Noranda Income Fund (the Fund ) have been prepared by management in accordance with International Financial Reporting Standards ( IFRS ). Financial statements are not precise, since they include certain amounts based on estimates and judgments. When alternative methods exist, management has chosen those which it deems most appropriate in the circumstances in order to ensure that the consolidated financial statements are presented fairly, in all material respects, in accordance with IFRS. Management maintains adequate systems of internal accounting and administrative controls, consistent with reasonable cost. Such systems are designed to provide reasonable assurance that the financial information is relevant and reliable, and that the Fund s assets are appropriately accounted for and adequately safeguarded. The Board of Trustees oversees management s responsibility for financial reporting and internal control systems through an audit committee. This committee meets periodically with management and the external auditors to discuss internal controls, auditing matters and financial reporting issues, and to satisfy itself that each party is properly discharging its responsibilities. The committee reviews the consolidated financial statements and reports to the Board of Trustees. The external auditors have full and direct access to the audit committee. Eva Carissimi Chief Executive Officer Canadian Electrolytic Zinc Limited Noranda Income Fund s Manager Michael Boone Chief Financial Officer Canadian Electrolytic Zinc Limited Noranda Income Fund s Manager 36 Annual Report 2014 Noranda Income Fund

39 independent auditors report To the Unitholders of Noranda Income Fund: We have audited the accompanying consolidated financial statements of Noranda Income Fund, which comprise the consolidated statements of financial position as at December 31, 2014 and 2013, and the consolidated statements of comprehensive income, changes in net assets attributable to Unitholders and non-controlling interest and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management's responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Noranda Income Fund as at December 31, 2014 and 2013, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Ernst & Young, LLP Montréal, Canada March 10, CPA auditor, CA, public accounting permit no. A Noranda Income Fund Annual Report

40 Consolidated Statements of financial position As at December 31 [in thousands of dollars] Notes Assets Current assets Cash and cash equivalents 1,626 15,547 Accounts receivable Trade and other receivables 5 65,916 72,933 Glencore Canada and affiliates 15 28,636 18,965 Inventories 6 118,948 77,580 Income taxes receivable 4,103 4,040 Derivative financial assets 7 2, Prepaids and other assets 2,845 1, , ,796 Non-current assets Property, plant and equipment 8 228, ,341 Deferred tax assets 9 4,816 3,334 Employee benefits , , , ,075 Liabilities Current liabilities Accounts payable and accrued liabilities Trade and other payables 32,337 33,622 Glencore Canada and affiliates 15 43,919 54,222 Derivative financial liabilities Distributions payable 1,562 1,562 Bank and other loans 10 15,216 15,204 93, ,735 Non-current liabilities Residue ponds rehabilitation liabilities 11 26,618 21,116 Employee benefits 12 17,904 13,000 Bank and other loans 10 63,754 36,118 Deferred tax liabilities 9 2,270 12, ,546 82,807 Total liabilities excluding net assets attributable to Unitholders and Non-controlling interest 203, ,542 Net assets attributable to Unitholders and Non-controlling interest 254, ,533 Net assets attributable to: Priority Unitholders , ,823 Ordinary Unitholders 13 66,300 71, , ,432 Non-controlling interest (10,716) (6,899) 254, ,533 (See accompanying notes) On behalf of the Board of Trustees of the Noranda Operating Trust: John J. Swidler 38 Annual Report 2014 Noranda Income Fund 4 Barry Tissenbaum

41 Consolidated Statements of comprehensive (loss) income For the years ended December 31 [in thousands of dollars] Notes Revenues Sales 14/15 712, ,509 Transportation and distribution costs (17,772) (17,104) 1 695, ,405 Raw material purchase costs , ,459 Revenues less raw material purchase costs 306, ,946 Other expenses Production 189, ,725 Selling and administration 22,939 21,794 Foreign currency loss 13,951 7,446 Derivative financial instruments gain 7 (1,587) (1,080) Depreciation of property, plant and equipment 36,560 36,351 Rehabilitation expense (recovery) 11 5,314 (3,683) Impairment of non-financial assets 8 40,500 - (Loss) earnings before finance costs and income taxes (700) 71,393 Finance costs, net 16 5,280 6,371 (Loss) earnings before income taxes (5,980) 65,022 Current income tax expense 9 10,221 13,443 Deferred income tax (recovery) expense 9 (11,099) 804 (Loss) earnings attributable to Unitholders and Non-controlling interest (5,102) 50,775 Distributions to Unitholders 18,748 18,750 Current income tax recovery on distributions 9 (660) (603) (Decrease) increase in net assets attributable to Unitholders and Non-controlling interest (23,190) 32,628 Other comprehensive (loss) income Item not to be reclassified to earnings attributable to Unitholders and Non-controlling interest: Remeasurement (loss) gain on employee benefit plans 12 (2,547) 16,275 Deferred income tax (recovery) expense (685) 4,378 (1,862) 11,897 Comprehensive (loss) income (25,052) 44,525 (Decrease) increase in net assets attributable to: Priority Unitholders (15,926) 23,891 Ordinary Unitholders (5,309) 7,964 (21,235) 31,855 Non-controlling interest (1,955) 773 (23,190) 32,628 Comprehensive (loss) income attributable to: Priority Unitholders (15,926) 23,891 Ordinary Unitholders (5,309) 7,964 (21,235) 31,855 Non-controlling interest (3,817) 12,670 (25,052) 44,525 Noranda Income Fund Annual Report

42 Consolidated Statements of changes in net assets attributable to unitholders and non-controlling interest For the years ended December 31 [in thousands of dollars] Earnings Attributable Remeasurement Priority to Unitholders Gain (Loss) Units and and Non- Distributions on Employee Ordinary controlling to Benefits, Units interest Unitholders Net of Tax Total Balance at January 1, , ,098 (375,703) (19,424) 235,008 Comprehensive income - 51,378 (18,750) 11,897 44,525 Balance at December 31, , ,476 (394,453) (7,527) 279,533 Comprehensive loss - (4,442) (18,748) (1,862) (25,052) Redemption of Priority Units (80) (80) Balance at December 31, , ,034 (413,201) (9,389) 254,401 Non- Priority Ordinary controlling Attributable to: Units Units interest Total Balance at January 1, ,932 63,645 (19,569) 235,008 Comprehensive income 23,891 7,964 12,670 44,525 Balance at December 31, ,823 71,609 (6,899) 279,533 Comprehensive loss (15,926) (5,309) (3,817) (25,052) Redemption of Priority Units (80) - - (80) Balance at December 31, ,817 66,300 (10,716) 254,401 (See accompanying notes) 40 Annual Report 2014 Noranda Income Fund

43 Consolidated Statements of cash flows For the years ended December 31 [in thousands of dollars] Notes Operating activities (Loss) earnings before income taxes (5,980) 65,022 Adjustments to reconcile (loss) earnings before income taxes to cash (used) provided: Depreciation of property, plant and equipment 36,560 36,351 Impairment of non-financial assets 8 40,500 - Net change in residue ponds rehabilitation liabilities 11 5,050 (4,098) Derivative financial instruments gain 7 (1,431) (5,761) Change in fair value of embedded derivatives 7 (3,006) 2,309 Finance costs, net 16 5,280 6,371 Gain on sale of assets (219) (457) Net change in employee benefits 2,961 (771) Working capital adjustments: (Increase) decrease in accounts receivable and other assets (4,474) 8,110 (Increase) decrease in inventories (40,742) 13,504 (Decrease) increase in accounts payable and accrued liabilities (9,181) 12,221 Interest paid (3,926) (4,940) Income taxes paid (9,625) (17,916) Distributions to Unitholders (18,748) (18,750) Cash (used in) provided by operating activities (6,981) 91,195 Investing activities Purchase of property, plant and equipment (35,078) (33,395) Proceeds from government assistance Proceeds from sale of property, plant and equipment 1,460 1,527 Cash used in investing activities (33,618) (31,657) Financing activities Proceeds from bank loans 479, ,814 Repayment of bank and other loans (452,962) (349,108) Redemption of Priority Units 13 (40) - Cash provided by (used in) financing activities 26,678 (45,294) Net (decrease) increase in cash and cash equivalents (13,921) 14,244 Cash and cash equivalents at beginning of year 15,547 1,303 Cash and cash equivalents at end of year 1,626 15,547 (See accompanying notes) 7 Noranda Income Fund Annual Report

44 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] 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 June 30, 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 2014 was $0.400 ( $0.395) 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. Under any renewal, Glencore Canada would act as agent for the Partnership for the purchase of zinc concentrate and the 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. 42 Annual Report 2014 Noranda Income Fund

45 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] NOTE 2. BASIS OF PREPARATION AND CHANGES IN ACCOUNTING POLICIES Basis of preparation The consolidated financial statements of the Fund have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value and the employee benefits which are recognized as plan assets less the present value of the defined benefit obligation. The consolidated financial statements are prepared in Canadian dollars and all values are rounded to the nearest thousand (CAD$ thousand), except where otherwise indicated. The Board of Trustees approved these consolidated financial statements on March 10, Basis of consolidation The consolidated financial statements comprise the financial statements of the Fund and its wholly-owned subsidiaries and the Manager, a structured entity as at December 31, Control is achieved when the Fund is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Fund controls an investee if, and only if, the Fund has all of the following: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); Exposure, or rights, to variable returns from its involvement with the investee; and The ability to use its power over the investee to affect its returns. When the Fund has less than majority of the voting or similar rights of an investee, it considers relevant facts and circumstances in assessing whether it has power over the investee, as applicable, including: The contractual arrangement with the other vote holders of the investee; Rights arising from other contractual arrangements; and The Fund s voting rights and potential voting rights. The Fund reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Fund obtains control over the subsidiary and ceases when the Fund loses control of the subsidiary. Assets, liabilities, revenues and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statements of comprehensive income from the date the Fund gains control until the date the Fund ceases to control the subsidiary. All intra-group assets and liabilities, revenues, expenses and cash flows relating to intra-group transactions are eliminated in full on consolidation. Non-controlling interests represent the portion of the profit or loss and net assets attributable to the Manager and are presented separately in the statements of comprehensive income and within the statements of financial position. 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. Use of estimates and judgments The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the date of the financial statements. Estimates and assumptions are continuously evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets and liabilities affected in future periods. 9 Noranda Income Fund Annual Report

46 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] In particular, the Fund has identified the following areas where significant judgments, estimates and assumptions are required. Changes in these assumptions may materially impact the financial position or financial results reported in future periods. Further, the information on each of these areas and how they impact the various accounting policies are described below and also the relevant notes to the consolidated financial statements. Judgments Consolidation of a structured entity The Manager was incorporated in the province of Québec on December 14, Since May 3, 2002, the Manager has been operating as a management company that provides management and administrative services to the Fund and its subsidiaries. Upon the termination of the operating and management agreement, the Partnership is required to acquire the Manager from Glencore Canada and set up a pension plan for the employees of the Manager. The Fund considers that it controls the Manager even though it does not have any voting rights. This is because the sole purpose of the Manager is to provide operating and management services to the Fund. In addition, the contractual arrangements between the Fund and the Manager result in the Fund being exposed to the variability of returns from its involvement with the Manager as the Fund reimburses the Manager for all if its direct and indirect costs and expenses incurred relating to the Fund. The Fund also has the ability to direct the Manager through the approval of relevant activities such as the annual operating plans by the Board of Trustees which affects the Fund s returns. Accordingly, the Fund has concluded that the Fund controls the Manager and it should be consolidated within the Fund s consolidated financial statements. Use of estimates The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Fund based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Fund. Such changes are reflected in the assumptions when they occur. Impairment of non-financial assets (Notes 3 and 8) Impairment exists when the carrying value of a non-financial asset or cash-generating unit ( CGU ) exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The Fund has only one CGU. Management uses the value in use calculation to determine the recoverable amount which is based on a discounted cash flow model with cash flows expected to be generated from the Processing Facility over its remaining useful life and a terminal value. Cash flows do not include restructuring costs, if any, that the Fund is not yet committed to, decommissioning costs or significant future investments that may enhance the non-financial assets performance of the CGU being tested. The recoverable amount is based on detailed budgets and forecasts and requires estimates and assumptions that a market participant may take into account. Summary of impairments As at December 31, 2014, management concluded that an indicator of impairment existed relating to its CGU. As a result of the estimated recoverable amount of $362,900, an impairment of non-financial assets of $40,500 was recorded as a reduction of the Fund s property plant and equipment. The indicators for impairment were primarily i) the upcoming end of the initial term of the SPA in May 2017 and the anticipated purchase of zinc concentrate at market terms, which is estimated to result in lower cash flows being generated by the Fund; ii) the increase in the Fund s carrying value in 2014 relating to fluctuations in the price of zinc and foreign exchange rates; iii) a sustained increase in the souring of concentrates from overseas resulting in higher inland freight costs and feed acquisition costs; and iv) the recent decline in the Fund s market capitalization. 44 Annual Report 2014 Noranda Income Fund 10

47 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Key assumptions The determination of value in use is most sensitive to the following key assumptions: Continued supply of concentrate after the initial term of the SPA Market treatment charges after the expiry of the initial term of the SPA based on industry forecasts and treatment charge rates as a proportion of the associated purchase price Price of zinc, copper and sulphuric acid and zinc premium based on industry forecasts Remaining useful life of the assets and terminal value Sustaining capital expenditures, Production volumes (including recoverable quantities) Estimated production costs Discount rates Foreign exchange rates Rehabilitation expenditures Therefore, there is a possibility that changes in circumstances, in particular the availability of concentrate beyond the term of the SPA, may impact the recoverable amount calculated by management. Discount rates In calculating the value in use, a real post-tax discount rate of 9.8% was applied to the post-tax cash flows expressed in real terms. This discount rate is derived from the Fund s post-tax weighted average cost of capital (WACC), with appropriate adjustments made to reflect the risks specific to the CGU and to determine the pre-tax rate. The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by the Fund s investors. The cost of debt is based on its interest-bearing borrowings the Fund is obliged to service. Fundspecific risk is incorporated by applying individual beta factors. The beta factors are evaluated annually based on publicly available market data. Taxes (Note 9) To determine the extent to which deferred income tax assets can be recognized, management must estimate the amount of probable future taxable profits that will be available against which deductible temporary differences. Such estimates are made as part of the budgets by tax jurisdiction on an undiscounted basis and are reviewed at each reporting date. Management exercises judgment to determine the extent to which realization of future taxable benefits is probable, considering factors such as the number of years to include in the forecast period and the history of taxable profits. Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the range of business relationships and the long-term nature of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to income taxes already recorded. The Fund establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities. Employee benefits (Note 12) The Manager participates in defined benefit pension plans administered by Glencore Canada. Assets are allocated to the Manager based upon the Pension and Benefits Agreement with Glencore Canada, based on the Manager s share of the benefit obligation and its share of contributions made. The cost of defined benefit pension plans and other post-retirement benefits and the present value of the pension obligation are required to be determined annually using actuarial valuations. An actuarial valuation involves making various estimates and assumptions including discount rate, future salary increases, mortality rates, expected remaining periods of service of employees and future pension increases. Due to the complexity of the valuation, the underlying assumptions, and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. 11 Noranda Income Fund Annual Report

48 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] In determining the appropriate discount rate, management considers the interest rate spreads of corporate bonds in Canada with at least AA rating or government bonds with similar maturities. As Canada is not considered to have a deep market in long-term corporate bonds, Canadian provincial bonds with similar maturities are used taking into consideration the interest rate spread on the short- and medium-term corporate bonds, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The underlying bonds are further reviewed for quality, and those having excessive credit spreads are removed from the population of bonds on which the discount rate is based, on the basis that they do not represent high-quality bonds. The mortality rate is based on publicly available mortality tables for Canada. Future salary increases and pension increases are based on expected future inflation rates for Canada, average wage growth and historical information and future expectations. Residue ponds rehabilitation liabilities (Note 11) The Fund has recognized rehabilitation liabilities solely related to the residue ponds on the Processing Facility site as their rehabilitation is required under the Québec Mining Act. The rehabilitation liabilities do not include other site rehabilitation costs that would be required if the Processing Facility was decommissioned. The Fund assesses its rehabilitation provision at each reporting date. Significant estimates and assumptions are made in determining the provision for rehabilitation as there are numerous factors that will affect the ultimate amount payable. These factors include estimates of the extent and costs of reclamation of the residue ponds and the expected timing of those costs, technological changes, regulatory changes, cost increases as compared to the inflation rates and changes in discount rates ( %, %). These uncertainties may result in future actual expenditure differing from amounts currently provided. To the extent the actual costs and timing of expenditures differ from these estimates, adjustments will be recorded in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income. The provision at the reporting date represents management s best estimate of the present value of the future rehabilitation costs required. The Fund s operations are affected by federal, provincial, and local laws and regulations concerning environmental protection. The Fund s provisions for rehabilitation are based on known requirements. It is not currently possible to estimate the impact on operating results, if any, of future legislative or regulatory developments. Inventories Inventories are stated at the lower of cost and net realizable value. Cost of raw materials, work-in-process and finished products is determined on a weighted average basis and includes all costs incurred in the normal course of business including direct material and direct labour costs and an allocation of production overheads, depreciation and amortization and other costs, based on normal production capacity, incurred in bringing each product to its present location and condition. Stockpiles are measured by estimating the number of tonnes added to and removed from the stockpile, the number of contained pounds is based on assay data, and the estimated recovery percentage is based on the expected processing method. Stockpile tonnages are verified by periodic surveys. Fair Value Measurement (Notes 7 and 19) The Fund measures financial instruments, such as derivatives, at fair value at each balance sheet date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Fund uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. Changes in estimates and assumptions about these inputs could affect the reported fair value. 46 Annual Report 2014 Noranda Income Fund 12

49 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] NOTE 3. PRINCIPAL ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. Foreign currency Transactions in foreign currencies are translated at the exchange rates prevailing at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates at the reporting date. All differences that arise are recorded in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income. Non-monetary assets measured at historical cost in a foreign currency are translated using the exchange rates at the date of the initial transactions. Cash and cash equivalents Cash and cash equivalents comprise cash bank balances, cash in hand and highly-liquid short-term deposits with an original maturity of three months or less. Due to the short-term nature of these financial assets, the Fund has elected to classify them as held-for-trading. As at December 31, 2014, there were no cash equivalents held in overnight deposits (December 31, 2013 $7,000). Revenue The Fund recognizes revenue from the sale of refined metals and by-products when all significant risks and rewards of ownership of the asset are transferred to the buyer, which generally occurs upon shipment. Revenue is recognized, at fair value of the consideration received or receivable, to the extent that it is probable that economic benefits will flow to the Fund and the revenue can be reliably measured. Revenues from the sale of by-products are also included in sales revenue. For a portion of the Fund s sales contracts, the sales price is determined provisionally at the date of sale, with the final price determined at a mutually agreed date (generally between one and three months from the date of the sale), generally at a quoted market price at that time. This provisional pricing arrangement has the characteristics of an embedded derivative which does not qualify for hedge accounting and is recorded at fair value based on the forward metal prices for the relevant contract period. All subsequent mark-to-market adjustments are recorded in sales revenue up to the date of final settlement. Price changes for shipments awaiting final pricing at period-end could have a material effect on future revenues. As at December 31, 2014, there was $29,800 (December 31, $3,035) in revenues that were awaiting final pricing. The following table provides an analysis of the revenues awaiting final pricing, as at December 31: Zinc metal Accountable metal content (pounds) 23,850,539 1,188,936 Provisional price ( US$/pound) Copper in cake Accountable metal content (pounds) 1,666, ,126 Provisional price ( US$/pound) Property, plant and equipment On initial acquisition, property, plant and equipment are valued at cost, being the purchase price and the directly attributable costs of acquisition or construction required to bring the asset to the location and condition necessary for the asset to be capable of operating in the manner intended by management. The cost also includes borrowing costs on qualifying assets under construction, if any, less any applicable government assistance. The capitalized value of a finance lease is also included in property, plant and equipment. 13 Noranda Income Fund Annual Report

50 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Depreciation is recorded on a straight-line basis over the estimated useful life of the asset taking into account the estimated residual value. Estimates of remaining useful lives, residual values and methods of depreciation are reviewed at each reporting date and adjusted prospectively, if appropriate. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate components and are depreciated over their useful lives. The expected useful lives are as follows: Buildings and plant equipment Anodes (included in buildings and plant equipment) Mobile equipment Computers Automobiles and trucks years 3 years 5-10 years 4 years 4 years Capital spare parts are depreciated when they are put into use over the estimated useful lives of the associated equipment. Insurance spare parts are amortized over the estimated useful lives of the associated equipment. When significant parts of property, plant and equipment are required to be replaced at intervals, the Fund derecognizes the replaced part, and recognizes the new part with its own associated useful life and depreciation. All other repair and maintenance costs are recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income as incurred. Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets and overhaul costs. Where an asset or part of an asset that was separately depreciated and is now written off is replaced, and it is probable that future economic benefits associated with the item will flow to the Fund through an extended life, the expenditure is capitalized. When an item of property, plant and equipment is disposed of or when no future economic benefits are expected from its use, it is derecognized and the gain or loss on the difference between its carrying value and proceeds from sale is included in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Leases are classified as financing or operating depending on the terms and conditions of the contracts. Lease agreements where the Fund assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. However, if there is no reasonable certainty that the Fund will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Obligations recorded under finance leases are reduced by lease payments, net of imputed interest. Leases where the Fund does not assume substantially all of the risks and rewards are classified as operating leases. Costs under operating leases are recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income on a straight-line basis over the term of the lease. 48 Annual Report 2014 Noranda Income Fund 14

51 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Impairment of non-financial assets The Fund assesses at each reporting date whether there is an indication that an asset may be impaired. If there are indications of impairment, a review is undertaken to determine whether the carrying amounts are in excess of their recoverable amounts. An asset s recoverable amount is determined as the higher of its fair value less costs to sell and its value-in-use. Such reviews are undertaken on an asset-by-asset basis, except where assets do not generate cash flows independent of other assets, in which case the review is undertaken at the CGU level If the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recorded in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income to reflect the asset at the lower amount. In assessing the value-in-use, the relevant future cash flows expected to arise from the continuing use of such assets and from their disposal are discounted to their present value using a marketdetermined pre-tax discount rate that reflects current market assessments of the time value of money and assetspecific risks for which the cash flow estimates have not been adjusted. Fair value less costs to sell is determined as the amount that would be obtained from the sale of the asset in an arm s-length transaction between knowledgeable and willing parties. Given the nature of the Fund s activities, information on the fair value of an asset is usually difficult to obtain unless negotiations with potential purchasers or similar transactions are taking place. Consequently, the Fund has used the value in use calculation to determine the recoverable amount which is based on a discounted cash flow model with cash flows expected to be generated from the Processing Facility over its remaining useful life. An impairment loss is reversed in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income if there is an increase in the estimates used to determine the recoverable amount since the prior impairment loss was recognized. The carrying amount is increased to the recoverable amount, but not beyond the carrying amount, net of depreciation or amortization that would have arisen if the prior impairment loss had not been recognized. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Financial instruments Financial assets are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. Financial liabilities are classified as financial liabilities at fair value through profit or loss, other liabilities, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Fund determines the classification of its financial assets or liabilities at initial recognition. When financial assets or liabilities are recognized initially, they are measured at fair value. The subsequent measurement of financial assets and liabilities depends on their classification. Financial assets and liabilities are offset and the net amount reported in the statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. Derivative instruments that are not designated as effective hedging instruments are classified as current or noncurrent or separated into current or non-current portions based on an assessment of the facts and circumstances (i.e. the underlying contracted cash flows). Derivative instruments that are designated as, and are effective hedging instruments, are classified consistently with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and a non-current portion only if a reliable allocation can be made. 15 Noranda Income Fund Annual Report

52 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] The Fund financial assets and liabilities are classified and measured as follows: Classification Measurement Cash and cash equivalents Held for trading Fair value Accounts receivable Loans and receivable Amortized cost Derivative financial assets Held for trading Fair value Derivative financial liabilities Held for trading Fair value Bank and other loans Other liabilities Amortized cost Accounts payable and accrued liabilities Other liabilities Amortized cost Distribution payable Other liabilities Amortized cost Derecognition of financial assets and liabilities A financial asset is derecognized when the rights to receive cash flows from the asset have expired or the Fund has transferred its rights to receive cash flows from the asset and either has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Gains and losses on derecognition are recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income. Financial assets or liabilities at fair value through profit or loss Financial assets or liabilities classified as held-for-trading are included in the category financial assets or liabilities at fair value through profit or loss. Financial assets or liabilities are classified as held-for-trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held-for-trading unless they are designated as and are effective hedging instruments. Gains or losses on these items are presented in derivative financial instrument gain on the consolidated statements of comprehensive income. The Fund considers whether a contract contains an embedded derivative when it becomes a party to the contract. Embedded derivatives are separated from the host contract if it is not measured at fair value through profit and loss and when the economic characteristics and risks are not closely related to the host contract. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss or available-for-sale. Such assets are carried at amortized cost using the effective interest method, less impairment. Losses are recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income when the loans and receivables are derecognized or impaired, as well as through the amortization process. Trade and other receivables are recognized and carried at their original invoiced value and are non-interest bearing, and are adjusted, where appropriate, for provisional pricing or their recoverable amount if this differs from the invoiced amount. Where the time value of money is material, receivables are discounted and are carried at their present value. A provision is made where the estimated recoverable amount is lower than the carrying amount. Other liabilities Other liabilities are recognized initially at fair value net of any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. Other liabilities are presented as current if payment is due within twelve months. Otherwise, and in cases where the Fund has an unconditional right to defer settlement for at least twelve months after the reporting period, they are presented as non-current liabilities. Finance costs are recognized in earnings attributable to Unitholders and noncontrolling interest on the consolidated statements of comprehensive income using the effective interest method. 50 Annual Report 2014 Noranda Income Fund 16

53 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Fair values The Fund measures derivatives at fair value at each balance-sheet date. Also, fair values of financial instruments measured at amortized costs are disclosed in Note 19. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Fund. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Fund uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described, as follows, based on the lowest-level input that is significant to the fair value measurement as a whole: Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities, or Level 2 Valuation techniques for which the lowest-level input that is significant to the fair value measurement is directly or indirectly observable, or Level 3 Valuation techniques for which the lowest-level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Fund determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Notes 7 and 19. Impairment of financial assets The Fund assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets carried at amortized costs are impaired. A financial asset or a group of financial assets carried at amortized cost are deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset, such as debtors experiencing significant financial difficulty, and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate (i.e. the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced and the amount of the loss is recognized in the statements of comprehensive income. Objective evidence of impairment of loans and receivables exists if the counter-party is experiencing significant financial difficulty, there is a breach of contract, concessions are granted to the counter-party that would not normally be granted, or it is probable that the counter-party will enter into bankruptcy or a financial reorganization. 17 Noranda Income Fund Annual Report

54 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. Derivative financial instruments and hedging The Fund periodically uses derivative financial instruments such as commodity contracts to hedge the risks associated with commodity price fluctuations. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivative financial instruments are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. The Fund periodically uses commodity forward contracts to hedge the effect of price changes relating to its firm fixed commitments on the commodities it sells. Hedge accounting is permitted when there is a high degree of correlation between price movements in the derivative instrument and the item designated as being hedged. The relationship between the Fund s firm fixed sales commitments and the commodity forward contracts purchased to hedge these commitments permits the use of hedge accounting on these fair value hedges. The Fund has determined that its derivatives which were contracted in connection with its inventory management hedging program do not meet the hedging requirements. As a result, these derivatives have been recognized on the consolidated statements of financial position as a derivative financial asset or liability with the change in their fair values at each reporting period recognized as a gain or a loss in earnings attributable to Unitholders and noncontrolling interest on the consolidated statements of comprehensive income. Fair value hedges are hedges of the Fund s exposure to changes in the fair value of a recognized asset or liability that could affect profit or loss. The carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged, the derivative is re-measured at fair value, and gains and losses from both are taken to earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income. At the inception of a hedge relationship, the Fund formally designates and documents the hedge relationship to which the Fund wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument s effectiveness in offsetting the exposure to changes in the hedged item s fair value or cash flows attributable to the hedged risk. Hedges that are expected to be highly effective in achieving offsetting changes in fair value or cash flows are assessed on an ongoing basis to determine if they actually have been highly effective throughout the financial reporting periods for which they were designated. When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability with a corresponding gain or loss recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income. The subsequent cumulative change in the fair value of the hedging instrument, the commodity forward contracts, is recognized as an asset or liability with a corresponding gain or loss recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income. If the hedged item is derecognized, the unamortized fair value is recognized immediately in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income. Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are recorded in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income. 52 Annual Report 2014 Noranda Income Fund 18

55 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Inventories Inventories are stated at the lower of cost and net realizable value. Cost of raw materials, work-in-process and finished products is determined on a weighted average basis and includes all costs incurred in the normal course of business including direct material and direct labour costs and an allocation of production overheads, depreciation and amortization and other costs, based on normal production capacity, incurred in bringing each product to its present location and condition. Spare parts inventory is valued at the lower of cost and net realizable value, where cost is determined using a first-in first-out basis and includes direct material costs incurred. Any provision for obsolescence is determined by reference to the aging of items as well as review of specific items in stock. A regular review is undertaken to determine the extent of any provision for obsolescence. Inventories are categorised, as follows: Spare parts; Raw materials: zinc concentrate to be consumed in the production process; Work-in-process: items stored in an intermediate state that have not yet passed through all the stages of production; and Finished products: zinc metal and by-products that have passed all stages of the production process. Net realizable value is the estimated selling price in the ordinary course of business less estimated costs to completion and the estimated costs necessary to make the sale. Government grants Government grants are recognized where there is reasonable assurance that the grant will be received and all the attaching conditions will be complied with. Government grants in respect of capital expenditures are credited to the carrying amount of the related asset and are released to earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income in equal amounts over the expected useful lives of the relevant assets. Grants that are not associated with an asset are credited to earnings so as to match them with the expense to which they relate. Grant amounts from government assistance programs are reflected as reductions in the cost of the assets or in the expenses to which they relate at the time which the assistance becomes receivable and when there is reasonable assurance that the assistance will be received. For the year ended December 31, 2014, the amount received was nil (2013 $200 related to plant equipment). There are no ongoing obligations related to the assistance, which is subject to audit by the government agency. Residue ponds rehabilitation liabilities The Fund records a rehabilitation provision for legal and constructive asset retirement obligations. The rehabilitation of the residue ponds is recognized as an obligation resulting from their recognition as mining waste under Québec s Mining Act. The rehabilitation liabilities do not include other site rehabilitation costs that would be required if the Processing Facility was decommissioned. Provision is made for restoration and for environmental rehabilitation costs in the financial period when the related environmental disturbance occurs, based on the estimated future costs and timing of expenditures using information available at year end. The provision is discounted using a pre-tax rate that reflects the risk specific to the rehabilitation liabilities and the unwinding of the discount is recognized in finance costs. At the time of establishing the provision, a corresponding asset is capitalized, where it gives rise to a future benefit, and depreciated over future production from the operations to which it relates. Subsequent changes in the estimated costs are recognized immediately in the statements of comprehensive income. The estimated future costs of rehabilitation are reviewed on a regular basis for changes to obligations, timing of expenditures, legislation or discount rates that impact estimated costs. The cost of the related asset is adjusted for changes in the provision resulting from changes in the estimated cash flows or discount rate and the adjusted cost of the asset is depreciated prospectively unless the corresponding asset is fully depreciated, as is the case for the Fund, in which case the change is recognized immediately in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income. 19 Noranda Income Fund Annual Report

56 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] The unwinding of the discount rate is recorded in earnings attributable to Unitholders and non-controlling interest in the consolidated statements of comprehensive income as part of finance costs, net. Taxes Income tax expense comprises current and deferred tax. Current income tax and deferred income tax are recognized in earnings attributable to Unitholders and non-controlling interest except to the extent that it relates to a business combination, or items recognized directly in other comprehensive income, in which case the current and/or deferred tax is also recognized directly in other comprehensive income. The Fund and the Operating Trust are trusts for income tax purposes and are subject to Canadian income taxes on certain income distributed to its unitholders at the same combined federal and provincial corporate tax rate applicable to a Canadian taxable corporation. Income not distributed to unitholders is subject to a top marginal individual income tax rates. IAS 12 requires that current and deferred tax assets and liabilities be measured at the tax rate applicable to undistributed profits until such time that the distribution becomes payable. The Fund s corporate subsidiaries are taxed at the corporate tax rates. Current income tax Current income tax assets and liabilities for the current reporting period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date. Current income tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax Deferred tax is recognized using the statement of financial position method in respect of all temporary differences between the tax bases of assets and liabilities, and their carrying amounts for financial reporting purposes. Deferred income tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. Deferred income tax assets and liabilities are presented as non-current. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. To the extent that an asset not previously recognized fulfils the criteria for recognition, a deferred income tax asset is recorded. Deferred tax is measured on an undiscounted basis at the tax rates applicable to undistributed profits that are expected to apply in the periods in which the asset is realized or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date. Employee benefits The Manager participates in defined benefit pension plans and unfunded post-retirement benefit plans, managed and administered by Glencore Canada. Re-measurements, comprising of actuarial gains and losses, the effect of the asset ceiling, excluding amounts included in net interest on the net defined liability and the return on plan assets (excluding amounts included in net interest on the net defined liability), are recognized immediately in the consolidated statement of financial position with a corresponding debit or credit to net assets attributable to unitholders and non-controlling interest through other comprehensive income in the period in which they occur. Re-measurements are not reclassified to profit or loss in subsequent periods. 54 Annual Report 2014 Noranda Income Fund 20

57 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Net interest is calculated by applying the discount rate to the net defined benefit liability or asset. The Fund recognizes the following changes in the net defined benefit obligation under production expenses and in selling and administration expenses in the consolidated statement of comprehensive income: Service costs comprising current service costs, past-service costs, gains and losses on curtailments and nonroutine settlements; and Net interest expense or income. Past service costs, if any, are recognized through production expenses and selling and administration expenses in the statements of comprehensive income on the earlier of: The date of the plan amendment or curtailment, and The date that the Fund recognizes restructuring-related costs. Plan assets are measured at fair value based on market price information and, in the case of quoted securities, the published bid prices, while plan liabilities are measured on an actuarial basis using the projected unit credit method and discounted at an interest rate equivalent to the current rate of return on Canadian provincial bonds with equivalent currency and term to the plan liabilities, taking into consideration the interest rate spread on corporate bonds with at least AA rating. When the calculation results in a benefit to the Fund, the recognized asset is limited to the total of the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan of the Fund. An economic benefit is available to the Fund if it is realizable during the life of the plan, or on settlement of the plan liabilities. When the payment in the future of minimum funding requirements related to past service would result in a net defined benefit surplus or an increase in a surplus, the minimum funding requirements are recognized as a liability to the extent that the surplus would not be fully available as a refund or a reduction in future contributions. Remeasurement of this liability is recognized in other comprehensive income in the period in which the remeasurement occurs. The full pension surplus or deficit is recorded in the consolidated statements of financial position. Other provisions Provisions are recognized when the Fund has a present obligation (legal or constructive), as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the effect is material, the provision is discounted to net present value using an appropriate pre-tax rate that reflects, where appropriate, the risk specific to the liability and the unwinding of the discount is included in finance costs. Net assets Balance sheet presentation In accordance with IAS 32 Financial Instruments: Presentation, puttable instruments are generally classified as financial liabilities. The Fund s Priority Units are puttable instruments, meeting the definition of financial liabilities in IAS 32. There are exception tests within IAS 32 which could result in classification as equity, however, the Fund s Priority Units do not meet the exception requirements, primarily because the Fund has a contractual obligation to distribute taxable income to unitholders on an annual basis (Note 17). The Partnership s Class B Ordinary Units (the Ordinary Units ) with the attached Special Fund Units (as defined below) are exchangeable into Priority Units are considered a financial liability. Accordingly, the Fund has no instrument qualifying for equity classification on its consolidated statements of financial position. The classification of all units as financial liabilities with presentation as net assets attributable to unitholders of the Fund (the Unitholders ) does not alter the underlying economic interest of the Unitholders in the net assets and net operating results attributable to Unitholders. 21 Noranda Income Fund Annual Report

58 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Balance sheet measurement Priority Units and Ordinary Units are carried on the consolidated statements of financial position at net asset value. The net asset value is split based on the number of units outstanding (75% for the Priority Units and 25% for the Ordinary Units) prior to the distribution deficiency noted in Note 17. Although instruments classified as financial liabilities are generally required to be re-measured to fair value at each reporting period, including the embedded derivative relating to the conversion feature of the Ordinary Units, the alternative presentation as net assets attributable to Unitholders reflects that, in total, the interest of the Unitholders is limited to the net assets of the Fund. Statement of comprehensive income presentation As a result of the classification of all units as financial liabilities, the consolidated statements of comprehensive income recognize distributions to Unitholders in earnings attributable to Unitholders and non-controlling interest. The re-measurement of income taxes on distribution is also recorded in earnings attributable to Unitholders and noncontrolling interest on the consolidated statements of comprehensive income. In addition, terminology such as Net income has been replaced by increase in net assets attributable to Unitholders to reflect the absence of an equity component on the consolidated statements of financial position. Presentation of per unit measures As a result of the classification of all units as financial liabilities, the Fund has no equity instrument; therefore, in accordance with IAS 33 Earnings per Share, there is no denominator for purposes of calculation of per unit measures. Non-controlling interest Non-controlling interests represent the portion of the profit or loss and net assets attributable to the Manager and are presented separately in the statements of comprehensive income and within the statements of financial position. Losses within a subsidiary are attributable to the non-controlling interests even if that results in a deficit balance. Allocation of comprehensive income The components of comprehensive income are allocated between the Priority Units and Ordinary Units based on the weighted average number of units outstanding during the reporting period. NOTE 4. NEW STANDARDS, INTERPRETATIONS AND AMENDMENTS ADOPTED BY THE FUND The nature and the impact of each new standard/amendment are described below: New standards issued and effective IFRIC Interpretation 21 Levies (IFRIC 21) IFRIC 21 provides guidance on the accounting for levies within the scope of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014 and applied retrospectively. IFRIC 21 did not have material financial impact on the Fund s condensed consolidated financial statements. IAS 39 Novation of Derivatives and Continuation of Hedge Accounting Amendments to IAS 39 These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments are effective for annual periods beginning on or after January 1, The Fund has not novated its derivative financial instruments during the current period. However, these amendments would be considered for future novations. 56 Annual Report 2014 Noranda Income Fund 22

59 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Amendments to IAS 36 Impairment of assets IAS 36, Impairment of Assets (IAS 36) was amended by the IASB in March The amendments require the disclosure of the recoverable amount of impaired assets when an impairment loss has been recognized or reversed during the period and additional disclosures about the measurement of the recoverable amount of impaired assets when the recoverable amount is based on fair value less costs of disposal, including the discount rate when a present value technique is used to measure the recoverable amount. This amendment to IAS 36 was effective for the Fund on January 1, 2014 and must be applied retrospectively. The Fund s impairment disclosures are updated for this amendment. Annual Improvements Cycle In the annual improvements cycle, the IASB issued seven amendments to six standards, which included an amendment to IFRS 13 Fair Value Measurement. The amendment to IFRS 13 clarifies in the Basis for Conclusions that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This amendment to IFRS 13 was effective for the Fund on January1, 2014 and was applied retrospectively and it did not have material financial impact on the Fund s condensed consolidated financial statements. New standards issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Fund s consolidated financial statements are disclosed below. The Fund intends to adopt these standards, if applicable, when they become effective. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. The Fund is currently assessing the impact of IFRS 9 and plans to adopt the new standard on the required effective date. IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognising revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after January 1, 2017 with early adoption permitted. The Fund is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date. Amendments to IAS 19 Defined Benefit Plans: Employee Contributions IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of services, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the services is rendered, instead of allocating the contribution of the periods of services. This amendment is effective for annual periods beginning on or after July 1, The adoption of this amendment is expected to have no impact on the und s consolidated statements. 23 Noranda Income Fund Annual Report

60 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] NOTE 5. TRADE AND OTHER RECEIVABLES Trade and other receivables were as follows, as at December 31: Trade receivables, gross 67,243 72,933 Allowance for doubtful accounts (1,327) - Total 65,916 72,933 The factors that the Fund considers to classify trade receivables as impaired are as follow: the customer is in bankruptcy or under administration, payments are in dispute, or payments are in arrears. Further information on credit risk is provided in note 19. Change in the allowance for doubtful accounts were as follows, for the year ended December 31: 2014 Balance at beginning of year - Provision for doubtful accounts (1,281) Effect of foreign currency exchange rate changes (46) Balance at end of year (1,327) NOTE 6. INVENTORIES Inventories were as follows, as at December 31: Spare parts 7,303 6,846 Raw materials 59,942 36,545 Work-in-process 15,555 11,414 Finished products 36,148 22, ,948 77,580 During the year ended December 31, 2014, $610,316 (December 31, $513,535) of inventory was expensed including depreciation related to property, plant and equipment of $36,560 (December 31, $36,351). As at December 31, 2014, raw material, work-in-process and finished goods were all carried at cost. NOTE 7. DERIVATIVES AND HEDGES The Fund s derivatives were as follows, as at December 31: Assets Derivative financial assets: Hedges of fixed firm commitments - 23 Inventory management program 2, , Liabilities Derivative financial liabilities: US dollar overnight transactions Firm commitments Annual Report 2014 Noranda Income Fund

61 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] The derivatives financial instruments gain were as follows, for the years ended December 31: Derivative financial instruments gain: Inventory management program (1,587) (1,027) Hedges of fixed firm commitments - (53) (1,587) (1,080) Inventory management program The Fund purchases zinc concentrate to be processed eventually 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 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 December 31, 2014, the Fund had sold forward approximately 60 million pounds of zinc (December 31, 2013 bought forward 27 million pounds of zinc). During the year ended December 31, 2014, the change in fair value of these derivatives was a gain of $1,587 which was recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income in gain on derivative financial instruments (December 31, gain on derivative financial instruments of $1,027). As at December 31, 2014, the fair value of these positions was a current derivative financial asset of $2,270 (December 31, current derivative financial asset of $683). Hedges of fixed firm commitments Certain customers request a fixed sales price instead of the LME average price in the month of shipment. Glencore Canada enters into commodity forward and futures contracts on behalf of the Fund that will allow the Fund to receive the LME price in the month of shipment while customers pay the agreed-upon fixed price. Glencore Canada accomplishes this by settling the futures contracts during the month of shipment. In the event that the futures contracts have to be terminated early, due to the customer cancelling a fixed price order, Glencore Canada has the right to charge the customer with the cost of settling the LME futures contract. The change in the fair value of the derivative financial instrument is recorded in the consolidated statements of comprehensive income as a derivative financial instrument gain or loss. The Fund has not applied hedge accounting to its fixed forward sales contracts in As at December 31, 2013, Glencore Canada had future contracts hedging approximately 0.4 million pounds of zinc to be sold pursuant to firm commitments at fixed prices and delivery dates related to the Fund. As at December 31, 2013, the fair value of these contracts was recognized as a derivative financial current asset of $23 and the fair value of the fixed firm commitments was recognized as a derivative financial current liability of $23. The net change in fair value of these net positions, representing the ineffective portion of the hedge position for the year ended December 31, 2013 was recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income as a gain on derivative financial instruments of $53. Embedded derivatives For the year ended December 31, 2014, the Fund recorded $3,006 as an decrease of raw material purchase costs related to the change in fair value of the embedded derivatives resulting from the quotational pricing feature of its zinc concentrate payables (December 31, increase of $2,309). 25 Noranda Income Fund Annual Report

62 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] NOTE 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment were as follows, as at December 31: Land and buildings Plant equipment Mobile equipment Computers Auto and trucks Total Cost 144, ,979 2,723 3,236 1, ,241 Accumulated depreciation (102,789) (521,350) (2,271) (2,600) (364) (629,374) Balance at January 1, , , ,867 Additions 1,521 36, ,281 Depreciation (2,883) (32,222) (119) (349) (164) (35,737) Disposals (18) (1,047) (5) - - (1,070) Net changes (1,380) 2, (28) 1,474 Cost 144, ,947 2,736 3,415 1, ,299 Accumulated depreciation (104,987) (545,561) (2,233) (2,705) (472) (655,958) Balance at December 31, , , ,341 Additions 2,781 32, ,465 Depreciation (2,979) (33,541) (160) (336) (170) (37,186) Impairment loss (6,075) (34,425) (40,500) Disposals - (1,241) (1,241) Net changes (6,273) (36,957) (22) (40) (170) (43,462) Cost 147, ,459 2,799 3,308 1, ,510 Accumulated depreciation (114,028) (602,030) (2,318) (2,638) (617) (721,631) Balance at December 31, , , ,879 During the year ended December 31, 2014, an impairment loss of $40,500 was recognized as reduction of buildings for $6,075 and plant equipment $34,425 (notes 2 and 3). Land and buildings as at December 31, 2014 included non-depreciating land amounting to $3,241 (December 31, $3,142). The carrying value of plant equipment held under finance leases as at December 31, 2014 was $487 (December 31, $ 691). Assets under construction included in plant equipment as at December 31, 2014 were $10,906 (December 31, $26,744), and are not amortized until put in use. 60 Annual Report 2014 Noranda Income Fund 26

63 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] NOTE 9. INCOME TAXES A reconciliation of income tax (recovery) charge applicable to accounting (loss) earnings before income taxes at the weighted average statutory income tax rate to income tax charge at the Fund effective income tax rate were as follows, for the years ended December 31: (Loss) earnings before income taxes (5,980) 65,022 Partnership income allocated to Ordinary Units (1,611) (14,121) (7,591) 50,901 Expected tax (recovery) charge at the average statutory income tax rate ( %; %) (3,793) 25,435 Effect of subsidiary tax rate differential 2,412 (11,139) Other 503 (49) Tax (recovery) charge at an effective income tax rate before distributions (878) 14,247 Tax recovery on distribution of non-portfolio earnings (Note 17) (660) (603) Tax (recovery) charge at an effective income tax rate (1,538) 13,644 Income tax (recovery) expense is composed of the following on the consolidated statements of comprehensive income, for the years ended December 31: Current income tax expense 10,221 13,443 Deferred income tax (recovery) expense (11,099) 804 Income tax (recovery) expense before distributions (878) 14,247 Current income tax recovery on distribution of non-portfolio earnings (Note 17) (660) (603) Income tax (recovery) expense after distributions (1,538) 13,644 The deferred tax assets and liabilities were as follow, as at December 31: Deferred tax assets Employee benefits 4,816 3,334 4,816 3,334 Deferred tax liabilities Property, plant and equipment 16,368 26,153 Bank and other loans - finance lease (106) (152) Debt issuance costs Rehabilitation liability (5,834) (4,627) Eligible capital property (8,199) (8,817) 2,270 12,573 As at December 31, 2014, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognized is $9,400 ( $21,000). The Fund is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. 27 Noranda Income Fund Annual Report

64 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] NOTE 10. BANK AND OTHER LOANS Bank and other loans were as follows, as at December 31: Senior secured notes 37,500 52,500 ABL revolving facility 42, Obligation under finance lease Total bank and other loans 80,146 53,428 Less: unamortized deferred financing fees (1,176) (2,106) Less: current portion (15,216) (15,204) Long-term portion 63,754 36,118 Senior secured notes On July 28, 2011, the Operating Trust closed its private placement of senior secured notes ( Notes ), for an aggregate principal amount of $90,000, bearing interest at 6.875%. The Notes amortize by an amount of $7,500 on a semi-annual basis on June 28 and December 28 of each year prior to December 28, The $15,000 remaining principal balance will be repayable at maturity on December 28, The Notes are redeemable at the option of the Operating Trust in whole or in part, at any time on or after: December 28, 2014 at % of the principal amount; December 28, 2015 and thereafter at 100% of the principal amount; plus, in each case, accrued and unpaid interest to the redemption date. The prepayment options are considered to be closely related to the Notes and are therefore not considered to be an embedded derivative. The Notes governing trust indenture lists events that constitute an event of default, should they occur. They include the non-payment by the Operating Trust of principal, interest or other obligations of the Operating Trust in respect of the Notes and a breach of any covenant pursuant to the ABL Facility credit agreement (discussed below), subject to customary cure periods where applicable. If any event of default occurs under the Notes trust indenture, the holders of the Notes may require the Operating Trust to repay any outstanding obligations pursuant to the Notes trust indenture. ABL revolving facility On July 28, 2011, the Operating Trust entered into a 5-year secured asset-backed revolving credit facility (the ABL Facility ) providing availability of up to $150,000. 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) $150,000 and (b) the aggregate of (i) 85% of eligible accounts receivable (90% in the case of insured accounts receivable or that are owed by qualified investment grade account debtors) plus (ii) the lesser of (A) 70% of the lower of cost or fair market value of eligible inventory, and (B) 85% of the appraised net orderly liquidation value of eligible inventory, with availability from inventory subject to a cap of 100% of availability under clause (i), minus customary priority payables and reserves. The borrowing base is tested on a monthly basis so long as excess availability is equal to or greater than $15,000 and on a weekly basis if excess availability over the most recent 45-day period is less than $15,000. The borrowing base on the ABL Facility was $98,199 based on the Fund s working capital position as at December 31, As at December 31, 2014, there was $43,027 drawn down on the ABL Facility (including letters of credit of $868), leaving an excess availability of $55,172. Borrowings under the ABL Facility are available by way of Canadian prime rate advances, US base rate advances, bankers acceptances, US dollar Libor advances and Canadian and US dollar letters of credit. The ABL Facility bears interest at rates that vary with the Canadian prime rate, US base rate, the bankers acceptance rate and Libor rates plus applicable margins between -0.25% and 2.25% depending on the average excess availability for the preceding quarter. The effective interest rate as et December 31, 2014, including the accretion of deferred financing costs, is 3.6% (December 31, %). As at December 31, 2014, the US dollar portion payable on the ABL Facility was US$36,324 (CAD$42,139). 62 Annual Report 2014 Noranda Income Fund 28

65 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] The ABL Facility matures on July 28, The credit agreement entered into in connection with the ABL Facility contains covenants that restrict the Operating Trust (and the Fund, the Manager, Ontario Inc., the Partnership and its general partner, NILP General Partner Ltd., as guarantors) in several respects, including their ability to make distributions or repurchase the Notes. The ABL Facility also contains customary representations, warranties and covenants and conditions to funding. The ABL Facility credit agreement does not contain financial covenants, provided the Fund s average excess availability over the most recent 45-day period is equal to or greater than $15,000 which was the case as of December 31, In the event that the Fund s average excess availability is less than $15,000 for any 45-day period, the Fund will be required to maintain (i) adjusted tangible net worth of the Fund and its subsidiaries at a level prescribed in the credit agreement and (ii) annual capital expenditures at a level not to exceed 120% of budgeted annual capital expenditures. The ABL Facility credit agreement lists events that constitute an event of default, should they occur. They include the non-payment by the Operating Trust of principal, interest or other obligations of the Operating Trust in respect of the ABL Facility credit agreement, a default under the Notes trust indenture that permits, or has resulted in, the acceleration of the obligations owing to the holders of Notes, and a breach of any covenant pursuant to the ABL Facility credit agreement, subject to customary cure periods where applicable. If any event of default occurs under the ABL Facility credit agreement, the ABL Facility lenders will be under no further obligation to make advances to the Operating Trust and may require the Operating Trust to repay any outstanding obligations pursuant to the ABL Facility credit agreement. The Notes and the ABL Facility are fully and unconditionally guaranteed, on a senior secured basis (subject to the terms of an inter creditor agreement with the lenders under the ABL Facility), by the Fund, the Manager, Ontario Inc., the Partnership and NILP General Partner Ltd., the Partnership s general partner. Under the Notes' trust indenture and the ABL Facility credit agreement, the Fund is permitted to distribute excess cash flows to its Unitholders subject to maintaining the minimum excess availability, compliance with certain financial covenants and other customary restrictions. The proceeds of the ABL Facility are used for working capital and other general corporate purposes. NOTE 11. RESIDUE PONDS REHABILITATION LIABILITIES Residue ponds rehabilitation liabilities were as follows, as at December 31: Balance at beginning of year 21,116 24,691 Accretion of rehabilitation liabilities Site rehabilitation expenditures (264) (415) Change in estimates 5,314 (3,683) Balance at the end of year 26,618 21,116 The Fund had recognized rehabilitation liabilities solely related to the residue ponds within the Processing Facility. The Fund has determined the fair value of this rehabilitation liabilities as at December 31, 2014 by using a discount rate of 2.12% (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. During the year, in preparation for filing cost estimates with the Government of Québec, the Fund completed a review of the residue ponds rehabilitation expenditures which resulted in an increase in the undiscounted amount from $35,900 to $39,400 to be incurred from now until The ultimate amount to be incurred is uncertain. The Fund received the approval of the revised residue pond cost estimate by the Government of Québec. 29 Noranda Income Fund Annual Report

66 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] NOTE 12. EMPLOYEE BENEFITS The Manager participates in two defined benefit pension plans managed and administered by Glencore Canada. The defined benefit obligations recorded by the Fund represent the obligations for those employees who have been working for the Manager since the Fund s inception in May Assets are allocated to the Manager based upon the Pension and Benefits Agreement with Glencore Canada, based on the Manager s share of the defined benefit obligations and its share of contributions made. The first plan is for staff employees ( Staff Plan ) and is a final salary plan based on a set formula. The Staff Plan is entirely funded based upon funding requirements of the plan as determined by the actuarial valuations and the Pension and Benefits Agreement between the Manager and Glencore Canada and has been closed to new entrants since The second plan is for unionized employees ( Unionized Plan ) and membership is based on defined periods of continuous employment and pension benefit rates are determined by negotiated labour agreements. Contributions are made by the employer with no contributions from employees. Contributions are based upon funding requirements of the plan as determined by actuarial valuations and the Pension and Benefits Agreement between the Manager and Glencore Canada. The normal retirement date is the first day of the month coincident with or next following the member s 65th birthday. A member who retires at normal retirement date is entitled to a monthly pension equal to the member s total year of credited service calculated in accordance with the plan text multiplied by the member s effective negotiated rate at the time of retirement. Both pension plans are registered in Québec with each plan s assets being held within a registered pension trust. Each of the pension plans has established a separate Pension Committee. The role of these Pension Committees, with the input from expert advisors, is to closely monitor the status of all aspects of the plans (i.e. assets and liabilities) to make sure they are prudently managed and in compliance with regulatory requirements. Currently the mix of the pension plan portfolio is approximately 43% in equity and 57% in fixed income instruments. The Manager s funding policy for the two defined benefit pension plans is to contribute amounts sufficient to meet minimum funding requirements as set forth by the Pension and Benefits Agreement with Glencore Canada plus such additional amounts as the Manager may determine to be appropriate. 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 recorded by the Fund 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 principal assumptions used in determining pension and post-retirement benefit obligations for the Manager s plans are as follows, for the years ended December 31: Post- Postretirement retirement Pension benefit Pension benefit plans plans plans plans Rate of salary increases 3.25% 3.25% 3.25% 3.25% Discount rate 3.85% 3.90% 4.70% 4.70% Inflation rate 2.00% % - Rate of medical cost increases % (1) % Mortality tables CPM Private sector Table projection scale CPM-B 1994 Uninsured Table with generational improvement using 150% of scale AA (1) Drugs benefits Grading down to 4% in and after 2021; hospital, major medical and dental 4% in 2014 (2) Grading down to 4% in and after 2021 in 2013 (2) Annual Report 2014 Noranda Income Fund

67 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] The Manager s share of (asset) liabilities of the pension and post-retirement benefit plans and the amounts recognized in the Fund s consolidated statements of financial position are as follows, as at December 31: 4,499 13,405 (604) 13,000 The reconciliation of the Manager s share of net employee benefit (asset) liabilities movement in the pension and post-retirement benefit plans are as follows, for the years ended December 31: The components of the Manager s share of benefit expense recognized in earnings attributable to Unitholders and non-controlling interest on the consolidated statements of comprehensive income were as follows, for the years ended December 31: Post- Postretirement retirement Pension benefit Pension benefit plans plans plans plans Defined benefit obligations 85,400 13,405 68,155 13,000 Fair value of plan assets (80,901) - (68,759) Post- Postretirement retirement Pension benefit Pension benefit plans plans plans plans Balance at beginning of year (604) 13,000 15,966 13,476 Net employee benefit expense 7,412 1,180 4,250 1,076 Remeasurement (gain) loss 2, (15,720) (555) Employer contributions (4,725) (906) (5,100) (997) Balance at end of year 4,499 13,405 (604) 13, Post- Postretirement retirement Pension benefit Pension benefit plans plans plans plans Current service cost 3, , Interest cost 3, , Plan amendments 4, Interest income (3,208) - (2,268) - 7,412 1,180 4,250 1, Noranda Income Fund Annual Report

68 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] The components of the Manager s share of actuarial (losses) gain recognized in other comprehensive income on the consolidated statements of comprehensive income were as follows, for the years ended December 31: The reconciliation of the present value of fair value of plan asset and benefit obligations movements were as follows, for the years ended December 31: Plan assets fair value as at January 1 68,759-59,100 - Interest income 3,208 2,268 Return on plan assets (excluding interest income) 5,981-3,635 - Employer contributions 4, , Benefits paid (1,772) (906) (1,344) (997) Plan assets fair value as at December 31 80,901-68,759 - Post- Postretirement retirement Pension benefit Pension benefit plans plans plans plans Actuarial (loss)/gain: Changes in demographic assumptions (701) - (1,090) - Changes in financial assumptions (9,182) (131) 8, Effect of experience adjustments 1,486-4,402 - Return on plan assets (excluding interest income) 5,981-3,635 - (2,416) (131) 15, Post- Postretirement retirement Pension benefit Pension benefit plans plans plans plans Post- Postretirement retirement Pension benefit Pension benefit plans plans plans plans Benefit obligation present value as at January 1 68,155 13,000 75,066 13,476 Current service cost 3, , Interest cost 3, , Plan Amendments 4, Actuarial loss (gain) 8, (12,085) (555) Benefit payments (1,772) (906) (1,344) (997) Benefit obligation present value as at December 31 85,400 13,405 68,155 13, Annual Report 2014 Noranda Income Fund 32

69 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] A breakdown of the plan assets by major asset category of the pension benefit plans were as follows, as at December 31: Cash 1% 2% Short-term notes - 1% Fixed income - Government of Canada 18% 20% Fixed income - Provincial and municipal 19% 15% Fixed income - corporate, preferred shares and foreign government 19% 17% Equities - Canadian 7% 8% Equities - US and international 36% 37% 100% 100% The expected contribution to be made in 2015 to the pension plans is $4,000. The average duration of the defined benefit plan obligation as at December 31, 2014 is 14.9 years (December 31, years). Pre-May 2, 2002 The estimated liability of the pension plans covering the pension obligation of the Manager s employees prior to May 2, 2002, was approximately $96,100 as at December 31, 2014 (December 31, $89,800). There were approximately $97,000 of assets within the pension plan as at December 31, 2014 (December 31, $92,000). 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. Sensitivity analysis A quantitative sensitivity analysis for significant assumptions as at December 31, 2014 has the following impact on the benefit obligation: Sensitivity Level Assumptions 1% increase 1% decrease Impact on benefit obligation Estimates healthcare cost increase rate 771 (681) Discount rate (12,293) 14,263 Future salary increases 645 (634) The impact of a one-year improvement in life expectancy rate would increase benefit obligations by $1,396. The sensitivity analyses above have been determined based on a method that extrapolates the impact on the present value of defined benefit obligations as a result of reasonable changes in key assumptions occurring at the end of the reporting period. 33 Noranda Income Fund Annual Report

70 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Employee benefits expense included in production and selling and administration expense were as follows, for the years ended December 31: Wages and salaries 52,536 52,412 Benefit costs 8,941 9,662 Defined contribution pension costs Pension costs 7,412 4,250 Post-retirement benefit plan costs 1,180 1,076 NOTE 13. PRIORITY AND ORDINARY UNITHOLDERS Priority and Ordinary Unitholders were as follows, as at December 31: 70,847 68, (units) (units) ($thousands) ($thousands) Priority Units Beginning of the year 37,497,975 37,497, , ,932 Comprehensive (loss) income - - (15,926) 23,891 Redeemed Units (8,000) - (80) - Ending of the year 37,489,975 37,497, , ,823 Ordinary Units and Special Fund Units Beginning of the year 12,500,000 12,500,000 71,609 63,645 Comprehensive (loss) income - - (5,309) 7,964 Ending of the year 12,500,000 12,500,000 66,300 71,609 As at December 31, 2014, the Fund had 37,489,975 Priority Units outstanding (December 31, ,497,975). In May 2014, 8,000 units were redeemed for $40 and a gain on redemption of Priority Units of $40 was recorded as other financing income (Note 16). 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. The Partnership has 12,500,000 Ordinary Units (the Ordinary Units ) outstanding (December 31, ,500,000), which are exchangeable into Priority Units on a one-for-one basis only after May 2, 2017, or earlier upon the occurrence of certain events. Each Ordinary Unit is entitled to receive a cash distribution on a monthly basis in an amount that is equal to the monthly cash distribution paid to each Priority Unit, provided each Priority Unit is first paid an amount that is equal to the monthly cash distribution of not less than $ per Priority unit (the Base Distribution ) before any amount is paid to holders of Ordinary Units. See Note 17 for further details. 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. 68 Annual Report 2014 Noranda Income Fund 34

71 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] NOTE 14. OPERATING SEGMENT For management purposes, the Fund is organized into one business unit and has one reportable operating segment. All assets and liabilities of the Fund are held in Canada. Revenues from customers based on their geographic location and product type were as follows, for the years ended December 31: Canada 231, ,633 United states 481, ,641 Other 765 9, , ,509 Zinc 681, ,693 Sulphuric acid 22,339 29,523 Copper and other 8,810 9, , ,509 Management determines revenue concentration based on customers who account for more than 10% of revenues. Revenue from two customers amounted to $320,744 or 45% during the year ended December 31, 2014 (December 31, 2013 one customer amounted to $133,966 or 21%). NOTE 15. RELATED PARTIES The consolidated financial statements include the financial statements of the Fund, the subsidiaries and the structured entity listed in the following table, as at December 31: Country of % Equity Interest 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. 35 Noranda Income Fund Annual Report

72 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] The Manager s financial information consolidated before eliminations by the Fund were as follows: As at December 31: Current assets 4,698 4,657 Non-current assets 4,816 3,938 Total assets 9,514 8,595 Current liabilities 2,326 2,494 Non-current liabilities 17,904 13,000 Total liabilities 20,230 15,494 Net assets attributable to Non-controlling interest (10,716) (6,899) For the year ended December 31: Revenue (Decrease)/increase in net assets attributable to Non-controlling interest (1,955) 773 Other comprehensive (loss) income, net of tax (1,862) 11,897 (Decrease)/increase in comprehensive income attributable to Non-controlling interest (3,817) 12,670 For the year ended December 31: Cash provided by operating activities The Company entered into transactions in the ordinary course of business with Glencore Canada, its subsidiaries and its affiliates as follows, for the years ended December 31: Sales of zinc metal 136,228 59,757 Sales of by-products 30,385 29,524 Purchases of zinc concentrate 388, ,823 Purchases of plant equipment, raw materials and operating supplies 34,880 5,976 Support services 1,954 2,089 Sales agency services 1,601 1,965 Except for the zinc concentrate transactions 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. Compensation of key management personnel of the Fund Expenses related to executive management personnel recorded by the Fund were as follows, for the years ended December 31: Salaries and other short-term benefits 1,144 1,113 Employee benefits ,180 1, Annual Report 2014 Noranda Income Fund 36

73 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] NOTE 16. FINANCE COSTS, NET Finance costs were as follows, for the years ended December 31: Interest on bank and other loans 4,008 4,853 Amortization of deferred financing fees 930 1,107 Interest income and other (110) (112) Accretion of rehabilitation liability ,280 6,371 NOTE 17. DISTRIBUTIONS When not restricted, 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 year so as, to the extent possible, minimize its liability for tax under the ITA in the year. Such distributions are to be made in cash, unless the Fund is restricted from distributing cash or sufficient cash is not available, in which case such distributions are to be satisfied in whole or in part by the issuance of additional Priority Units having a value equal to the amount of cash which is unavailable for distribution. Following such an in-kind distribution, the Priority Units are automatically consolidated such that each certificate representing a number of units prior to the in-kind distribution of additional units is deemed to represent the same number of units after the distribution of additional units and the consolidation. 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 ). If 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. 37 Noranda Income Fund Annual Report

74 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] As at December 31, 2014 and March 10, 2015, the accumulated Deficiency Amount was $23,335 and $24,377 (December 31, $17,049). 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. NOTE 18. COMMITMENTS AND CONTINGENCIES Leases and purchase commitments The Fund had commitments under leases requiring annual rental payments as follows, as at December : and after As at December 31, 2014, the Fund s purchase commitments requiring payments were $10,669 for the next 12 months. Included in the above is $5,358 of purchase commitments to related parties as described in Note 15. Certain agreements for operating costs require the Fund to make minimum purchases, or be subject to penalties. Included in the above is $9,094 of capital commitments relating to the purchase of replacement anodes for the cell house, cold heat exchanger for the acid plant and other plant equipment. 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 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, As of this date, 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. 72 Annual Report 2014 Noranda Income Fund 38

75 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Guarantees Some of the Fund s inceptive agreements, specifically those related to the acquisition of the Processing Facility and the debt, include indemnification provisions in which the Fund may be required to make payments to Glencore Canada or lenders for breach of fundamental representations and warranty terms in the agreements. The Fund indemnifies its trustees and officers against claims reasonably incurred and resulting from the performance of their services to the Fund, and maintains liability insurance for its trustees and officers. As at December 31, 2014, the Fund does not believe these indemnification provisions would require any material cash payments by the Fund. NOTE 19. FINANCIAL INSTRUMENTS Fair value The Fund s significant financial instruments, other than derivatives, comprise bank and other loans, and cash and cash equivalents. The main purpose of these financial instruments is to finance the Fund s ongoing operations. The Fund s derivatives are already carried at fair value using a Level 1 valuation technique in both years (with no transfers between fair value levels during the year ended December 31, 2014). The Fund enters into derivative financial instruments (Note 7) with various counterparties, principally financial institutions with investment-grade credit ratings. The fair value recorded is net of counterparty default risk which had no material effect on the fair value recorded by the Fund. The fair value of the Fund s Senior Secured Notes as at December 31, 2014 amounted to $37,500. The fair value was determined using a Level II valuation technique by using discounted cash flow models that use discount rates that reflect the Fund s borrowing rate as at December 31, The Fund s own non-performance risk as at December 31, 2014 was assessed to be insignificant. Principles of risk management The Fund s primary risk management objective is to protect the Fund s financial position, comprehensive income, and cash flow in support of providing, when possible, monthly cash distributions to Unitholders. The main risks arising from the Fund s financial instruments are credit risk, liquidity risk, interest rate risk, foreign currency risk and commodity price risk. These risks arise from exposures that occur in the normal course of business. From time-to-time, the Fund may use foreign exchange forward contracts and commodity price contracts to manage exposure to fluctuations in foreign exchange and metal prices. The Fund s use of derivatives is based on established practices and parameters, which are subject to the oversight of the Board of Trustees of the Operating Trust. Credit risk Exposure to credit risk arises as a result of transactions in the Fund s ordinary course of business and is applicable to all financial assets. Derivative instruments and similar assets are with approved counter-party banks and other financial institutions. Counter-parties are assessed prior to, during, and after the conclusion of transactions to ensure exposure to credit risk is limited to an acceptable level. The Fund s major exposure to credit risk is in respect of trade receivables. Trade receivable credit risk is mitigated through established credit monitoring activities. These include conducting financial and other assessments to establish and monitor a customer s creditworthiness, setting customer limits, monitoring exposure against these limits, and in some instances moving the customer to cash-in-advance terms. The Fund does not hold collateral as security. 39 Noranda Income Fund Annual Report

76 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Management determines credit risk based on customers who account for more than 10% of accounts receivable. As at December 31, 2014 two customers (including Glencore Canada and affiliates) represented 44% of the accounts receivable balance (December 31, 2013 two customers (including Glencore Canada and affiliates) represented 46% of the accounts receivable balance). As at December 31, 2014, $1,327 of the accounts receivable was fifteen days past due and fully provisioned. (December 31, $591was fifteen days past due but not provisioned). The requirement for impairment is analyzed at each reporting date on an individual basis for major clients. The calculation is based on actually incurred historical data. The Fund s maximum exposure to counterparty credit risk at the reporting date is the carrying value of cash and cash equivalents, accounts receivables, firm commitments, and derivative financial instruments. Liquidity risk Liquidity risk is the risk that the Fund may not be able to settle or meet its obligations on time or at a reasonable price. The Fund manages liquidity risk by maintaining adequate cash and cash equivalent balances, and by appropriately using the Fund s ABL Facility. The Fund continuously reviews both actual and forecasted cash flows to ensure that the Fund has appropriate ABL Facility capacity. The operational, tax, capital and regulatory requirements and obligations of the Fund are considered in the management of liquidity risk. As at December 31, 2014, the Fund had $1,539 of cash (excluding cash held by the Manager) and $55,172 of unutilized ABL Facility. See Note 10 for additional information on the Fund s debt position. The following table summarizes the amount of contractual undiscounted future cash flow requirements for financial instruments as at December 31, 2014 (excluding finance costs (Note 16 and Note 10) and commitments (Note 18): Carrying amount Maturing under one year one to three years over three years Trade and other payables 76,256 76, Dividends payable 1,562 1, Senior secured notes 37,500 15,000 22,500 - ABL revolving facility 42,159-42,159 - Capital lease Derivative financial liabilities Total 158,022 93,092 64,930 - Market risk analysis Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, foreign currency risk and commodity price risk. Financial instruments affected by market risk include bank and other loans, trade receivables, accounts payable and accrued liabilities and derivative financial instruments. The sensitivity analyses has been prepared on the basis that the amount of bank and other loans, trade receivables, accounts payable and accrued liabilities and derivative financial instruments. The sensitivity analyses is intended to illustrate the sensitivity to changes in market variables on the Fund s financial instruments and show the impact on consolidated statements of comprehensive income and net assets attributable to Unitholders and non-controlling interest where applicable. 74 Annual Report 2014 Noranda Income Fund 40

77 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] The following assumptions have been made in calculating the sensitivity analyses: The statement of financial position sensitivity relates to derivatives and US dollar denominated cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued liabilities, and the ABL Facility. The sensitivity of the relevant earnings before income taxes or earnings before finance costs and income taxes is the effect of the assumed changes in respective market risks. This is based on the financial assets and financial liabilities held at December 31, 2014 and 2013 and constant throughout the year. The impact on unitholders and non-controlling interest where applicable is the same as the impact on earnings before income tax. Interest rate risk Interest rate risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Fund is exposed to interest rate risk primarily as a result of exposures to movements in the short term interest rates on the ABL Facility bearing interest at a floating rate. The interest rate sensitivity analysis excludes the interest rate movements on the carrying value of employee benefits and rehabilitation liability. If the market interest rates had been 100 basis points higher (lower) at December 31, 2014 earnings before income taxes would have been $422 lower (higher) (December 31, $2 lower (higher)). Foreign currency risk Foreign exchange risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Fund s foreign exchange risk arises primarily with respect to the US dollar. The Fund s revenue and raw material purchase costs are exposed to foreign exchange risk as commodity sales and raw material purchase costs are denominated in US dollars. The majority of operating expenses, principally labour costs and energy costs, are payable in Canadian dollars. The US dollar revenue exposure is higher than the US dollar raw material purchase cost exposure due to the realization of zinc metal premiums, the sale of copper in cake and sulphuric acid and zinc metal recovery gains in US dollars. The Fund also has exposure to the US dollar for its cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued liabilities, and the ABL Facility. The Fund attempts to manage the overall economic exposure to the US dollar by matching US dollar assets to US dollar liabilities. This currency exposure is managed in part through US dollar overnight transactions. As at December 31, 2014, the Fund had sold forward US dollars with a notional amount of US$96,000 (December 31, 2013 US$92,700) and bought forward dollars with a notional amount of $111,312 (December 31, 2013 $98,494). An unrealized loss of $58 related to these open positions was recorded as at December 31, 2014 (December 31, 2013 an unrealized loss of $102). The impact of foreign currencies has been determined based on the balances of financial assets and liabilities at December 31, This sensitivity does not represent the statement of comprehensive income impact that would be expected from a movement in foreign currency exchange rates over the course of a period of time. If the Canadian dollar had gained or lost 5% against the US dollar, the increase (decrease) in earnings before finance costs and income taxes would have been $6,461/($6,461) as at and for the year ended December 31, Noranda Income Fund Annual Report

78 Notes to the Consolidated Financial Statements December 31, 2014 [$ thousands except as otherwise indicated] Commodity price risk The Fund is subject to price risk from fluctuations in market prices of commodities. The Fund uses future contracts to manage its exposure to fluctuations in commodity prices. The use of the future contracts is based on established practices and parameters. The Fund s commodity price risk associated with financial instruments primarily relates to changes in fair value caused by settlement adjustments to receivables and payables and other financial instruments, including firm commitments. The impact of commodity prices has been determined based on the balances of financial assets and liabilities at December 31, This sensitivity does not represent the statement of comprehensive income (loss) impact that would be expected from a movement in commodity prices over the course of a period of time. The following represents the financial instruments effect on earnings before finance costs and income taxes as at and for the year ended December 31, 2014 from a 10% change to metal prices based on December 31, 2014 LME forward prices: Zinc: 10% increase/decrease (12,769)/12,769 Copper: 10% increase/decrease 554/(554) Capital management The Fund s capital consists of net assets attributable to Unitholders and non-controlling interest. The Fund s objectives when managing capital is to ensure the Fund has the capital and capacity to support the Fund s ability to continue as a going concern, and to enable the Fund to make sustaining and revenue generating capital expenditures. The Fund s long-term objective is to maximize unitholder value and, when possible, provide monthly distributions to Unitholders. The Fund s capital consists of net assets attributable to unitholders and bank and other loans. The Fund s capital structure reflects the requirements of a business in the zinc processing industry that has long-term fixed processing fee supply contracts. The Fund is reducing the amount of debt within the capital structure as it moves closer to the end of the SPA. The Fund s investment in working capital is directly correlated to the price of zinc and is funded by the ABL Facility. The Fund continually assesses the adequacy of its capital structure and capacity and makes adjustments within the context of the Fund s strategy, economic conditions and the risk characteristics of the business. 76 Annual Report 2014 Noranda Income Fund 42

79 CORPORATE INFORMATION Transfer Agent and Registrar Inquiries regarding change of address, unit transfers or distributions should be directed to our registrar and transfer agent: Computershare Trust Company of Canada 1500 University Street, Suite 700 Montréal, Québec H3A 3S8 Tel: (North America) Auditors Ernst & Young LLP Chartered Professional Accountants Montréal, Québec Annual Meeting of Unitholders May 12, 2015 at 2:00 p.m. ET TSX Broadcast & Conference Centre Gallery Room The Exchange Tower 130 King Street West Toronto, Ontario M5X 1J2 Exchange Listing TSX: NIF.UN Head Office 100 King Street West First Canadian Place Suite 6900, P.O. Box 403 Toronto, Ontario M5X 1E3 Processing Facility 860 Gérard-Cadieux Boulevard Salaberry-de-Valleyfield, Québec J6T 6L4 Contact Michael Boone c/o Canadian Electrolytic Zinc Limited Noranda Income Fund s Manager Tel: info@norandaincomefund.com Officers Eva Carissimi President and Chief Executive Officer Michael Boone Vice President and Chief Financial Officer Reid Bowlby Vice President, Marketing Ginette Berthel Corporate Secretary Board of Trustees John J. Swidler, Chair 1,2,3 Chris Eskdale 4 Yvan Jost 4 Jean Pierre (J.P.) Ouellet 1,2,3 François R. Roy 1,2,3 Barry Tissenbaum 1,2,3 Dirk Vollrath 4 1 Member of the Audit Committee 2 Member of the Governance and Human Resources Committee 3 Member of the Independent Committee 4 Related to Glencore plc