EVENT: NORANDA INCOME FUND Q2 RESULTS CONFERENCE CALL. OPERATOR: Good afternoon, ladies and gentlemen. Thank you for

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1 1 EVENT: NORANDA INCOME FUND Q2 RESULTS CONFERENCE CALL TIME: 16H30 E.T. REFERENCE: LENGTH: APPROXIMATELY 28 MINUTES DATE: JULY 30, 2007 OPERATOR: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Noranda Income Fund second quarter 2007 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press '*0' for operator assistance at any time. I would like to remind everyone that this conference is being recorded Monday, July 30th, 2007, at 4:30 p.m. ET. I would now like to turn the conference over to Mr. Michael Boone, Chief Financial Officer of Noranda Income Fund. Please go ahead, sir. MICHAEL BOONE (Chief Financial Officer, Noranda Income Fund): Good afternoon, everyone. Thank you for joining us today for our second quarter conference call. I'll just go through slide 2, the forward-looking statements. During the course of the call, we will be making some forward-

2 2 looking statements that are based on certain assumptions and are subject to a number of risk factors. Forward-looking text appears on this slide, full discussion of the risks and uncertainties can be found in our December 31, 2006 annual MD&A and our 2007 quarterly MD&A. On the call this afternoon are analysts and investors. I would like to welcome those joining us via our website that are on listen-only mode. There are slides to go along with the presentation. You can access these slides by going to the homepage of our website at clicking on Investor Center and then Conference Calls. The presentation is also posted as a PDF file that can be printed. After the presentation, we will be open for questions and answers. Joining me today is Mario Chapados, President and Chief Executive Officer of Noranda Income Fund s Manager. I would like to turn the call over to Mario. MARIO CHAPADOS (President and Chief Executive Officer, Noranda Income Funds): Thank you, Mike, and good afternoon, everyone. On slide number 3 today we recorded a second quarter net loss of $7.9 million compared to net earnings of $9.3 million for the same period in The loss was mainly due to the enactment of Bill C-52 in June of this

3 3 year whereby the Fund recorded a future tax expense of $14.6 million. The tax has no immediate cash impact. Mike will address this in more detail when he speaks. Earnings before income taxes were $6.8 million for the second quarter, compared to $9.3 million a year ago. Zinc metal production was 8 percent lower than last year due to process difficulties in the hydrometallurgical section of the plant. In the second quarter, production was reduced to a series of problems in leaching and purification sections. Organic contamination in the purification process, followed by combination of loss of jarosite crystals and instrumentation bias in a neutral leaching circuit resulted in a reduced throughput of the plant. In addition, the lower zinc content in the feed and higher zinc dust consumption further reduced zinc metallic production. The hydrometallurgical section production problems were resolved at the end of June, while the low metal containing content in the feed is expected to remain for the rest of the year. In the second half of 2006, the change in process to produce no arsenic-containing copper cake negatively impacted zinc metal production, increasing zinc dust consumption. The optimization work to reduce zinc dust consumption at the beginning of the year was, fortunately, also due to

4 4 process instabilities. Efforts will be re-initiated in the third quarter to reduce the zinc dust consumption to normal levels. As mentioned last quarter, the slowdown in sales was expected to continue into the second quarter. Demand for zinc remained soft during the quarter as North American sheet steel producers sustained weak order levels from the automotive and steel service center customers. By the end of June, vehicle and service center inventories had returned to normal levels, and economic indicators now point to a stronger second half. The U.S. housing sector continues to be weak, which will have a dampening effect on the recovery and demand for galvanized sheet steel. Spot sales year-to-date are above plan to offset reduced contract orders from steel customers. We are expecting a recovery in contract order volumes by the end of the third quarter. For the period sales, we are 12 percent lower. On slide number 4, for the first half 2007, net earnings of $8.5 million, were recorded, compared to a net earnings of $13.6 million in the first half of Future income tax is a non-cash item that has no current impact of our cash from operating activities. Earnings before income taxes were $23.2 million for the first six months of 2007, compared to $13.6 million a year ago.

5 5 As mentioned earlier, production has been effected by difficulties in the hydrometallurgical section of the plant. Production in July returned to plant operating throughput. We remain on target for our revised position forecast of 265,000 tonnes. Sales were negatively impacted in auto, housing, and steel sectors. The target for 2007 sales is 272,000 tons. The volume is greater than production because of some plans to reduce inventories to normal levels during the second half of Cash costs. Production costs include labour, energy, supplies, and other costs directly assisted with the production process. In the second quarter of 2007, productions costs were $40 million compared to $41.6 million in Cash costs were $732 per tonne compared to $674 per tonne in the second quarter of 2006, largely due to the lower production. I will now ask Mike to review our financial performance for the second quarter. Then, I will come back to you with our outlook for MICHAEL BOONE: Thanks, Mario. I m on slide 7, Q Second quarter 2007 net revenues were $56 million. This compares to $69 million in the second quarter of The $13 million decrease was due to lower sales and byproduct revenues,

6 6 offset by higher premiums and processing fee. EBITDA for the second quarter was $23 million compared to $24 million the second quarter of Slide 8, Bill C-52. On June 22nd, the federal government substantially enacted the bill that existing income and royalty trusts would be taxed as corporations January 1, The Fund estimates that the unrecognized temporary differences, outstanding as of June 30th, 2007, that would remain outstanding as of January 1, 2011, are approximately $60 million. The recording of this future tax liability related to the temporary differences resulted in the Fund recording a charge to future income tax expense and an increase to the long-term future tax liabilities of $14.6 million in the second quarter of 2007 based on an effective tax rate of 31 percent. The $14.6 million future income tax expense resulted in a net loss for the income tax resulted in a net loss for the second quarter of $7.9 million. This compared to the net earnings of $9.3 million in the second quarter of Again, future income tax is a non-cash item and had no current impact on our cash from operating activities. Earnings before income taxes for the quarter were $6.8 million as compared to $9.3 million for the same quarter of $2.5 million

7 7 decrease was due to lower production, sales, byproduct revenue, and higher interest expense partly offset by higher premiums, processing fee and commodity financial instrument gains. Cash flow. Decrease in earnings before income tax resulted in cash earning from operations of $15 million compared to $20 million in the second quarter of last year. The first half of 2007, net revenues were $129 million. This compares to the $130 million in the first six months of EBITDA for the first half was $54 million compared to $40 million in the same period of For the first half of 2007, net earnings of $8.5 million were recorded compared to net earnings of $13.6 million in the first half of This year's results included $14.6 million of future income tax expense. Earnings before income taxes for the first half were $23.2 million as compared to $13.6 million in the same half of The $9.6 million increase in earnings was due to higher premiums and processing fee, and lower amortization and reclamation costs, partially offset by lower production, sales and byproduct revenues and higher interest expense. The increase in earnings before income taxes resulted in cash earnings from an operation of $40 million compared to $33 million in the

8 8 second quarter of last year. Slide 14, Notional Operating Reserve. Our notional operating reserve now stands at $15.3 million, this compared to a reserve of $11.1 million at the end of Our earnings (loss) variance for the second quarter of 2007 versus the second quarter of Comparing that the second quarter results versus the second quarter of last year, the following were the main variances. Positive price and premium variance of $8 million due to higher premiums, processing fees, and copper prices. Month prior higher pricing positively impacted revenues by $2.9 million as the zinc price increase in 2006 period was more than the zinc price increase in Positive financial instruments variance of $2.5 million related to the implementation of new hedging and financial instruments accounting policies. There was a negative volume variance of $8.9 million into the lower zinc metal sales and production. Lower zinc recoveries resulted in a negative $5.2 million variance

9 9 Higher interest expense of $1.3 million is the higher debt balances - the impact of the higher zinc price on the fund s working capital. A higher income tax expense as a result of the new bill being introduced and it was $14.6 million. Net earnings lost variance for the first half of 2007 versus the first half of The negative variance of $5.1 million can be explained as follows: There was a positive price and premium variance at $14.1 million due to the high premiums and processing fee as well as copper prices. Month-prior pricing positively impacted revenues by $8.8 million. Falling zinc prices in 2007 had a favourable impact and it was amplified when compared to the rising zinc price environment of Amortization reclamation was lower by $3.2 million as a result of the reduction in the present value of future site restoration and reclamation liabilities. There was a negative volume variance of $8.3 million due to

10 10 the lower zinc metal sales and production. There was higher interest expense of $4.7 million. Again, the higher income tax expense of $14.6 million versus no income tax expense from That concludes my comments. I'll turn the call back over to Mario. MARIO CHAPADOS: Thanks, Mike. Slide 18, Production and Sales. Production and sales for 2007 are estimated to be 265,000 and 272,000 tonnes respectively. The processing fee will be at $0.37 a pound. Based on contract sales for 2007, premiums are expected to be $0.10 U.S. a pound. In 2007, copper sulphuric acid prices are expected to remain strong. Capital spending: in 2006, the Fund initiated a number of capital projects to improve productivity and increased revenues over the next few years. In 2007, capital spending is forecasted at $23.5 million. $17 million will be spent on sustaining capital, and $6.5 million will be for revenue enhancement and cost reductions. The majority of the projects will be focused on increasing zinc

11 11 concentrate throughout towards the maximum available concentrate supply under the terms of the Supply and Processing Agreement with Falconbridge. The extra capital expenditure will be allocated toward debottlenecking the plant to increase the capacity with the potential to generate an additional $4 million incremental cash flow starting in At the end of June, these projects were on scheduled for completion at the end of year. The Fund will be negotiating a new three-year labour contract with the United Steel Workers in America this fall. The current contract expires October 31st, That concludes my remarks, Michael. MICHAEL BOONE: Thanks, Mario. Operator, would you give the flooring instructions before we open up for questions and answers? OPERATOR: Certainly. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press the '*' followed by the '1' on your touch-tone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order that they are received. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment please, for your first question. Your first question comes from Jay Turner of BMO Capital

12 12 Markets. Please go ahead. JAY TURNER: Yes, thanks. Good afternoon, everyone. I just wanted to ask a couple quick questions. The premium at 12.8 cents in the quarter - on average based on $0.10 in each quarter for the second half of the year, that's going to raise it closer to $0.11 than $0.10. Are you maintaining that? I was just wondering why the premium shot up so much and then, secondly, does that have a negative impact for the second half of the year? MICHAEL BOONE: Yes, Jay, in terms of the premium, we have left the overall premium of $0.10 for the year. We are carrying some excess inventory, and our plan is to decrease that inventory over the second half of the year. As a result, we expect to have to make some additional spot sales that would be at premiums lower than the contract premiums. That would generate the $0.10-premium. JAY TURNER: Great, thanks. Then, I know you've got this labour negotiation coming up in the fall. I'm just wondering if you could remind us again, what the brief history of labour relations has been there, and when was the last time you had a strike at the facility? MARIO CHAPADOS: I'm not sure I will give you the right answer. I was not here during this time. But, I believe the last strike was during 1986.

13 13 It was about 20 years ago. The climate in the plant is very good. We are in discussions with and are talking to all the employees, the union executives and, in fact, I met all the employees in June, discussing a lot of different subjects, and the climate was very good. The questions were good. We are not expecting any type of dispute during the fall. JAY TURNER: I see. Is contracting out still a big issue there? I think it was, if my memory serves me, a few years back. MARIO CHAPADOS: It was in the past, but this year we showed the union executive our statistics for contracting out. We showed to them that we've reduced the number of contractors in the plant, and they were pleased with that. JAY TURNER: Okay. Great. I'll let somebody else jump on. Thanks. OPERATOR: Your next question comes from Nima Billou of Bloom Investment Council. Please go ahead. NIMA BILLOU: Yes, good afternoon. I just wanted to get a sense of the lower zinc recoveries. You said that the lower content of zinc is going to continue through the end of the year. Is there another mine coming on in 2008 where you expect the content and the quality of the feed to increase? In terms of the consumption (of zinc dust), last time you were trying to alter the process to lower the consumption. Do you anticipate any sort of

14 14 hitches or any disruptions in production in terms of trying to continue to optimize this process? MARIO CHAPADOS: The first question is on the feed. Yes, there's a new mine that will be online next year. One from the northern Quebec called Perseverance. We're expecting to process this concentrate at our plant, but we're still waiting for some indication of the content of the concentrate, the grade of the concentrate, and so on. We don't have all the final numbers. We're still expecting some improvement in the next years. In terms of production that we revised, the operating difficulties in the plant during the last three or four months were resolved and, in fact, in July we have a good month of operations. NIMA BILLOU: And the final question I have in terms of the macro outlook. Will the recovery in the auto sector be more than enough to offset, the difficulties in housing - just wanted to get your thoughts on that. MICHAEL BOONE: Yes, the auto industry would be a much bigger user of zinc than the housing sector would be. In terms of actual usage of zinc, an improvement in the auto sector would be a positive for us and more than offset any negative in the housing. I guess the one part we re unsure about is what type of impact does the housing market problems in the U.S. have on U.S. consumption. That's still a bit of a question mark. I

15 15 think we have to wait and see if that has any lasting impact on consumer consumption. NIMA BILLOU: Okay. That's it for me. Thanks. OPERATOR: Your next question comes from Adam Schatzker of RBC Capital Markets. Please go ahead. ADAM SCHATZKER: Thanks. Hi guys. A few questions, hopefully we can get through them pretty quick. Looking through your sales forecast that you have for the year. If my math tells me right, if we take what you sold already and just divide it equally, that would imply that your sales levels for the next two quarters would be higher than, I guess going back on my numbers, than you've done since Just wondering what your level of confidence is in that sales level, given you have said that you're looking at strengthening, but that certainly is quite a bit of an increase especially over Q2. The other one, I guess for Mike, is regarding the debt. You spoken before about the discussions with the debt holders and the banks about getting that extended. I was wondering how that's going, if you just give us a quick update. The last question is do you have any ideas how much the labour increase might be from negotiations: looking at others, it has been sort of anywhere between 3 and 3.75 percent. That's my questions for today.

16 16 MARIO CHAPADOS: I will try to answer the question of the labour increase. In fact, in our industry, we completed a survey, and it come to something around between 2 and 2.5 percent a year. This year our refinery, CCR, close to Montreal, signed a three-year contract with a 2 percent salary increase a year for the next three years. They are with the Steelworkers too. ADAM SCHATZKER: Okay, so closer to 2 is probably a better number then. MARIO CHAPADOS: That's what was found in reality. ADAM SCHATZKER: Okay. MARIO CHAPADOS: Mike will answer your other two other questions. MICHAEL BOONE: Yes, Adam, in terms of the zinc metal sales confidence that we have in it - that's still what our target is, and our commercial people and our salespeople are working hard to help us get there. I think as reflected in our expected zinc metal premiums for the entire year, that our plan is to take a little bit, and sell it at lower spot premiums than contract premiums. This would help us achieve what we want to get to in terms of the inventory levels for the end of the year. ADAM SCHATZKER: Okay.

17 17 MICHAEL BOONE: And for the question on the debt, I did meet with both the note holders and the banks in terms of the credit facility, and discussions have progressed a fair ways since the last call. We're still finalizing some documentation on that, but we expect to extend within the third quarter our credit facility for an additional year. Depending on how conversations go with the note holders, we re expecting to increase the credit facility to allow us to finance some additional working capital. ADAM SCHATZKER: Okay, thank you. OPERATOR: Ladies and gentleman, if there are any additional questions at this time, please press the star followed by the '1'. As a reminder, if you are using a speakerphone, please lift the handset before pressing the keys. Your next question is a follow-up question from Nima Billou of Bloom Investment Council. Please go ahead. NIMA BILLOU: Yes, just a couple quick questions. Adam touched on it. I just wanted to clarify the $90-odd million coming due with respect to the debt. Is that solely associated within one year with the credit facility? MICHAEL BOONE: Yes, it is. So, we have a credit facility that's coming due on May 3rd, 2008, and so our expectation is in the near future that we would extend out to May 3rd, That's what the $96 million relates to.

18 18 NIMA BILLOU: Okay. Is there any reason (for going short term)? Is it just kind of difficult now to find long-term financing in the markets? Is that why you just want to extend it for a year? MICHAEL BOONE: Our pattern, historically, over the last number of years, is just to have that two-year credit facility, and then we just keep rolling it after the end of the one year. For now, we're comfortable with that. I think what we've seen with the variation in zinc price that it does have a relatively big impact on how much working capital we have and how much debt we have to finance. If there was a drop in the zinc price at some point in the future, then we would expect the amount of financing we require to be lower. That's why, for now, we've continued to do it by way of the flexible credit facility as opposed to the long-term debt. NIMA BILLOU: Got you. And the need for the conversations with the note holders is because of? MICHAEL BOONE: In our note-holder agreement, there's a cap on the amount that the credit facility can be. NIMA BILLOU: Got you. MICHAEL BOONE: We're just talking with them to see if we can get their approval for us to increase that credit facility. NIMA BILLOU: And, the final question just has to do with byproduct

19 19 revenues. The drop in the quarter, one reason cited was sulphur price netbacks, and also, the other was just the timing of copper shipments. With respect to sulphur netbacks, was some of that affected by FX? I guess the second question is, do you expect copper to come back with respect to the time in terms of contribution with respect to byproduct revenues? MICHAEL BOONE: Maybe I'll touch on the netback question first. I think the netback information we were providing was on a U.S. dollar per tonne basis, so there was a drop on a U.S. dollar basis as well as if you had taken into consideration the exchange rate. NIMA BILLOU: Yes. MICHAEL BOONE: On the copper side, prices, at least for the first half of the year, have still been pretty strong, and so if we are able to ship some additional copper in the second half, then we'll see that come through. We did have, in 2006, some concentrate that was very high in copper concentrate. NIMA BILLOU: Got you. MICHAEL BOONE: So, we may not achieve the same level that we did last year in terms of volume. NIMA BILLOU: Okay, so it's almost a question of yield, what you can extract from the byproducts there.

20 20 MICHAEL BOONE: Yes, partially that. NIMA BILLOU: Okay. Thanks very much. MICHAEL BOONE: Thank you. OPERATOR: Gentlemen, there are no further questions at this time. Please continue. MICHAEL BOONE: Okay? Thanks, everyone, for joining us for the second quarter conference call. I'd like to remind everyone that the recording will be available from 6:30 p.m. tonight till midnight on August 6th by dialling or with the reservation number of In addition, it will also be available on our website. Thanks for joining us this afternoon, and we'll talk to you again on November 5th, for our third quarter results. OPERATOR: Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.