noranda income fund annual report 2012 eng_final... · a wholly-owned subsidiary of xstrata canada...

Noranda Income Fund Annual Report 2012 NIF.UN

Noranda Income Fund is an income trust whose unitstrade on the Toronto Stock Exchange under the symbol“NIF.UN”. Noranda Income Fund was created to acquireNoranda Inc.’s CEZ processing facility and ancillaryassets (the “Processing Facility”) located inSalaberry-de-Valleyfield, Québec. The ProcessingFacility is the second-largest zinc processing facilityin North America and the largest zinc processingfacility in eastern North America, where the majorityof zinc customers are located. It produces refined zincmetal 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 Xstrata Canada Corporation.

Contents

IFC AGM information

1 2012 Highlights

2 50 Years of Producing Zinc

3 Letters to Unitholders

4 Management’s Discussion and Analysis

28 Management’s Statement of Responsibility

29 Independent Auditors’ Report

30 Financial Statements

34 Notes to Financial Statements

IBC Corporate Information

Annual Meeting of Unitholders

Will be held at 2:00 p.m. on May 16, 2013 at the TSX Broadcast & Conference Centre, The Exchange Tower, 130 King Street West, Toronto, Ontario M5X 1J2, in the Gallery Room.

Above photo: Operators discuss over a tank containing zinc solution.

Cover photo: Zinc cell house operator ensures proper alignment of cathodes and anodes.

2012 HIGHLIGHTS

40.0

80.0

60.0

2011 2012

up 11%

EARNINGS BEFORE FINANCE COSTS AND INCOME TAXES ($M)$66.7 M2011 $59.9 M

0.01

0.02

0.03

0.04

0.05

Jan11

Mar11

May11

Jul11

Sep11

Nov11

Jan12

Mar12

May12

Jul12

Sep12

Nov12

MONTHLY CASH DISTRIBUTIONS OF $0.04167 WERE PAID TO PRIORITY UNITHOLDERS IN 2012 ($ PER PRIORITY UNIT)

$0.50 per Unit annually

12345678

2011 2012

ZINC PREMIUMS7.5 cents US per pound2011 5.9 cents US per pound

up 27%

60.0

80.0

100.0

120.0

2011 2012

ADJUSTED EBIDTA ($M)$100.7 M2011 $97.6 M

up 4%

ANNUAL REPORT 2012 NORANDA INCOME FUND 1

Financial Highlights

• The Fund completed an internal reorganization that eliminated the requirement for an “in-kind” distribution, commencing in fiscal 2012.

• The Fund issued a monthly cash distribution of $0.04167 per unit to Priority Unitholders ($0.50 annually) in each of the twelve months of 2012.

• Earnings before finance costs and income taxes were 11% higher and totalled $66.7 million.

• Adjusted EBITDA was $100.7 million compared to $97.6 million in 2011.

• Premiums were 7.5 cents US per pound compared to 5.9 cents US per pound in 2011.

Operational Highlights

• The Processing Facility achieved a new quarterly production record of 74,748 tonnes in the fourth quarter of 2012.

• The Fund increased its 2013 capital investment program by $20 million to improve the Processing Facility’s silica removal capability.

• The Processing Facility received an increased supply of zinc concentrate in the fourth quarter. This allows for greater flexibility in blending the new with the current feed mix ensuring a gradual transition.

• The Processing Facility is positioning itself to be able to treat a more varied feed quality mix, prior to the expiration of the Supply and Processing Agreement in 2017.

THE 50TH ANNIVERSARY OF THE PROCESSING FACILITY

• Early in 1961, five mining companies formed Canadian Electrolytic Zinc Limited to build an electrolytic zinc processing facility with a capacity of 65,000 tonnes per year.– The Processing Facility was commissioned in

August 1963.

• Salaberry-de-Valleyfield, Québec, was selected as the location for the new Processing Facility because of its easy access to available rail, maritime and truck routes, a reliable outlet for sulphuric acid, availability of ample power at competitive rates, availability of skilled labour and an adequate supply of cooling water. – All of these features remain as competitive advantages

for the Processing Facility today.

• Since the inception of operations at the Processing Facility:– It has produced 9.5 million tonnes of refined zinc.– Capacity has quadrupled to 265,000 tonnes per year.– Products such as jumbos, slab, shot and powders

have been developed.– It was the first zinc processing facility in the world

to be ISO certified for quality.– The Processing Facility is an industry leader in

environmental and sustainable development performance. The Jarofix Process, which was developed at the refinery, is sold worldwide to other zinc producers. It was also one of the first zinc processing facilities to be ISO certified for environmental performance.

– Over the past 50 years, the Processing Facility has provided employment to approximately 2,700 people; today there are 590 employees.

– Productivity has increased to 460 tonnes per employee in 2012 from 40 tonnes per employee in 1963.

– During the past 10 years, $1.5 million has been donated to support a variety of community programs.

THE 10TH ANNIVERSARY OF THE NORANDA INCOME FUND

• The Noranda Income Fund was founded in May 2002. The Priority Units were listed on the Toronto Stock Exchange under the symbol of NIF.UN.

• Since the inception of the Fund in May 2002, – The Fund has made cash distributions totalling

$7.74 to Priority Unitholders and $7.07 to Ordinary Unitholders.

– Debt was reduced to $98.7 million as at December 31, 2012 from a peak of $244.5 million in 2006 and from $175 million at its inception in 2002.

– A total of $230 million has been spent on sustaining or improving the Processing Facility.

– During the past 10 years, approximately 2.9 million tonnes of refined zinc have been produced.

50 YEARS OF PRODUCING ZINC

2 NORANDA INCOME FUND ANNUAL REPORT 2012

2

4

6

8

10

1963 1975 1987 1998 2012

DURING THE PAST 50 YEARS, THE PROCESSING FACILITY HAS PRODUCED 9.5 MILLION TONNES

OF REFINED ZINC

Cumulative production (million tonnes)

Dear Unitholders,

The Noranda Income Fund (the “Fund”) achieved excellent financial results during fiscal 2012 which supported monthly cash distribution of $0.04167 per Priority Unit ($0.50 per Priority Unit for the year).

The Fund made significant progress on several strategic issues in 2012 including eliminating the in-kind distribution in fiscal 2012 and in subsequent years.

An important issue facing the Fund is the continued source of zinc concentrate to keep the Processing Facility at full capacity after the expiry of the Supply and Processing Agreement in 2017. Xstrata Canada Corporation is required to give notice by November 2016 as to whether it plans to extend this agreement. Regardless of whether this agreement is extended or not, the processing fee will be at market terms which are likely to be lower than those presently enjoyed under the current agreement.

The Board of Trustees, through its Independent Committee, retained the services of an industry consultant in early 2013 to assist in identifying possible alternative sources of zinc concentrate should the agreement not be renewed in May 2017.

Bob Sippel resigned from the Fund’s Board of Trustees in February 2013. He has been a valuable Board member since April 2004. On behalf of the Board, I would like to thank Mr. Sippel for his support and contribution.

We welcome Neil Wardle to the Board. Neil has outstanding industry experience and has been an employee of Xstrata plc for many years.

The Board of Trustees will continue to monitor the results of the Fund and take the necessary action to prepare for a successful transition in 2017. During this year, the Board will ensure that management continues to focus on the delivery of the key capital projects.

In conclusion, I would like to thank our management and employees for delivering strong operating results. I would also like to thank my fellow Trustees for their dedicated efforts which have enabled the Fund to achieve some significant milestones. Finally, my thanks to you, our Unitholders, for your support.

John J. Swidler, FCPA, FCAChairman of the Board

Dear Unitholders,

The Noranda Income Fund recorded earnings before finance costs and income taxes of $66.7 million in 2012, thanks to a strong operational performance, and healthy zinc premiums and sulphuric acid netbacks.

AchievementsDuring the year 2012, the Processing Facility developed a strategy to address the upcoming changes to its feed supply due to the closure of Xstrata Canada Corporation’s Brunswick Mine in March 2013. For the past 50 years, the Processing Facility has received domestic feeds that were low in silica, an impurity commonly present in zinc concentrate.

Going forward, there is a trend towards higher silica levels in zinc concentrate. The Processing Facility is expected to be impacted in two ways: a portion of the Processing Facility’s future feed supply will contain higher silica levels; and a greater portion of the future feed supply will be sourced from outside of Canada.

An investment of $20 million has been approved for the Salaberry-de-Valleyfield, Québec facility. New equipment will be installed to increase the Processing Facility’s silica removal capacity. Commissioning is expected in June 2014. In the meantime, the Processing Facility has built up an inventory of low silica containing concentrate so that it can blend the new with the old concentrate.

This investment, along with a continued focus on productivity and cost improvements, will favourably position the Processing Facility to treat a more varied concentrate mix going forward.

The Processing Facility achieved its best ever safety and environmental performance in 2012 and will continue to strive for continual improvement in 2013.

Our Appreciation and ThanksI would like to commend our employees for their commitment to safely delivering results. I would like to express my sincere appreciation to all of our Trustees, for their guidance and support during a time of change. And on behalf of the management team at Canadian Electrolytic Zinc Limited, I would like to thank you, our Unitholders, for your continued support.

Eva CarissimiPresident and Chief Executive OfficerCanadian Electrolytic Zinc LimitedNoranda Income Fund’s Manager

LETTERS TO UNITHOLDERS


Management’s Discussion and Analysis

2012 HIGHLIGHTS AND SUBSEQUENT EVENTSThis Management’s Discussion and Analysis(‘‘MD&A’’) of the financial position and results of • The Fund completed an internal reorganization thatoperations of Noranda Income Fund (TSX: NIF.UN) eliminated the requirement for an ‘‘in-kind’’ distribution,

starting in fiscal 2012.is the responsibility of management and has been• The Fund issued a monthly cash distribution of

prepared as at February 12, 2013. The board of $0.04167 per unit to Priority Unitholders in each of thetrustees of Noranda Operating Trust carries out its twelve months of 2012.

• The Fund increased its 2013 capital investment program byresponsibility by reviewing this disclosure$20 million to improve the Processing Facility’s silica removalprincipally through its audit committee and itcapability.

approves this disclosure prior to its publication. • The Board of Trustees, through its Independent Committee,has retained the services of an industry consultant to assist in

This MD&A provides a review of the consolidated financial identifying possible alternative sources of zinc concentrateposition, results of operations and performance of Noranda after the expiry of the Supply and Processing AgreementIncome Fund (the ‘‘Fund’’), Noranda Operating Trust in May 2017.(the ‘‘Operating Trust’’), 1884699 Ontario Inc. (‘‘Ontario Inc’’), • Earnings before finance costs and income taxes wereCanadian Electrolytic Zinc Limited (the ‘‘Manager’’ and $66.7 million compared to $59.9 million in 2011.alternatively, the ‘‘Administrator’’) and the Noranda Income • Zinc premiums were 25% or $8.6 million higher thanLimited Partnership (the ‘‘Partnership’’) for the years ended in 2011.December 31, 2012 and 2011. It should be read in conjunction • The Processing Facility received an increased supply of zincwith the Fund’s audited consolidated financial statements and concentrate in the fourth quarter.notes to those statements. • This allows for greater flexibility in blending the new with

the current feed mix ensuring a gradual transition.The Fund has prepared its consolidated financial statements for • At the same time, the Processing Facility is positioningthe years ended December 31, 2012 and 2011 in accordance itself to be able to treat a more varied feed quality mix,with International Financial Reporting Standards (‘‘IFRS’’). All prior to the expiration of the Supply and Processingamounts are expressed in Canadian dollars, the Fund’s reporting Agreement in 2017.currency, except where indicated.

OVERVIEWAdditional information regarding the Fund, including the Fund’sAnnual Information Form dated March 21, 2012, is available on The Fund is an unincorporated open-ended trust, establishedSEDAR at www.sedar.com. under the laws of Ontario, whose priority units (the ‘‘Priority

Units’’) trade on the Toronto Stock Exchange (‘‘TSX’’) under theThis MD&A contains forward-looking information and forward- symbol ‘‘NIF.UN’’. The Fund was created to acquirelooking statements within the meaning of applicable securities Noranda Inc.’s CEZinc electrolytic zinc plant and processinglaws. See ‘‘Forward Looking Information’’ below. facility (together with the associated roasters, acid plants,

remediation facilities, settling ponds, wastewater treatmentplants and related assets and equipment) (the ‘‘ProcessingFacility’’), located in Salaberry-de-Valleyfield, Quebec, in 2002.

As at June 30, 2005, Noranda Inc. changed its name toFalconbridge Limited (‘‘Falconbridge’’) pursuant to a corporateamalgamation. Falconbridge subsequently changed its name toXstrata Canada Corporation (‘‘Xstrata Canada’’) after beingacquired by Xstrata plc (‘‘Xstrata’’).

In November 2012, Xstrata’s shareholders approved theproposed all-share merger of Xstrata and GlencoreInternational plc.

The Administrator, a wholly-owned subsidiary of XstrataCanada (through its Xstrata Zinc Canada division), operates and

4 ANNUAL REPORT 2012 NORANDA INCOME FUND

manages the Operating Trust and the Partnership and and for sales of zinc metal and by-products and relatedadministers the Fund. hedging and derivative arrangements.

The board of trustees of the Operating Trust (the ‘‘Board’’ or The initial term of the Supply and Processing Agreement willthe ‘‘Trustees’’), the majority of whom are independent from end on May 2, 2017 and will automatically renew for a five-yearXstrata Canada, oversees the Fund. The Fund is, in turn, the sole term thereafter, unless Xstrata Canada provides the Partnershipunitholder of the Operating Trust. with written notice to the contrary at least 180 days prior. Under

Concurrently with the creation of the Fund and the acquisition any renewal, Xstrata Canada would act as agent for theof the Processing Facility by the Partnership from Noranda Inc. in Partnership for the purchase of zinc concentrate and the2002, the Administrator entered into various 15-year Partnership would pay the market cost of the zinc concentrateagreements with the Fund and/or the Operating Trust relating to that it receives. Xstrata Canada would also act as exclusive salesthe management, administration and operation of the Fund, the agent for the purchase of zinc concentrate and the sale of zincOperating Trust, the Partnership and the Processing Facility. The metal and by-products and related hedging and derivativeinitial term of these agreements will end on May 2, 2017 and will arrangements.automatically renew for a five-year term thereafter, unless Further details concerning these arrangements relating to theterminated in accordance with the terms. Upon the termination management, administration and operation of the Fund and itsof the operating and management agreement, the Partnership subsidiaries, and the supply and processing of concentrate at thewill acquire the Manager from Xstrata Canada. Processing Facility are described under ‘‘Transactions with

1. Pursuant to an administration agreement dated Related Parties’’ below.April 18, 2002 between the Fund and the Administrator The Processing Facility, which the Fund indirectly owns(the ‘‘Administration Agreement’’), Computershare Trust through the Partnership, produces refined zinc metal and variousCompany of Canada, the sole trustee of the Fund by-products from zinc concentrate purchased from mining(the ‘‘Sole Trustee’’), has delegated all of its power and operations and sells refined zinc products to customers in theauthority to the Administrator, and the Administrator open market. The Fund earns a processing fee for transformingprovides administrative and support services to the Fund. zinc concentrate into zinc metal and it earns additional revenue

2. Pursuant to a management services agreement dated from premiums, by-product revenues and metal gains.April 18, 2002 between the Operating Trust and the The Processing Facility is favourably located along majorManager (the ‘‘Management Services Agreement’’), the transportation networks which connect it to its principal marketsManager provides management services to the Operating in the United States and Canada.Trust. Zinc is central to our daily lives. Its main use is to galvanize

3. Pursuant to an operating and management agreement steel for the construction and automotive industries. Zinc is alsodated May 3, 2002 between the Manager and the used in the production of die-castings and brass. Zinc powders,Partnership (the ‘‘O&M Agreement’’), the Manager oxide and dust are used in the manufacture of batteries, rubberoperates and maintains on an ongoing basis, the tires, pigments and various creams.Processing Facility owned by the Partnership and providesmanagement services to the Partnership. Long-Term Strategy

4. In addition, Xstrata Canada and the Partnership are parties The Board is charged with evaluating the Fund’s long-termto a supply and processing agreement dated May 3, 2002 strategy, and for evaluating and supervising the formulation and(the ‘‘Supply and Processing Agreement’’), pursuant to execution of the Fund’s business and operating plans, which thewhich Xstrata Canada is obligated, except in certain Manager prepares.circumstances, to sell to the Partnership until May 2017 The main issue facing the Fund is the continued source of zincall of its zinc concentrate requirements up to concentrate to keep the Processing Facility running at full550,000 tonnes of zinc concentrate per year at a capacity after the expiry of the Supply and Processing Agreementconcentrate price based on the price of zinc metal on the in May of 2017.London Metal Exchange (‘‘LME’’) for the ‘‘payable zinc The Supply and Processing Agreement will be automaticallymetal’’ contained in the concentrate, less a fixed, renewed with Xstrata Canada for successive periods of five yearsescalating processing fee (calculated in Canadian dollars). unless Xstrata Canada provides the Partnership with writtenPursuant to the Supply and Processing Agreement, Xstrata notice to the contrary at least 180 days prior to the expiry of theCanada acts as exclusive agent for the Partnership to applicable term (by November 2016), of its decision with respectarrange for purchases of any additional zinc concentrate in to an extension, if any, beyond May 2017.excess of the 550,000 tonne amount described above, In order to prepare for the potential non-renewal of the Supply

and Processing Agreement by Xstrata Canada and given the



uncertainty regarding zinc concentrate supply, the Board, under There is no assurance that monthly distributions will continuethe guidance of its Independent Committee, undertook a review in the future; nor is there any assurance that, if they do continue,in 2011 to determine the availability of funds for future the level or frequency of such monthly distributions will not varydistributions while at the same time, to determine whether the from the level of the most recent monthly cash distribution.Fund would be able to secure zinc concentrate in the market, The Fund’s distribution policy and practices are impacted byshould the Supply and Processing Agreement not be renewed. various risks, uncertainties and other factors, which are

The resulting report indicated, without concluding and subject discussed in greater detail in this section and in the sectionsto certain major assumptions, that the Processing Facility could entitled ‘‘Distribution Policy’’, ‘‘Liquidity and Capital Resources’’operate profitably after May 2017 if the Fund was able to secure and ‘‘Forward-Looking Information’’ below.zinc concentrate in the market.

In 2012, the Board, through its Independent Committee, felt Reorganizationit would be prudent to identify possible alternative sources of zinc The Independent Committee of the Board, together with theconcentrate after the expiry of the Supply and Processing Board, reviewed the tax impact and other consequences to theAgreement, knowing that the Partnership may be required to Fund and its Unitholders for the Fund to convert to a corporation,commit funds to ensure its continued supply. while considering the impact of remaining as a trust. The

There can be no assurance that alternative sources of zinc Independent Committee engaged Canaccord Genuity to act asconcentrate will be available or, if available, would be available in an independent advisor to assist them in this regard.sufficient quantities to run the plant at full capacity and on terms In 2012, the Independent Committee decided not to pursue aand conditions, including pricing, that will allow the Processing conversion of the Fund to a corporation. The conversion couldFacility to continue to operate profitably. only have been completed on terms that were acceptable to both

Another step that was taken in 2012 was the commitment to unitholders of the Fund and Xstrata Canada, the holder of theincrease the 2013 capital investment program, enabling the Ordinary Units of the Partnership. The Independent CommitteeProcessing Facility to treat a more varied feed quality mix. During and Xstrata Canada discussed the terms on which such athe year, the Fund was advised that with the closure of Brunswick conversion could occur, but they were unable to reachMine, the Processing Facility may be required to treat an agreement.concentrate containing higher levels of impurities. In order for the As an alternative to a conversion to a corporation, theProcessing Facility to be able to treat a more varied feed quality Trustees, with the support of Xstrata Canada, approved anmix in the future, it is important that it increase its silica removal internal reorganization that eliminated the need for the Fund tocapabilities. Approximately $20 million will be invested in 2013 declare an annual ‘‘in-kind’’ distribution to reduce its effective taxto do so. rate, commencing in fiscal 2012. On December 7, 2012, the

Also in the fourth quarter of 2012, the Processing Facility Fund completed the internal reorganization. Upon completion ofreceived an increased supply of zinc concentrate. Over the next the reorganization, the Operating Trust owns all the shares of ayear, the increased concentrate availability will allow greater newly-formed company, Ontario Inc. Ontario Inc., in turn, ownsflexibility in blending the new with the current feed mix ensuring a the Partnership’s Class A Partnership Units that were previouslygradual transition. At the same time, the Processing Facility is owned by the Operating Trust.positioning itself to be able to treat a more varied feed quality As a result of this reorganization, it is expected thatmix, prior to the expiration of the Supply and Processing unitholders will be taxed only on the income received as cashAgreement in 2017. distributions.

The reorganization did not affect any of the arrangementsOther Developments between Xstrata Canada and the Fund or the Partnership,In 2012, the Board, through its Independent Committee, felt it including the subordination of distributions on Xstrata Canada’swould be prudent, and has since retained the services of an Ordinary Units.industry consultant to assist in identifying possible alternativesources of zinc concentrate after the expiry of the Supply andProcessing Agreement.

Cash DistributionsIn 2012, the Board approved a monthly cash distribution of$0.04167 per Priority Unit in each of the twelve months ofthe year.


RESULTS OF OPERATIONS Production costs before change in inventory in 2012 were$169.9 million compared to $179.4 million recorded in 2011.

Selected Financial Highlights The decrease in costs in 2012 was mostly due to lower labour,($ millions, except per-unit amounts) 2012 2011 2010 contractor and energy costs, partially offset by higher operating

supplies costs. In 2011, there was a non-recurring $6.4 millionSales $ 594.6 $ 663.0 $ 659.1labour cost increase for additional pension benefits and earlyRevenues less raw materialretirement provisions in the new three-year collective agreement.purchase costs 289.6 303.8 271.4

Earnings before income taxes 58.7 43.8 33.3Production Cost BreakdownIncrease in net assets atttributable

Increase/to Unitholders 34.5 12.5 9.2($ millions) 2012 2011 (decrease)Total assets 477.6 447.4 493.1Labour $ 57.3 $ 62.9 $ (5.6)Bank and other loans 95.5 94.2 190.3Energy 60.2 60.9 (0.7)Cash distributions declared perOperating supplies 39.3 37.8 1.5Priority Unit 0.50 0.17 –Other 13.1 17.8 (4.7)In-Kind Distributions declared perProduction cost beforePriority Unit – 0.58 0.48

change in inventory 169.9 179.4 (9.5)Distributions declared per OrdinaryChange in inventory (0.9) 1.8 (2.7)Unit $ – $ – $ –

$ 169.0 $ 181.2 $ (12.2)

In 2012, sales were $594.6 million or 10% lower than theSelling and administration costs in 2012 were $21.1 million$663.0 million which was recorded in 2011. The main factors

compared to $20.1 million in 2011 due to higher labour andexplaining this drop include:insurance costs.• Zinc metal revenues in 2012 were lower because of an 11%

The foreign currency gain in 2012 was $0.7 million comparedreduction in the average LME zinc price and a 2% reduction into a loss of $0.9 million in 2011. The foreign exchange gain inzinc metal sales volumes compared to 2011.2012 was primarily a result of the impact of the strengthening• By-product revenues from sulphuric acid and copper in cakeCanadian dollar on the Fund’s net US monetary liabilities. Thedecreased to $43.4 million in 2012 from $50.4 million inforeign exchange gain was largely offset by a decrease in the2011. The decrease was mainly due to lower copper salesvalue of in-process and finished inventory. The decrease in theand prices.value of inventory is realized in Net Revenues as the metal is sold• These results were partially offset by higher zinc premiums,to customers (thereby decreasing the Net Revenue recorded byprocessing fee and recoveries.the Fund). The Fund’s main US denominated balances areIn 2012, zinc premiums rose to US$0.075 per pound, upcomprised of cash and cash equivalents, accounts receivable,from US$0.059 per pound in 2011. The increase in realizedaccounts payable and a portion of its debt.2012 zinc premiums compared to the previous year reflects the

In 2012, the gain on the derivative financial instruments wasimpact of improved annual contract terms.$1.0 million. In 2011, the loss on the derivative financialTransportation and distribution costs in 2012 of $16.9 millioninstruments was $3.5 million. During these periods, the changewere lower than the $18.7 million recorded in 2011. In 2012,in the market value of the Fund’s financial instruments resultedzinc metal deliveries to customers and copper in cake shipmentsin these amounts being recorded.to Europe for treatment were lower.

In 2012, depreciation was $33.5 million compared to theRaw material purchase costs in 2012 were $288.1 million$34.1 million recorded in 2011. The higher depreciation in 2011compared to $340.4 million in 2011. The decrease was mainlywas due to the reduction in zinc metal inventory, as depreciationdue to the lower average LME zinc metal price and lower volumesthat was previously recorded in inventory was realized upon theof zinc metal sales.sale of the zinc metal.Revenues less raw material purchase costs (‘‘Net Revenues’’)

In 2012, the rehabilitation expense was $3.2 million lower atin 2012 were $289.6 million compared to $303.8 million in$0.9 million, compared to $4.1 million in 2011. The expenses2011. The $14.2 million decrease was mainly due to lowerwere due to a decrease in the risk-free interest rate used toby-product revenues and the provisional pricing feature of thediscount the liabilities, resulting in an increase in the liabilities.Supply and Processing Agreement which decreased the raw

In 2012, net finance costs were $8.0 million compared tomaterial purchase costs in 2011, partially offset by the impact of$16.1 million in 2011. The decrease was due to lower averagehigher premiums.



debt outstanding and due to a $5.5 million reduction in the distribution to a tax rate of 26.9%. The impact of this adjustmentaccretion of deferred financing fees during the year. in 2012 was $4.1 million. As a result of the reorganization,

The current income tax expense was $15.3 million in 2012 deferred tax assets and liabilities were re-measured using the taxcompared to $19.0 million in 2011. Prior to the Fund’s rate applicable to a corporation, which does not vary dependingreorganization in December 2012, the Fund was required to on whether income is distributed or not. The effect of the changerecord tax expense using the ‘‘undistributed’’ rate for both its in the tax rate was to reduce the deferred tax liability bycurrent and deferred taxes, being the highest marginal personal $9.1 million, which was recorded as a deferred incometax rate of approximately 48%. Upon the distribution of taxable tax recovery.income, the income tax provision was adjusted on the

Summary of Quarterly ResultsThe following table provides a summary of quarterly results for the two years ended December 31, 2012 and 2011:

2012 2012 2012 2012 2011 2011 2011 2011Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Revenues $ 150.7 $ 128.6 $ 152.6 $ 145.8 $ 137.8 $ 160.9 $ 164.6 $ 181.0Increase (decrease) in net assets attributable to

Unitholders $ 22.2 $ 2.3 $ 3.5 $ 6.5 $ (13.5) $ 9.3 $ 6.0 $ 10.7Production (tonnes) 74,748 60,615 65,521 62,813 67,504 63,923 67,906 63,953* 1 tonne = 2,204.62 pounds

Fourth-Quarter 2012 Results In the fourth quarter of 2012, zinc metal production was arecord 74,748 tonnes compared to 67,504 tonnes in the sameThe Fund reported earnings before finance costs and incomequarter of 2011. Zinc metal production was higher because of ataxes of $24.3 million in the fourth quarter of 2012 compared tosignificant reduction in the third quarter work-in-process$2.4 million in the same quarter a year ago. The $21.9 millioninventory. Zinc recoveries in the fourth quarter of 2012 wereincrease was mainly due to higher revenues being realized in97.6% compared to 96.6% in the fourth quarter of 2011.2012 compared to 2011. In addition, in 2011 a non-recurring

Fourth quarter 2012 sales were 67,511 tonnes versus$7.1 million cost increase was recorded for additional pension63,655 tonnes in the fourth quarter of 2011. In the fourthbenefits and early retirement provisions in the new three-yearquarter of 2012, zinc metal demand from the galvanizing and thecollective agreement.die cast alloy sectors was supported by improved automotiveRevenues in the fourth quarter of 2012 were $150.7 million,sales and a recovery in private construction.up from the $137.8 million recorded in the same quarter of

Zinc metal premiums were US$0.075 per pound in the fourth2011. Much of this increase was due to higher zinc metal andquarter of 2012 compared to US$0.058 per pound in the samecopper in cake sales, and higher premiums and copper prices,quarter of 2011, primarily due to higher premiums realized onpartially offset by lower sulphuric acid sales.contract sales.

In the fourth quarter of 2012, the Fund generatedQ4 2012 Q4 2011$12.2 million in revenue from the sale of its copper in cake andZinc metal production (tonnes) 74,748 67,504sulphuric acid compared to $11.2 million achieved in the fourthZinc metal sales (tonnes) 67,511 63,655quarter of 2011.Zinc metal premium (US$/pound) 0.075 0.058

Revenues from the sale of sulphuric acid were $7.7 million inBy-product revenues ($ millions) 12.2 11.2the fourth quarter of 2012, up from $7.5 million in the fourthCopper in cake production (tonnes) 790 594quarter of 2011, as a result of higher netbacks. Sulphuric acidCopper in cake sales (tonnes) 734 585sales totalled 97,419 tonnes in the fourth quarter of 2012,Sulphuric acid production (tonnes) 99,884 104,798compared to 100,541 tonnes in the fourth quarter of 2011.Sulphuric acid sales (tonnes) 97,419 100,541

Copper in cake revenues were $3.4 million in the fourthAverage LME copper price (US$/pound) 3.59 3.40

quarter of 2012 compared to $3.7 million in the fourth quarter ofSulphuric acid netback (US$/tonne) 80 73

2011, as a result of a negative provisional pricing settlement in* 1 tonne = 2,204.62 pounds

2012 compared to a positive provisional pricing settlement in2011, offset by higher copper prices and sales volumes. Copperin cake sales volumes in the fourth quarter of 2012 totalled734 tonnes compared to 585 tonnes in the correspondingperiod of 2011.


Cash provided from operating activities, before net changes in The following table provides a summary of the performance ofnon-cash working capital items in the fourth quarter of 2012, these key drivers for the years ended December 31, 2012was $17.4 million compared to $18.0 million in the fourth and 2011. The discussion of key performance drivers that followsquarter of 2011. During the fourth quarter of 2012, non-cash is subject to various risks and uncertainties, some of which areworking capital increased by $36.5 million. The increase in discussed under ‘‘Risks and Uncertainties’’ and ‘‘Forward-working capital resulted primarily from an increase in inventories, Looking Information’’ below, which investors are encouraged toaccounts receivable and income taxes payable, partially offset by read carefully.an increase in accounts payable and accrued liabilities. The

Year 2012 2011increase in inventories in the fourth quarter was a result ofZinc concentrate processed (tonnes) 497,183 504,851additional deliveries of zinc concentrate that were received. TheZinc grade (%) 54.0 54.1increased concentrate availability allows for more flexibility inZinc recovery (%) 97.2 96.8blending the various feeds, ensuring a gradual transition to theZinc metal production (tonnes) 263,697 263,286new feed mix in 2013.Zinc metal sales (tonnes) 260,401 266,814Capital expenditures in the fourth quarter of 2012 wereProcessing fee (cents/pound) 39.2 38.9$9.0 million, compared to $9.1 million in the fourth quarter ofZinc metal premium (US$/pound) 0.075 0.0592011. Sustaining capital accounted for almost all of theBy-product revenues ($ millions) 43.4 50.4expenditures in the last quarter of 2012.

Copper in cake production (tonnes) 2,202 2,604Cash distributions paid to Priority Unitholders during the fourthCopper in cake sales (tonnes) 1,951 3,396quarter of 2012 totalled $4.7 million, unchanged from the fourthSulphuric acid production (tonnes) 408,849 419,003quarter of 2011.Sulphuric acid sales (tonnes) 410,358 414,010

Average LME copper price (US$/pound) 3.61 4.00KEY PERFORMANCE DRIVERSSulphuric acid netback (US$/tonne) 76 72Average LME zinc price (US$/pound) 0.88 0.99The principal factor affecting the Fund’s performance is theAverage US/Cdn. exchange rate 1.00 0.99processing of zinc concentrates into zinc metal. This activity* 1 tonne = 2,204.62 poundsresults in the Fund earning a processing fee. In 2012, the

processing fee accounted for 74% of the Fund’s Net RevenuesZinc Metal Production Capacity(2011 – 77%).The amount of zinc metal produced in a year is a function of fourA second key factor affecting the performance of the Fund ismain factors: (1) the volume of zinc concentrate processed;the premiums that are realized on the sale of zinc products to(2) the grade of the zinc concentrate processed; (3) the zinccustomers. Zinc metal is sold to customers on the basis of anrecoveries; and (4) changes to work-in-process inventory levels.LME zinc price plus a premium that is negotiated between the

In 2012, 497,183 tonnes of zinc concentrate was processedbuyer and seller. Premiums can vary according to various factorscompared to 504,851 tonnes in 2011. In 2012, the averageincluding product form, quantity, quality and payment terms. Inconcentrate grade was 54.0% and zinc recovery was 97.2%2012, product premiums accounted for 10% of the Fund’s Netcompared to 54.1% and 96.8%, respectively, in 2011.Revenues (2011 – 6%).

While the quantity of zinc concentrate processed in 2012 wasBy-product revenues (copper in cake and sulphuric acid) andlower than in 2011, zinc metal production in 2012 waszinc metal recovery gains generated 14% and 2%, respectively,263,697 tonnes, unchanged from the 263,286 tonnesof the Fund’s Net Revenues in 2012 (2011 – 15% and 2%).produced in 2011 because zinc recoveries were higher andThe Canada/US exchange rate also impacts the Fund’sbecause of a drawdown of work-in-process inventories,performance through premiums, by-product revenues and zincparticularly in the fourth quarter of 2012.recovery gains which, collectively, represented 26% of the 2012

The Fund pays for 96% of the zinc in the concentrate itNet Revenues (2011 – 23%). As the processing fee is earned inpurchases; therefore, any recovery over 96% results in additionalCanadian dollars, 74% of the Fund’s Net Revenues are notrevenue for the Fund.exposed to currency risk.

In 2012, the bulk of the zinc concentrate came from sixTwo other performance drivers that impact the Fund aremines: Brunswick, Antamina, Perseverance, Kidd Creek, Langloismanaging costs and a disciplined use of capital.and Mount Isa. Five of the six mines are owned or partly-ownedThe Fund provides annual guidance for a number of its keyby entities within the Xstrata Zinc group.performance drivers, including production, sales, processing fee

and capital expenditures. Guidance for 2013 key drivers can befound in ‘‘Outlook’’ below.



The Processing Facility Transitions to a New Feed Mix quarter of 2012. This, in fact, occurred with fourth quarterIn March 2012, Xstrata Zinc Canada announced that Brunswick production reaching a new record of 74,748 tonnes. The delay inMine was expected to close no later than March 2013. This Mine the completion of the project is not expected to impact thehas been a major supplier to the Processing Facility for most of overall capital expenditure for the project. The project requiresthe fifty years that the Processing Facility has operated. With the that two cells are always off-line for rehabilitation, therebyclosure of Brunswick Mine, the future feed mix to the Processing reducing availability of the cell house by approximately 2%.Facility may contain an increased level of impurities. During The target for 2013 annual production is 265,000 tonnes.2012, there was no material change to the level of impurities in The annual zinc metal production capacity of the Processingthe concentrate that was treated. Facility, under normal operating conditions, is 270,000 tonnes of

While future feeds are expected to still be within the zinc. The Fund continues to believe that the Supply andspecifications set out in the Supply and Processing Agreement, Processing Agreement will provide sufficient concentrate to runthe Processing Facility may experience an increase in its the Processing Facility at its productive capacity until itsoperating costs, working capital requirements and/or capital anticipated expiry in 2017.expenditures as a result of being required to treat a more varied The targets for annual zinc metal production and the timing offeed quality stream. Higher amounts of impurities may also the completion of the replacement of the cell house liners, andnegatively impact the volume of zinc concentrate that can be future expected annual production capacity, operating costs,processed, resulting in a lower overall production. working capital, capital expenditures, the level of impurities in

In December 2012, the Fund announced that it was making a the concentrate and the level of the zinc concentrate inventorycapital investment of $20 million in 2013 to increase the are subject to various risks and uncertainties, some of which areProcessing Facility’s capability for removing silica, an impurity in set out under ‘‘Forward-Looking Information’’ below.the zinc concentrate. Approximately $5 million has beenapproved to procure long-delivery items, conduct a pilot plant Salesstudy and complete feasibility engineering on the project. The Zinc metal is used in a wide range of industries. Its major use isbulk of the investment is expected to occur in 2013 and the in the production of galvanized steel. Sales in 2012 wereproject is scheduled to be completed by June 2014. 260,401 tonnes compared to 266,814 tonnes in 2011. During

In addition, as a result of the expected feed changes noted the year, zinc metal inventories increased by approximatelyabove, the Processing Facility received increased deliveries of 3,300 tonnes.zinc concentrate in the fourth quarter of 2012. The additionalconcentrate will be used for blending with the new feed mix, Processing Feeensuring a gradual transition. The additional concentrate In 2012, the processing fee was $0.392 per pounddeliveries increased inventories by approximately $28.1 million ($864 per tonne), compared to $0.389 per poundin 2012. Most of this additional concentrate is expected to be ($858 per tonne) in 2011. The processing fee is adjustedprocessed by the third quarter of 2013. annually: (i) upward by 1% and (ii) upward or downward by 10%

Going forward, inventory levels are expected to be more of the year-over-year percentage change in the average cost ofvariable, as larger and more irregular seaborne deliveries of electricity per megawatt hour for the Processing Facility. Basedconcentrate will replace some of the regular rail deliveries from on the annual 1% increase and the average increase in electricityOntario, Quebec and New Brunswick. costs, the processing fee for 2013 is expected to be

The fact that the Processing Facility successfully treated $0.395 per pound.higher levels of silica in concentrate feeds in December 2012was very encouraging. Going forward, the ability of the PremiumsProcessing Facility to treat a wide variety of zinc concentrate Zinc metal premiums averaged US$0.075 per pound in 2012feeds is required so that it can continue to operate at compared to US$0.059 per pound in 2011. The increase infull capacity. realized premiums compared to last year reflected the impact of

improved annual contract and spot premiums in North America.Liner Replacement ProjectIn 2010, the Processing Facility began a project to replace the By-productsliners protecting the concrete walls in the cell house. It was The Fund produces copper in cake and sulphuric acid asexpected to be completed by mid-2013, however, the Fund by-products from refining zinc concentrate. In 2012, the Fundannounced in the third quarter 2012 MD&A, the decision to generated $43.4 million in revenue from the sale of its copper indelay the completion of the project until the end of 2013. The cake and sulphuric acid compared to $50.4 million in 2011.rationale was to maximize zinc metal production during the fourth


Adjusted Earnings before Distributions to Unitholders,Copper in CakeFinance Costs, Income Taxes, Depreciation and AmortizationCopper in cake revenues in 2012 were lower at $11.1 million

compared to $20.4 million in 2011. The main reason for the (‘‘Adjusted EBITDA’’)significant drop in revenue was the decline in copper in cake Adjusted EBITDA is used by the Fund as an indication of cashsales volumes to 1,951 tonnes in 2012 from 3,396 tonnes in generated from operations. Adjusted EBITDA is not a recognizedthe prior year. This result was because of the lower copper measure under IFRS and therefore the Fund’s method ofcontent in the 2012 feed mix. In 2012, copper prices were also calculating Adjusted EBITDA is unlikely to be comparable tolower at $3.61 per pound, compared to $4.00 per pound methods used by other entities.in 2011. The Fund’s Adjusted EBITDA is calculated by adjusting

earnings before finance costs and income taxes for all of thenon-cash items such as depreciation, rehabilitation expense, netSulphuric Acidchange in employee benefits, loss on the sale of assets, changesRevenues from the sale of sulphuric acid rose to $31.0 million inin fair value of embedded derivatives and non-cash2012 from $29.5 million in 2011. Sulphuric acid netbacks ingains/(losses) on derivative financial instruments.2012, which were supported by higher spot and contract pricing,

The Fund’s Adjusted EBITDA is currently supported by therose to US$76 per tonne from US$72 per tonne in 2011. Salesstability provided in the Supply and Processing Agreement. It mayvolumes were lower in 2012 at 410,358 tonnes compared tobe subject to more variability when this agreement expires414,010 tonnes a year ago.in 2017.Although sulphuric acid market fundamentals weakened

A reconciliation of Adjusted EBITDA in 2012 and 2011 istowards the end of 2012, contract pricing which applied to aboutprovided below:85% of sales, kept the Fund’s sulphuric acid netback strong for

the year.Adjusted EBITDA

Exchange Rate ($ thousands) 2012 2011

The stronger Canadian dollar has had a negative impact on the Earnings before finance costs andFund’s financial results. In 2012, a one-cent Canadian income taxes $ 66,654 $ 59,860strengthening in the average Canadian/US exchange rate would Depreciation of property, plant andhave negatively impacted the Fund’s earnings before finance equipment 33,502 34,126costs and income taxes by approximately $0.8 million. In 2012 Net change in rehabiliation liability 521 4,111and 2011, the Canadian dollar remained stable at an annual (Gain) loss on derivative financialaverage of $1.00 per US dollar. See also ‘‘Risks and instruments (2,899) 3,757Uncertainties’’ below. Change in fair value of embedded

derivatives 5,593 (11,254)Costs (Gain) loss on sale of assets (380) 746Production costs before change in inventory in 2012 were Net change in employee benefits (2,331) 6,245$169.9 million compared to $179.4 million recorded in 2011. $100,660 $ 97,591The decrease in costs in 2012 was mostly due lower labour,contractor and energy costs, partially offset by higher operating

OPERATING CASH FLOWSsupplies costs. In 2011, there was a non-recurring $6.4 millionlabour cost increase for additional pension benefits and early

Cash provided by operating activities in 2012, before netretirement provisions in the new three-year collective agreement.changes in non-cash working capital items, was $64.6 millioncompared to $71.5 million in 2011. During 2012, non-cashCapital Expendituresworking capital increased by $39.3 million due to an increase inCapital spending was $27.0 million in 2012 compared toaccounts receivable and inventories and an increase in the$27.3 million in 2011. Most of the annual 2012 capitalincome taxes payable. During 2011, non-cash working capitalinvestment was spent on sustaining the Fund’s operations,decreased by $55.3 million due to a decrease in accountsincluding $3.7 million on the cell house rehabilitation project andreceivable and inventories and an increase in the income$9.0 million on replacement anodes for the cell house.taxes payable.



DISTRIBUTION POLICY cash, unless the Fund is restricted from distributing cash orsufficient cash is not available, in which case such distributions

Distribution Policy are to be satisfied in whole or in part by the issuance ofWhen not restricted and when possible, and as may be additional Priority Units having a value equal to the amount ofconsidered appropriate by the Board, the Fund’s policy is to cash which is unavailable for distribution. Following such anmake distributions at sustainable levels to Unitholders equal to ‘‘in-kind’’ distribution, the Priority Units are automaticallydistributable cash flows from operations (as discussed below). consolidated such that each certificate representing a number ofThe Fund determines the cash available for distribution, if any, on units prior to the ‘‘in-kind’’ distribution of additional units isa monthly basis for the Unitholders of record of the Fund on the deemed to represent the same number of units after thelast business day of each calendar month and these distributions distribution of additional units and the consolidation.are to be paid on or about 25 days thereafter. In 2012, the In December, 2012, the Fund completed an internalBoard approved monthly cash distributions of $0.04167 per reorganization which eliminated the requirement for an ‘‘in-kind’’Priority Unit in each of the twelve months of the year. The Board distribution commencing in fiscal 2012.has determined that monthly distributions of $0.04167 can be On December 12, 2011, the board of trustees of thesustained for the present time. Operating Trust approved an ‘‘in-kind’’ distribution of

Cash distributions on the Ordinary Units of the Partnership $21.7 million or $0.58 per unit to the Fund’s Priority Unitholdersheld indirectly by Xstrata Canada are subordinated to of record as at December 31, 2011, in accordance with thedistributions on Priority Units of the Fund until May 2017, except provisions of the Trust Indenture.upon the occurrence of certain events. The Fund’s distribution policy and practices are impacted by

In the event of an exchange of Ordinary Units on a one-for-onevarious risks, uncertainties and other factors, which are

basis for Priority Units on or after May 2, 2017, or earlier upondiscussed in greater detail in this section and in the sections

the occurrence of an early exchange event, any accumulatedentitled ‘‘Liquidity and Capital Resources’’ and ‘‘Forward-Looking

deficiency amount related to the Ordinary Units prior to theInformation’’ below.

exchange is not accrued by the Fund until such time that excesscash is available for distribution above the monthly cash

Cash Available for Distributiondistribution of $0.08333 per Priority Unit, and a cash distribution

The Fund’s objective is to maximize unitholder value and, whenis approved by the Board. Upon the exchange, the holder of

possible, make a sustainable level of distributions to Unitholders.Ordinary Units has the right to receive any distribution declared

‘‘Cash available for distribution’’ is used by the Fund as anbut not paid on the Ordinary Units as at that time and aindication of cash generated from operations that is available forpromissory note in the amount of the outstanding accumulateddistribution to Unitholders. Cash available for distribution is not adeficiency amount. Subsequent to an exchange, there is norecognized measure under IFRS and therefore the Fund’sfurther accumulation of the deficiency amount.method of calculating cash available for distribution is unlikely toAs a result of Xstrata Canada’s subordination, no distributionsbe comparable to methods used by other entities. Cash availablehave been declared to the Ordinary Units since January 2009.for distribution is calculated by taking cash provided by (used in)The accumulated distribution deficiency amount wasoperating activities before distributions to Unitholders and$10.8 million as at December 31, 2012 and $11.4 million as atchanges in non-cash working capital, and by subtractingFebruary 12, 2013. For further details on the terms of thepurchases of equipment, debt financing cost and permanentsubordination, reference should be made to the Fund’sdebt repayments, cash provided by the Manager’s operatingPartnership Agreement dated May 1, 2002, which is available onactivities and amounts retained for reserves. Distributable cashSEDAR at www.sedar.com.per Priority Unit and Ordinary Unit is calculated as distributableThere is no assurance that monthly distributions will continuecash divided by the number of Priority and Ordinary Unitsin the future; nor is there any assurance that, if they do continue,outstanding, respectively at the end of the year.the level or frequency of such monthly distributions will not vary

Reserves reflect amounts that may be required to pay forfrom the level of the most recent monthly cash distribution.potential closure costs at the Processing Facility and otherThe Fund, as a specified investment flow-through (‘‘SIFT’’), isamounts as considered necessary by the Board. The closuresubject to tax on its ‘‘non-portfolio earnings’’ (as defined in thecosts include estimated severance payments, pension andIncome Tax Act (Canada) (the ‘‘ITA’’)) (the ‘‘NPE’’) at the sameretirement benefit plans and site rehabilitation costs. Therate as a Canadian corporation provided it distributes a sufficientamounts required to fund such reserves have been establishedportion of such earnings to Unitholders.by third-party independent professionals based on certainThe Fund is required by its Trust Indenture to distribute eachassumptions. Should these assumptions need to be modifiedyear amounts equal to the sum of its non-NPE and a specifieddue to changing circumstances, the amount of the necessarypercentage of its NPE (2012 – 73.1%; 2011 – 71.6%) for thereserves may increase or decrease, with a corresponding effectyear so as, to the extent possible, minimize its liability for tax

under the ITA in the year. Such distributions are to be made in on cash available for distribution.


Tax PoolsThe Fund is also subject to the Operating Trust maintaining aThe Fund has certain tax pools available to shelter taxableminimum excess availability of cash per the asset-basedincome. The largest of these tax pools are capital cost allowancerevolving credit facility (the ‘‘ABL Facility’’) and other customary(‘‘CCA’’) deductions. These pools are available to the Unitholdersrestrictions pursuant to the terms of both its ABL Facility and thein proportion to their respective interest in the Partnership. As atsenior secured notes (‘‘the Notes’’) (as discussed below underDecember 31, 2012, the CCA tax pools available were‘‘Liquidity and Capital Resources’’).as follows:A reconciliation of cash provided by operations to cash

available for distribution for the periods January 1, 2012 to($ thousands)

December 31, 2012 and July 1, 2011 to December 31, 2011 is Class Federal Quebec Rateprovided below: 1 $ 8,511 $ 8,510 4%

1 7,538 7,538 6%January 1, 2012 July 1, 2011

3 665 616 5%to to($ thousands) December 31, 2012 December 31, 2011 6 3 3 10%Cash provided by operating 8 3 1 20%

activities $ 25,314 $ 68,387 10 25 10 30%Capital adjustments: 17 8 6 8%

Purchase of property, 26 312 303 5%plant and equipment (27,013) (14,303) 39 – – 25%

Debt financing costs – (5,088) 41 110,168 117,675 25%Total capital adjustments (27,013) (19,391) Total $ 127,233 $ 134,662Other adjustments:

Distributions declared to LIQUIDITY AND CAPITAL RESOURCESPriority Unitholders 18,750 6,249

Scheduled debt As at December 31, 2012, the Fund’s debt was $95.5 millionrepayment (15,000) (7,500) (net of deferred financing fees), up from $94.2 million at the end

Increase/(decrease) in of December 2011. The Fund’s cash as at December 31, 2012non-cash working totalled $1.3 million.capital 39,297 (31,510)

Elimination of the Long-Term RefinancingManager’s cash

Senior Secured Notesprovided by operatingAs at December 31, 2012, the Operating Trust had $67.5 millionactivities (193) (99)of Notes outstanding. Prior to December 28, 2016, the NotesTotal other adjustments $ 42,854 $ (32,860)are being amortized by an amount of $7.5 million on aDistributable Cash beforesemi-annual basis on June 28 and December 28 of each year.reserve $ 41,155 $ 16,136The $15 million remaining principal balance will be repayable at

Increase in reserve (22,405) (9,887)maturity on December 28, 2016. Under the Notes’ governing

Distributable Cash $ 18,750 $ 6,249trust indenture, the Fund is permitted to distribute excess cashflows to its Unitholders subject to compliance with certain

Weighted average number offinancial covenants and other customary restrictions.

Priority Units outstandingThe Notes’ trust indenture lists events that constitute an

(basic and diluted) 37,497,975 37,497,975event of default, should they occur. They include the

Distributable cash pernon-payment by the Operating Trust of principal, interest or other

Priority Unit $ 0.50004 $ 0.16668obligations of the Operating Trust in respect of the Notes and a

Distributions declared perbreach of any covenant pursuant to the ABL Facility credit

Priority Unit $ 0.50004 $ 0.16668agreement (discussed below), subject to customary cure periods

Weighted average number ofwhere applicable. If any event of default occurs under the Notes’

Ordinary Unitstrust indenture, the holders of the Notes may require the

outstanding (basic andOperating Trust to repay any outstanding obligations pursuant to

diluted) 12,500,000 12,500,000the Notes’ trust indenture, which would, among other things,

Distributions declared per negatively impact the Operating Trust’s ability to make cashOrdinary Unit $ – $ – distributions.



ABL Facility It was also expected that there would be a three-yearThe Operating Trust’s ABL Facility provides availability of up to transition period after the date of Bill 14 would have become law.$150 million with a maturity date of July 28, 2016. Under the The financial security was expected to be in the form of cash,credit agreement entered into in connection with the ABL Facility, letter of credit, or another acceptable form.the Fund is permitted to distribute excess cash flows to its Under the current Mining Act, the Fund posted financialUnitholders subject to maintaining a minimum excess availability security, in the form of letters of credit, starting with $0.1 millionand other customary restrictions. The borrowing base is tested in 2012. This financial security is expected to increase over theon a monthly basis so long as excess availability is equal to or next several years until it reaches a cumulative total ofgreater than $15 million and on a weekly basis if excess $11.7 million in 2022.availability over the most recent 45-day period is less than Any financial security that is posted under the current$15 million. legislation or any amended legislation is expected to reduce the

As at December 31, 2012, the borrowing base on the ABL excess availability on the ABL Facility, and may negatively impactFacility based on the Fund’s working capital position was cash available for distribution, if any, to Unitholders.$113.7 million: $30.4 million was drawn (including $0.1 million The Fund has provided certain forward-looking informationletters of credit), leaving an excess availability of $83.3 million. regarding the Notes, the ABL Facility and financial security under

The ABL Facility credit agreement lists events that constitute the Mining Act, which are subject to various risks andan event of default, should they occur. They include the uncertainties. Some of the risks, uncertainties and assumptionsnon-payment by the Fund of principal, interest or other underlying this information can be found in the section entitledobligations of the Fund in respect of the ABL Facility credit ‘‘Forward-Looking Information’’ below.agreement, a default under the Notes’ trust indenture thatpermits, or has resulted in, the acceleration of the obligations OUTSTANDING UNITS

owing to the holders of Notes, and a breach of any covenantpursuant to the ABL Facility credit agreement, subject to the Outstanding Unit Data As at February 12, 2013

customary cure periods where applicable. If any event of default Priority Units 37,497,975occurs under the ABL Facility credit agreement, the ABL Facility Ordinary Units and Special Fund Units 12,500,000lenders will be under no further obligation to make advances tothe Fund and may require the Fund to repay any outstanding As noted above, a wholly-owned subsidiary of Xstrata Canadaobligations pursuant to the ABL Facility credit agreement, which holds 12,500,000 Ordinary Units of the Partnership, whichwould, among other things negatively impact the Fund’s ability to represent all of the outstanding Ordinary Units of the Partnership,make cash distributions. and which are exchangeable for Priority Units on a one-for-one

The Notes and the ABL Facility are fully and unconditionally basis on or after May 2, 2017, or earlier upon the occurrence ofguaranteed, on a senior secured basis (subject to the terms of certain events. The 12,500,000 outstanding special voting unitsan intercreditor agreement with the lenders under the ABL of the Fund listed above (the ‘‘Special Fund Units’’) provideFacility), by the Fund, the Manager, the Partnership and NILP voting rights in respect of the Fund to the holder of OrdinaryGeneral Partner Ltd., the Partnership’s general partner. Units. Further details concerning the rights, privileges and

restrictions attached to the Fund’s outstanding Priority Units andFinancial Security Special Fund Units and the outstanding Ordinary Units of theIn May 2011, the provincial government of the province of Partnership, are contained in the Fund’s Annual InformationQuebec introduced Bill 14 which, if enacted, would have Form dated March 21, 2012 under the section entitled ‘‘Generalamended the Mining Act (Quebec) (the ‘‘Mining Act’’). Description of the Capital Structure’’. A copy is available on

With the election of the new government in Quebec in SEDAR at www.sedar.com.September 2012, Bill 14 died on the Order Paper. The newgovernment has yet to decide whether such a bill will bere-introduced in 2013 or at some time in the future, and whetheror not its content would be modified.


CONTRACTUAL OBLIGATIONS

The following table shows the Fund’s contractual obligations schedule for the years 2013 to 2017:

(millions of Canadian dollars) Payments due by period

2017Contractual Obligations Total 2013 2014 2015 2016 and beyond

Bank and other loans $ 97.8 $ 15.0 $ 15.0 $ 15.0 $ 15.0 $ 37.8Operating leases 0.6 0.4 0.2 – – –Purchase commitments 16.5 16.5 – – – –Finance leases 0.9 0.2 0.2 0.5 – –Rehabilitation liability 38.4 0.4 0.5 2.1 1.7 33.7

Total $ 154.2 $ 32.5 $ 15.9 $ 17.6 $ 16.7 $ 71.5

TRANSACTIONS WITH RELATED PARTIES The expiry of the Supply and Processing Agreement will resultin a concurrent termination of the O&M Agreement. If the Supply

In addition to those arrangements described elsewhere in the and Processing Agreement terminates and is not replaced with aMD&A, the Fund entered into the following transactions with similar agreement providing for a known supply source of zincrelated parties. concentrate, the Partnership will need to seek out alternative zinc

Pursuant to the O&M Agreement dated May 3, 2002 between concentrate supply relationships. As discussed above, inthe Partnership and the Manager, a wholly-owned subsidiary of November 2011, the Board advised that it had undertaken aXstrata Canada, the Manager is responsible for the ongoing review of the availability of funds for future distributions throughoperation and management of the Processing Facility and its Independent Committee. The focus of the review by theprovides management services to the Partnership in exchange for Independent Committee was, among other things, to examine,a management fee and reimbursement of certain specified costs using independent expertise, the future operations of the Fundincurred by the Manager in the course of performing its duties. upon the expiry of the Supply and Processing Agreement inThese services include, among other things, preparing annual 2017. In the event that the Independent Committee determinesoperating and maintenance plans and capital improvement plans that the supply of zinc concentrate beyond 2017 is not sufficientfor approval by the directors of the general partner of the to keep the Processing Facility running at full capacity, it may bePartnership, reporting to the general partner of the Partnership necessary to establish significant cash reserves to cover closureon the operation of the Processing Facility and the business of costs of the Processing Facility. See also ‘‘Overview – Long-Termthe Partnership, providing accounting and record keeping Strategy’’ above.services including coordination and management of accounting, Under the terms of an Administration Agreement datedcash management, treasury and other systems and preparing April 18, 2002 between the Fund and the Administrator, thefinancial statements and other reports on operations. Administrator provides administrative services to the Fund and

Pursuant to the Supply and Processing Agreement dated management services to the Operating Trust. Pursuant to theMay 3, 2002 between Xstrata Canada and the Partnership, Administration Agreement, Computershare Trust Company ofwhich expires on May 3, 2017, unless extended, Xstrata Canada Canada, the sole trustee of the Fund, has delegated all of itsis obligated, except in certain circumstances, to sell to the power and authority to the Administrator and the AdministratorPartnership a maximum of up to 550,000 tonnes of zinc provides certain administrative and support services to the Fund,concentrate per year at a concentrate price based on the zinc including to: (i) ensure compliance by the Fund with continuousmetal price on the LME for the ‘‘payable zinc metal’’ contained in disclosure obligations under applicable securities legislation;the concentrate, less a fixed, escalating processing fee (ii) provide investor relations services; (iii) provide or cause to be($0.392 per payable zinc metal in 2012). Additionally, the provided to Unitholders all information to which Unitholders areSupply and Processing Agreement provides that Xstrata Canada entitled under the Fund’s Trust Indenture including relevantwill act as exclusive agent for the Partnership to arrange for information with respect to income taxes; (iv) call, hold andpurchases of any additional zinc concentrate in excess of the distribute materials, including notices of meetings and550,000 tonnes described above, and for sales of zinc metal information circulars, in respect of all meeting of Unitholders;and by-products, and related hedging and derivative (v) compute, determine and make distributions to Unitholders;arrangements. (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; In addition, Xstrata Canada and the Manager have entered(vii) attend to all administrative and other matters arising in into various agreements and provided certain consents inconnection with any redemption of units; (viii) ensure compliance connection with providing credit support in respect of thewith the Fund’s limitations on non-resident ownership; and Operating Trust’s existing ABL Facility.(ix) undertake all matters required by the Fund’s Trust Indenture During the twelve month period ended December 31, 2012,to be performed by the sole trustee. All costs relating thereto are Xstrata Canada sold to the Partnership $317.1 million of zincfor the account of the Fund. concentrate (2011 – $319.4 million) and provided $2.0 million

Pursuant to the Management Services Agreement dated in sales agency services (2011 – $1.2 million). The sales agencyApril 18, 2002 between the Operating Trust and the Manager, services are provided on a cost recovery basis.the Manager provides management services to the Operating The administration, management and operating servicesTrust. These services include assisting the Operating Trust in: provided by the Manager are provided on a cost recovery basis(i) developing, implementing and monitoring a strategic plan; and for a management fee of $0.3 million per annum, adjusted(ii) developing an annual business plan which may include upward annually by 2%. As a result of the Administrationoperational and capital expenditures budgets when appropriate; Agreement between the Fund and the Administrator, the(iii) developing acquisition strategies, investigating potential Management Services Agreement between the Operating Trustacquisitions and analyzing the feasibility of potential acquisitions; and the Manager and the O&M Agreement between the(iv) carrying out acquisitions or dispositions and related Partnership and the Manager, the Manager has been paid thefinancings required for such transactions; (v) assisting in following amounts for administration, management andconnection with any financing of the Operating Trust or the Fund; operating services with respect to the Fund, its subsidiaries and(vi) computing, determining and making distributions to its assets for the years ended December 31, 2012 and 2011.unitholders of distributions properly payable by the Operating

Services provided by Xstrata Canada ($ millions) 2012 2011Trust; (vii) providing technical and evaluation services onSalary and benefits1 $ 68.0 $ 64.9equipment, processes and techniques relating to the operationsSupport services 1.2 1.2of the business; (viii) supervising the operation of the OperatingO&M Agreement management fee 0.3 0.3Trust’s business; and (ix) preparing, planning and co-ordinatingTotal $ 69.5 $ 66.4management and Trustees’ meetings. In consideration for1 This represents all amounts paid in respect of salaries and benefits for all of theproviding the services under the Management Services

employees of the Manager in connection with the operation of the Processing Facilityand the services provided to the Fund, the Operating Trust and the Partnership.Agreement, the Manager is entitled to reimbursement of its

direct and indirect costs and expenses incurred in connection In addition, the Fund undertakes other transactions withwith its duties under the Management Services Agreement. Xstrata Canada and affiliated companies, at terms that reflect

For further details concerning the above agreements, market rates. The table below summarizes sales and purchasesreference is made to the Management Information Circular of the that were transacted with Xstrata Canada and affiliatedFund dated April 4, 2012, the Fund’s Annual Information Form companies for 2012 and 2011:dated March 21, 2012 (under the headings ‘‘Xstrata CanadaCorporation – Major Agreements’’ and ‘‘The Administrator and Sales and Purchases ($ millions) 2012 2011

Manager’’), and the notes to the Audited Consolidated Financial SalesStatements of the Fund for the year ended December 31, 2012. Sales of zinc metal $ 22.2 $ 34.0Copies are available on SEDAR at www.sedar.com. Sales of by-products 31.0 29.7

Any agreements entered into by Xstrata Canada as agent on Purchasesbehalf of the Partnership with any party related to Xstrata Purchases of raw materials andCanada, and which are material to the Partnership, must be on operating supplies $ 5.8 $ 7.7terms that are, collectively, no less favourable to the Partnershipthan those available at the time from a reputable, non-relatedparty. These agreements must be reviewed and approved by theAudit Committee of the Operating Trust, all of the members ofwhich are unrelated to Xstrata Canada.


FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS fixed sales commitment has also been recognized as a firmcommitment liability of $0.8 million and a long term-firm

Due to the structure of the Processing Facility’s purchase and commitment liability of $0.1 million. Any net difference in thesale contracts, the Fund has the ability to manage some of its change in the fair value of both items between reporting datesexposure to fluctuations in zinc market prices. Zinc metal represents the ineffective portion of the hedge, and is recordedproducts are generally sold approximately two months after the as a commodity hedging gain or loss.concentrate from which they are made is delivered. As a result, The Fund does not enter into any hedging contracts for theby pricing the ‘‘payable’’ zinc metal contained in zinc concentrate purposes of speculation.at the LME zinc reference price in the second month following its The Fund has separated and recorded at fair value,delivery, and by pricing the processing fee in Canadian dollars, embedded derivatives resulting from the provisional pricingthe Supply and Processing Agreement seeks to limit the feature in the Supply and Processing Agreement. Under theexposure to zinc metal price fluctuations during the period in terms of this agreement, final prices for purchases ofwhich the concentrate is transformed into zinc metal. This results concentrate (‘‘quotational pricing’’) are based on the LME pricein matching the timing of pricing of the purchase of zinc prevailing on a specified future date after shipment (‘‘quotationalconcentrate with the expected timing of sales of the refined zinc period’’). The Fund accounts for changes in the fair value ofmetal produced from that concentrate. The Fund, through unsettled concentrate payable amounts resulting fromXstrata Canada, enters into hedges (‘‘inventory management quotational pricing with reference to forward LME rates for theprogram’’) to the extent that the natural hedge does not fully remaining quotational period through gains or losses recorded inminimize exposure to fluctuations in zinc prices. As at raw material purchases costs and corresponding adjustments inDecember 31, 2012, the Fund had sold forward approximately accounts payable and accrued liabilities. During the twelve50 million pounds of zinc, related to the inventory management month periods ended December 31, 2012, the Fund recordedprogram hedges. The fair value of these positions as at an increase of raw material purchase costs of $5.6 millionDecember 31, 2012 was a gain of $1.1 million and it was related to the change in fair value of the embedded derivativesrecognized as a derivative financial liability of $0.3 million on the resulting from the quotational pricing feature of its zincFund’s consolidated statements of financial position. concentrate payables (2011 – a decrease of $11.3 million).

In addition, some customers request a fixed sales price The Fund has exposure to the US dollar for its cash, accounts(instead of the LME average price in the month of shipment) in receivable, inventory, accounts payable and accrued liabilitiesorder to lock in the price of their zinc purchases for a future and bank debt. The Fund attempts to manage the overallperiod of time, generally not exceeding one year. These economic exposure to the US dollar by matching US dollar assetsarrangements, referred to as fixed forward sales contracts, are to US dollar liabilities. This currency exposure is managed in partgenerally made available to customers who request them and through US dollar overnight transactions. As atwho meet the Fund’s credit criteria for such contracts. When December 31, 2012, the Fund had sold forward US dollars withentering into a fixed forward sales contract, the Fund, through its a notional amount of US$109 million and bought forward dollarssales agent, Xstrata Canada, offsets this price risk by hedging with a notional amount of $108.5 million. An unrealized gain ofwith appropriate futures contracts with maturities and quantities $0.01 million related to these open positions was recorded as atwhich will match those which the customer has contracted to December 31, 2012.purchase the metal. These futures contracts typically allow theFund to receive the LME average price plus a premium in the CRITICAL ACCOUNTING ESTIMATESmonth of shipment, while customers pay the agreed-upon priceplus a premium. In the event that the futures contracts have to Reference should be made to the Fund’s Audited Consolidatedbe terminated early, due to the customer cancelling a fixed price Financial Statements and the notes thereto for the year endedorder, Xstrata Canada, on behalf of the Fund has the right to December 31, 2012. A copy is available on SEDAR atcharge the customer with the cost of settling the LME contract. www.sedar.com.The fair value of these open futures contracts as atDecember 31, 2012 was recognized as a current derivative Property, Plant and Equipmentfinancial asset of $0.7 million and a non-current derivative Included in the $477.6 million of assets as atfinancial asset of $0.1 million on the Fund’s consolidated December 31, 2012 ($447.4 million as at December 31, 2011)statements of financial position. were property, plant and equipment with a carrying value of

The Fund has applied hedge accounting to its fixed forward $270.9 million (2011 – $277.1 million). This amount representssales contracts, and as such, in addition to recording the fair 57% (2011 – 62%) of the book value of the asset base. As such,value of the fixed forward contract, the fair value of the related the estimates used in accounting for property, plant and



equipment and the related amortization charges are critical and the long-term nature of existing contractual agreements,have a material impact on the Fund’s financial condition and differences arising between the actual results and theearnings. Property, plant and equipment are recorded at cost and assumptions made, or future changes to such assumptions,the amortization is based on estimated service lives of the could necessitate future adjustments to income taxes alreadyassets, calculated on a straight line basis. Assets under recorded. The Fund establishes provisions, based on reasonableconstruction are not amortized until put into use. estimates, for possible consequences of audits by the tax

Impairment exists when the carrying value of a non-financial authorities.asset or cash-generating unit exceeds its recoverable amount,which is the higher of its fair value less costs to sell and its value Employee Benefitsin use. Management uses the value in use calculation to The cost of defined benefit pension plans and otherdetermine the recoverable amount which is based on a post-retirement benefits and the present value of the pensiondiscounted cash flow model with cash flows expected to be obligation are required to be determined annually using actuarialgenerated from the Processing Facility over its remaining useful valuations. An actuarial valuation involves making variouslife. Cash flows do not include restructuring activities, if any, that estimates and assumptions including the determination of thethe Fund is not yet committed to or significant future investments future returns on each different type of asset, discount rate,that may enhance the non-financial assets’ performance of the future salary increases, employee attrition rates, mortality rates,cash-generating unit being tested. The recoverable amount expected remaining periods of service of employees and futurerequires estimates and assumptions such as the discount rate, pension increases. Due to the complexity of the valuation, theforeign exchange rate assumption, useful life of the assets, underlying assumptions, and its long-term nature, a definedavailability of concentrate, the price of zinc, copper and sulphuric benefit obligation is highly sensitive to changes in theseacid, zinc premium, capital expenditures, closure and assumptions. All assumptions are reviewed at eachrehabilitation expenditures and operating costs. Therefore, there reporting date.is a possibility that changes in circumstances, in particular the In determining the appropriate discount rate, managementavailability of concentrate beyond the term of the Supply and considers the interest rate spreads of corporate bonds in CanadaProcessing Agreement, may impact the recoverable amount with at least AA rating or government bonds with similarcalculated by management. Any impairment results in a maturities. As Canada is not considered to have a deep market inwrite-down of the asset and a charge to net earnings during the long-term corporate bonds, the government rate on bonds withyear. There was no impairment of property, plant and equipment similar maturities is used taking into consideration the interestas at December 31, 2012. rate spread on the short and medium-term corporate bonds, with

extrapolated maturities corresponding to the expected durationIncome Taxes of the defined benefit obligation. The underlying bonds areIncome tax expense comprises current and deferred tax. Current further reviewed for quality, and those having excessive creditincome tax and deferred income tax are recognized in earnings spreads are removed from the population of bonds on which theattributable to Unitholders and non-controlling interest except to discount rate is based, on the basis that they do not representthe extent that it relates to a business combination, or items high quality bonds.recognized directly in other comprehensive income (loss), in The Manager participates in defined benefit pension planswhich case the current and/or deferred tax is also recognized administered by Xstrata Canada. Assets are allocated to thedirectly in other comprehensive income. Manager based upon the Pension and Benefits Agreement with

To determine the extent to which deferred income tax assets Xstrata Canada. Expected returns on assets are based on thecan be recognized, management must estimate the amount of asset mix and long-term expected returns.probable future taxable profits that will be available against which The mortality rate is based on publicly available mortalitydeductible temporary differences. Such estimates are made as tables for Canada. Future salary increases and pension increasespart of the budgets by tax jurisdiction on an undiscounted basis are based on expected future inflation rates for Canada, averageand are reviewed at each reporting date. Management exercises wage growth and historical information and future expectations.judgment to determine the extent to which realization of futuretaxable benefits is probable, considering factors such as the Future Site Restoration and Reclamationnumber of years to include in the forecast period and the history The Fund has recognized a rehabilitation liability solely related toof taxable profits. the residue ponds on the Processing Facility site. The Fund

Uncertainties exist with respect to the interpretation of assesses its rehabilitation provision at each reporting date.complex tax regulations and the amount and timing of future Significant estimates and assumptions are made in determiningtaxable income. Given the range of business relationships and the provision for rehabilitation as there are numerous factors that


will affect the ultimate amount payable. These factors include As a result of the expected feed changes noted above, theestimates of the extent and costs of reclamation of the residue Processing Facility received increased deliveries of zincponds and the expected timing of those costs, technological concentrate in the fourth quarter of 2012. Most of this additionalchanges, regulatory changes, cost increases as compared to the concentrate is expected to be processed by the third quarter ofinflation rates and changes in discount rates. These uncertainties 2013. The additional concentrate will allow for greater flexibilitymay result in future actual expenditures differing from amounts in blending the new with the current feed mix ensuring a gradualcurrently provided. To the extent the actual costs and timing of transition. The additional concentrate deliveries increasedexpenditures differ from these estimates, adjustments will be inventories by approximately $28.1 million in 2012.recorded in earnings attributable to Unitholders and Inventories are stated at the lower of cost and net realizablenon-controlling interest on the consolidated statements of value. Net realizable value is the estimated future selling pricecomprehensive income (loss). The provision at the reporting date the Fund expects to realize when the product is produced andrepresents management’s best estimate of the present value of sold, less estimated costs to complete production and bring thethe future rehabilitation costs required. product to sale. As at December 31, 2012 and 2011, all of the

The Fund’s operations are affected by federal, provincial, and above inventories were recorded at cost.local laws and regulations concerning environmental protection. Stockpiles are measured by estimating the number of tonnesThe Fund’s provisions for rehabilitation are based on known added and removed from the stockpile, the number of containedrequirements. It is not currently possible to estimate the impact pounds is based on assay data, and the estimated recoveryon operating results, if any, of future legislative or regulatory percentage is based on the expected processing method.developments. Stockpile tonnages are verified by periodic surveys.

The Fund has determined the fair value of this rehabilitationliability is $24.7 million as at December 31, 2012, by using a COMMITMENTS AND CONTINGENCIES

discount rate of 2.16% (December 31, 2011 – 2.26%). Theliability accretes to its future value until the obligation is Manager’s Employee Benefit Planscompleted. The estimated rehabilitation expenditures may vary The Manager participates in defined benefit pension plansbased on changes in operations, cost of rehabilitation activities, managed and administered by Xstrata Canada. There is one planand legislative or regulatory requirements. Although the ultimate for unionized workers and a second plan for staff. The plan foramount to be incurred is uncertain, the liability for rehabilitation staff has been closed to new entrants since 2002. The benefiton an undiscounted basis is estimated to be approximately obligation recorded by the Fund represents the obligations for$38.4 million. The cash flows required to settle the liability are those employees who have worked for the Manager since theexpected to be incurred from now until 2046. Fund’s inception in May 2002.

The estimate for future site restoration and reclamation The Manager also participates in unfunded, post-retirementimpacts upon the amount of reclamation expense that is benefit plans that are managed and administered by Xstrataincurred on the statement of comprehensive income (loss), and Canada, for a number of current and former employees. Thethe balance of the future site restoration and reclamation found benefit obligation recorded by the Fund represents thein the long-term liabilities section of the balance sheet. Actual obligations for those employees who are working for the Managersite restoration and reclamation expenditures reduce the Fund’s as of the reporting period or who have retired while working forcash provided by operations. the Manager.

Upon the termination of the O&M Agreement, the PartnershipInventories will acquire the Manager from Xstrata Canada. If this occurs, theAs at December 31st, zinc and by-product related inventories at Partnership is required to establish employee benefit plans forthe end of 2012 and 2011 included the following balances: the employees of the Manager. Pension plan assets and liabilities

will be transferred into the newly-established pension plan,($ millions) 2012 2011 subject to obtaining regulatory approvals.Raw materials $ 43.7 $ 18.2 As at December 31, 2012, the estimated liabilities andWork-in-process 11.5 11.1 assets of the Manager’s share of the pension plan wasFinished products 29.6 22.1 $75.1 million (2011 – $61.9 million) and $59.1 million

$ 84.8 $ 51.4 (2011 – $50.0 million).



The estimated liabilities of the pension plans covering the indemnification provision where the Fund may be required topension obligation of the Manager’s employees prior to make payments to Xstrata Canada or lenders for breach ofMay 2, 2002 was approximately $95.9 million as at fundamental representations and warranty terms in theDecember 31, 2012 (December 31, 2011 – $88.9 million). applicable agreement. As at December 31, 2012, the Fund doesThere was approximately $89.8 million of assets within the not believe these indemnification provisions would require anypension plan as at December 31, 2012 material cash payment by the Fund.(December 31, 2011 – $74.7 million). The benefit obligation The Fund indemnifies its Trustees and officers against claimsand plan assets for pre-May 2002 would only revert to the Fund reasonably incurred and resulting from the performance of theirupon the termination of the Administration Agreement between services to the Fund and the Operating Trust, and maintainsthe Manager and the Fund and establishment of a pension plan liability insurance for its Trustees and officers.by the Manager and will be subject to regulatory approval.

The Manager’s funding policy is to contribute amounts EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

sufficient to meet minimum funding requirements as set forth bythe Pension and Benefits Agreement with Xstrata Canada plus As at December 31, 2012, an evaluation of the effectiveness ofsuch additional amounts as the Manager may determine to be the issuer’s disclosure controls and procedures (as such term isappropriate. The Manager’s share of plan assets is estimated defined under the rules adopted by the Canadian securitiesbased on the Manager’s defined benefit obligation and any regulatory authorities) was carried out by management, underadjustments for historical contributions by the Manager. the supervision of, and with the participation of, the Manager’s

chief executive officer (‘‘CEO’’) and chief financial officerLitigation (‘‘CFO’’).In August 2004, the Processing Facility was served with a motion Based upon that evaluation, the CEO and CFO concluded thatto institute a class action before the Quebec Superior Court, as at such date, the Fund’s disclosure controls and proceduresfollowing an accidental discharge of sulphur trioxide. In were appropriately designed and were operating effectively suchJune 2008, the Quebec Superior Court dismissed the motion to that information relating to the Fund required to be disclosed byinstitute a class action. The plaintiff appealed the decision. In the Fund in the reports which the Fund files or submits to suchAugust 2009, the Quebec Court of Appeal dismissed the motion. regulatory authorities, (a) is recorded, processed, summarized

In December 2009, the Manager was served with a new and reported within the time periods specified under applicablemotion to institute a class action. On March 19, 2012, the securities laws, and (b) is accumulated and communicated toQuebec Superior Court authorized the motion to institute a class the Fund’s management, including the CEO and CFO, to allowaction against the Manager. In August 2012, the class action timely decisions regarding disclosure. Although the Fund’sstatement of claim was served upon the Manager and was filed disclosure controls and procedures were operating effectively asin Court, and class representative has made a motion to at December 31, 2012, there can be no assurance that therecognize the Fund as a ‘‘mis en cause’’ and add Xstrata and Fund’s disclosure controls and procedures will detect or uncoverXstrata Canada as co-defendants with the Manager. The Court is all failures of persons within the Fund and its subsidiaries tocurrently in the process of determining whether the Fund should disclosure material information otherwise required to be set forthbe recognized as a ‘‘mis en cause’’ and whether Xstrata and in the annual regulatory filings.Xstrata Canada should be added as co-defendants withthe Manager. INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Manager continues to maintain that the class action suitis unfounded and intends to vigorously defend the claim. During 2012, the Fund assessed the design and effectiveness of

its internal controls over financial reporting. The design of internalAppropriation of Land controls over financial reporting was evaluated as defined inThe Fund is currently in discussion with Quebec’s Ministry of Multilateral Instrument 52-109 – Certification of Disclosure onTransportation regarding land that the Fund is currently using. Issuers’ Annual and Interim Filings. Based on the results of thisThis land was expropriated by the Provincial Government a evaluation, the CEO and CFO concluded that as atnumber of years ago. The Fund is in discussions for the potential December 31, 2012, the internal controls over financialpurchase of this land. reporting were appropriately designed and were operating

effectively to provide reasonable assurance that the Fund’sGuarantees financial reporting is reliable and that its consolidated financialSome of the Fund’s agreements, specifically those related to the statements were prepared in accordance with IFRS and noacquisition of the Processing Facility and the debt, include an material weaknesses were identified through their evaluation.


Management also concluded that during the year ended • the need to secure suitable zinc concentrate on a long-termDecember 31, 2012, no changes were made to internal controls commercial basis to run the Processing Facility atover financial reporting that would have materially affected, or full capacity;would be reasonably likely to materially affect those controls. • the need for the Fund to remain financially viable and protect

Unitholders’ equity interests to the end of the life of theSupply and Processing Agreement and beyond;RISKS AND UNCERTAINTIES

• the need for the Fund to secure its long-term future andprotect the interests of all affected stakeholders, includingWhere appropriate, the Fund has included comments on risksUnitholders, employees, suppliers, customers and theand uncertainties throughout the MD&A. The following arecommunity of Salaberry-de-Valleyfield, Quebec; andadditional risks and uncertainties that have not been included

• the need for the Fund to make adequate allowances forelsewhere in the document. The Fund is also subject to certainemployee, environmental and closure obligations andrisks and uncertainties that are common in the zinc processingresponsibilities.industry and the market environment generally and that mayHowever, there can be no assurance that the Fund’s businessaffect future performance, events, results and operations. The

plan, operating plan, distribution policy and/or capital structurerisks and uncertainties included here are not exhaustive. Thewill be able to take into account all of the above objectives or doFund operates in a very competitive and rapidly changingso on a successful basis.environment. New risk factors may emerge from time to time and

At normal operating levels, the Processing Facility purchasesit is not possible for the Fund to predict all such risk factors, norapproximately 1,200 million kilowatt hours per year from Hydro-can it assess the impact of all such risks factors on the Fund’sQuebec at the market price charged to industrial users. Duringbusiness. In addition, historical trends discussed elsewhere in2012, the Fund’s electricity costs were approximatelythis MD&A should not be used to anticipate events,$53.4 million (2011 – $53.7 million). Increases in energy costsperformance, results or trends in future periods.could adversely affect cash realized from operations. Under theSupply and Processing Agreement, changes in the ProcessingOperational RisksFacility’s electricity costs are partially offset by adjustments toThe Processing Facility is dependent upon the continuing supplythe processing fee in the following year. After the Supply andof zinc concentrate. Currently, Xstrata Canada is obligated,Processing Agreement expires, there can be no assurance that aexcept in certain circumstances, to supply zinc concentratematerial increase in electricity costs can be offset by anbased on the terms set out in the Supply and Processingadjustment to the processing fees it receives. In addition, anAgreement. During the occurrence of an event of force majeure,interruption or a period where electricity is unavailable, couldthe obligations of Xstrata Canada will be suspended to the extenthave a material adverse impact upon the operations of thethat such obligations cannot be performed as a result of suchProcessing Facility, which could in turn have a material adverseforce majeure. If the Fund is not able to secure a supply of zinceffect on the business, cash flows and results of operations ofconcentrate on favourable terms because of the termination ofthe Fund.the contract in 2017, or during a force majeure situation, or if

Xstrata Canada fails to fulfill all of its obligations under the SupplyBusiness Risksand Processing Agreement, its cash realized from operationsDemand for the Processing Facility’s products is a function ofmay decline, which could in turn have a material adverse effectworld industrial production growth, the development of new useson the Fund’s business, cash flows and results of operations.and markets, and substitution. Demand for our products is alsoThe current economic conditions facing North American zincimpacted by general business and economic conditions and thesmelters present the Fund with some potential challenges. Incondition of financial and credit markets.2011, the Fund secured stable financing until 2016;

Sulphuric acid is a by-product of zinc processing. The Fundmanagement and the Board of Trustees are now addressing thehas a fixed storage capacity for sulphuric acid at the Processingchallenges that face the Fund with the expiration of the SupplyFacility of approximately 37,000 tonnes compared to an averageand Processing Agreement in 2017. The Trustees and the Fundannual production of approximately 400,000 tonnes. Theintend to pursue a business plan, operating plan, distributionavailability of storage facilities outside of the Processing Facility ispolicy and capital structure which include:limited due to the special material requirements for sulphuric• the need for the Processing Facility to make the investmentsacid storage. In a market where sulphuric acid sales havenecessary to remain competitive, including a $20 millionsignificantly slowed and the Fund is not able to secure additionalinvestment in 2013 to increase the Fund’s capability tostorage capacity, the Fund’s ability to produce sulphuric acidremove silica from zinc concentrate;and, therefore, zinc is expected to be reduced.



The global zinc market has fundamentally changed in recent results of operations and financial condition and its ability to payyears. Factors that have the potential to positively and/or cash distributions.negatively impact the Fund’s business in the future include the The Processing Facility is dependent upon key customers thatincreasing influence of demand from China and India as are relatively close to the Processing Facility. In 2012, theindustrialization and urbanization continues in their economies, Processing Facility’s 10 largest customers accounted forthe growth in low cost smelting capacity in China, the decline in approximately 74% (2011 – 70%) of its direct or indirect saleszinc mine production from traditional North American sources (on a volume basis), with its largest customer accounting forthat may see North American smelters increasingly dependent 24% (2011 – 24%). The loss of a significant customer may haveon seaborne zinc concentrate for their supply and the inability of a materially adverse effect on the Fund’s financial position andthe Fund to acquire sufficient zinc concentrate after the expiry of cash realized from operations.the Supply and Processing Agreement in May 2017 to run the In 2012, the Processing Facility sold more than 99% (2011 –Processing Facility at full capacity. The Fund must be prepared to 99%) of its zinc to customers in the United States and Canada. Ifadjust to these changes and, in particular, their impact on the the Processing Facility lost certain customers in theavailability of feed sources and treatment charges upon the United States and Canada, there is a risk that it would be forcedtermination of the Supply and Processing Agreement. The Fund’s to find alternative markets. This could increase distribution costs,failure or inability to adjust to such changes, or to do so in a thereby adversely affecting future cash realized from operations.manner that is satisfactory or successful, may have a material A portion of the Processing Facility’s Net Revenues resultsadverse effect on the Fund’s business, results of operations and from the premiums paid for value-added products, such as zincfinancial condition. shapes, zinc shot and zinc powder. Changes in the supply and

In March 2012, Xstrata Zinc Canada announced that demand for these products can cause premiums to fluctuate,Brunswick Mine was expected to close no later than impacting upon the Fund’s cash realized from operations. InMarch 2013. This Mine has been a major supplier to the 2012, each US$0.01 change in the zinc premium impacted theProcessing Facility for most of the fifty years that the Processing Fund’s annualized sales and cash realized from operations byFacility has operated. With the closure of Brunswick Mine, the US$5.7 million (2011 – US$5.9 million). See also ‘‘Forward-future feed mix to the Processing Facility may contain an Looking Information’’ below.increased level of impurities. The Processing Facility is dependent upon local transportation

While future feeds are expected to still be within the companies to deliver its product to its customers. Changes in thespecifications set out in the Supply and Processing Agreement, rates charged to make these deliveries or a major disruption inthe Processing Facility may experience an increase in its service, could increase distribution costs or adversely impact theoperating costs, working capital requirements and/or capital Processing Facility’s ability to satisfy its obligations to itsexpenditures in order to treat a more varied feed quality stream. customers, thereby adversely impacting cash realized fromHigher amounts of impurities may also negatively impact the operations and potentially exposing the Fund and its business tovolume of zinc concentrate that can be processed, resulting in a additional liabilities.lower overall production. Any increase in costs or reduction in A portion of the Processing Facility’s Net Revenues resultsproduction could adversely affect future cash realized from from the sale of by-products, such as sulphuric acid and copperoperations. The Fund is in the process of investing $20 million to in cake, as well as from the sale of zinc metal. Changes in theincrease its capability to remove silica from zinc concentrate. demand and supply of these products can cause them to

It is also expected that future feeds will be from mines located fluctuate, impacting upon the Fund’s cash, results of operationsoffshore. The additional cost associated with moving concentrate and business.from the Port of unloading to the Processing Facility will be borneby the Fund. Borrowing and Credit Risks

With the termination of the Supply and Processing As at December 31, 2012, the Fund had approximatelyAgreement, and should no comparable agreement be available $98.7 million of indebtedness. The Fund has credit in the form ofto replace it, the Fund will be subject to market prices an ABL Facility, as well as through proceeds received upon its(‘‘treatment terms’’) for converting zinc concentrate into metal. private placement of Notes, both of which mature in 2016. As atThese treatment terms have historically been very volatile and December 31, 2012, there was $67.5 million owing on thethere is reason to believe this will continue into the future. The Notes and $30.4 million drawn on the ABL Facility, leaving anFund’s failure or inability to create a more stable stream of excess availability of $83.3 million. Although the Fund currentlyrevenue as per the terms for the processing fee in the Supply and believes that its existing cash combined with its futureProcessing Agreement, especially when the treatment terms are anticipated cash flow and credit facility will be adequate to satisfylow, is expected to have a material adverse effect on the Fund’s its working capital needs for the foreseeable future, there is no


guarantee that the Fund’s anticipated cash flow will be adequate The Fund is also dependent upon the Manager, a subsidiary ofor that its existing credit facility will continue to be available or Xstrata Canada, for administration and management of the Fund,sufficient in the event of unforeseen contingencies. Material the Operating Trust and the Partnership. The failure of Xstratafactors that could result in the Fund being unable to fund its Canada, the Manager or their affiliates to perform theirworking capital needs and long-term strategies include: (i) a obligations pursuant to and in accordance with thematerial default or breach of a covenant under its outstanding Administration Agreement, Management Services Agreement,indebtedness; (ii) decreases in sales; (iii) deterioration of O&M Agreement, or the Supply and Processing Agreement, oreconomic, market or industry conditions; (iv) any material the termination or expiration of any of such agreements, is likelydisruption to the Processing Facility’s production or operations; to have a material adverse impact on the Fund and its business,and (v) a material change in the Fund’s working capital operations and financial condition.requirements and anticipated capital expenditures or in itsbusiness strategy or activities. Cash Distributions Are Not Guaranteed and May Fluctuate

The Fund is also subject to the risks associated with its with the Fund’s Performancelong-term indebtedness, including the risks that cash flow from Even in the absence of contractual restrictions, cash distributionsoperations will be insufficient to meet required payments of are not guaranteed and will fluctuate with the Fund’sprincipal and interest under the Notes and the ABL Facility, and performance. The Fund depends on income generated from thethe risk that the existing ABL Facility will not, if necessary, be able processing fee for processing zinc concentrate into zinc metalto be refinanced or that the terms of any such refinancing will not and additional revenue it earns from premiums, by-productbe as favourable to the Fund. In addition, the Fund is subject to revenues and metal gains to make such distributions.the risk that its interest expense may increase on its current ABL There can be no assurance regarding the amount of revenueFacility that bears interest at floating rates if interest rates generated by the Fund. The amount of distributable income willincrease, which could have a material adverse effect on the depend upon numerous other factors, including the profitabilityresults of operations of the Fund. of the business and the ability to run the Processing Facility at full

The Fund’s ABL Facility and Notes contain certain covenants capacity and the level of the treatment terms after the expiry ofand representations and warranties, the breach of which could the Supply and Processing Agreement in May 2017, fluctuationsresult in a default and the acceleration of their maturity. The in working capital, interest rates, capital expenditures, actual andFund and several of its subsidiaries and affiliates, as well as the contingent liabilities, including environmental remediation andManager, have granted security interests over all of their assets closure obligations, and other factors which may be beyond theto secure indebtedness owing under the ABL Facility and Notes. control of the Fund. If the Trustees determine that it would be inIf the Fund is not able to meet its debt service obligations, it risks the best interests of the Fund, they may reduce or suspend cashthe loss of some or all of its assets. For further details concerning distributions to the Unitholders.the Fund’s Notes and ABL Facility and the risks and uncertaintiesrelating thereto, see ‘‘Liquidity and Capital Resources’’ above. Impact of the US/Canadian Dollar Exchange Rate

A portion of the Processing Facility’s Net Revenues is impactedReliance on the Fund Administrator and Manager by the US/Canadian dollar exchange rate. Since the inception ofThe Fund is dependent upon Xstrata Canada for the operation the Fund, the Canadian dollar has generally strengthened againstand maintenance of the Processing Facility. The Fund is also the US dollar, negatively impacting the Fund’s cash provided bydependent upon Xstrata Canada as its principal supplier of zinc operating activities. In 2012, a $0.01 Canadian appreciation inconcentrate to the Processing Facility, as the provider of stable, the average Canadian/US exchange rate would have negativelyguaranteed annual processing fees that enable the Processing impacted the Fund’s annual earnings before finance costs andFacility to pass along a portion of the increase in its annual income taxes by approximately $0.8 million (2011 –operating and electricity costs, and as its exclusive sales agent $0.7 million). The further strengthening of the Canadian dollarfor the purchase of additional zinc concentrate and the sale of relative to the US dollar may have a material adverse effect onzinc metal and by-products and related hedging and derivative the Fund’s cash flows and results of operations.arrangements, all pursuant to the Supply and ProcessingAgreement. The Supply and Processing Agreement expires in Employee RelationsMay 2017, or earlier in certain circumstances, unless extended. Good labour relations are fundamental to the Fund’s ongoingUpon termination, the Partnership will be required to establish success. The Processing Facility has 590 employees, 401 ofreplacement arrangements for the operation of the Processing whom are represented by the United Steel Workers of America,Facility. Local 6486. The last labour disruption was in 1986. Improved

labour relations have translated into nine consecutive collective



agreements without a strike. The current three-year collective outside of its control, such as pursuant to any covenants thatagreement expires on October 31, 2014. may be required in connection with its long-term indebtedness.

A labour disruption, such as a strike or lockout, could have a There can be no assurance that the Fund’s hedging activities willnegative material effect on the Fund’s financial position, cash be successful or will protect the Fund against possible adverserealized from operations and its business. In addition, the Fund is effects resulting from fluctuations in the price of zinc concentratereliant upon the efforts and abilities of its current senior and by-products.management team, namely the CEO and CFO, and its Trustees. Ifthe Fund were to lose the benefit of these senior managers’ or Legal ProceedingsTrustees’ experience and skills, the Fund could be adversely The nature of the Fund’s business subjects it to regulatoryaffected. investigations, claims, lawsuits and other proceedings in the

ordinary course of business.Environment, Health and Safety The nature or results of these legal proceedings cannot beThe Processing Facility’s operations are subject to stringent laws predicted with certainty. There can be no assurance that thesegoverning air emissions, discharges into water, waste, hazardous matters will not have a material adverse effect on the business ormaterials and workers’ health and safety, among other things. As results of operations in any future period, and a substantialsuch, there is a significant risk of environmental, health and adverse judgment could have a material adverse impact on thesafety liabilities. The Processing Facility has obtained the Fund’s business, financial condition, liquidity and resultsnecessary permits and other approvals relating to the protection of operations.of the environment and workers’ health and safety. Compliance For further information concerning legal proceedings, see thewith applicable laws and future changes to them is material to section entitled ‘‘Commitments and Contingencies – Litigation’’the Processing Facility’s operation. Future legislation and above.regulations could necessitate additional expenditures andcommitments, capital expenditures, financial assurance and Price and Volatility of Priority Unitsrestrictions on the operation of the Processing Facility, the extent The market price and liquidity of Priority Units of the Fund hasof which cannot be predicted. experienced fluctuations which may not necessarily be related to

The Fund has a comprehensive environmental management the operating performance, underlying asset values or prospectssystem, which consists of an environmental policy, as well as of the Fund. It may be anticipated that any market for Priorityimplementation codes and procedures including codes of Units will be subject to market trends generally and changes orpractice, job descriptions, operating procedures, rules and disruptions in securities markets or credit markets generally, andresponsibilities, employee training, public and employee the value or liquidity of the Priority Units on the TSX may becommunications, emergency preparedness, hazard analysis adversely affected by such volatility.and audits.

Restrictions on Certain Unitholders and Liquidity of UnitsInterest Rates The Trust Indentures of the Fund and the Operating Trust imposeAs at December 31, 2012, $30.3 million of the Fund’s restrictions on non-resident Unitholders who are prohibited fromindebtedness bears interest at floating rates beneficially owning more than 49% of the Units. This restriction(December 31, 2011 – $16.2 million), which exposes the Fund may limit the rights of certain Unitholders, includingto financial risks as a result of interest rate fluctuations and the non-residents of Canada, to acquire Units, to exercise their rightspotential volatility of these rates. as Unitholders and to initiate and complete take-over bids in

respect of the Units. As a result, these restrictions may limit theHedging Activities demand for Units from certain Unitholders and thereby adverselyThe Fund attempts to manage its exposure to fluctuations in zinc affect the liquidity and market value of the Units held bymarket prices through hedging (as discussed above under the public.‘‘Financial Instruments and Other Instruments’’). Althoughhedging activities may protect the Fund against fluctuations in Redemption Rightcommodity prices, they can also limit the price that can be It is anticipated that the redemption right attached to Units willrealized on zinc or zinc by-products. In such forward sales and not be the primary mechanism for holders of Units to liquidatecall options, where the market price of zinc exceeds the price in a their investments. Notes which may be distributed in specie toforward sale or call option contract, this reduces the potential Unitholders in connection with redemption will not be listed onrevenue stream for the Fund. In addition, the Fund’s ability to any stock exchange. No established market is expected tohedge against such fluctuations may also be limited by factors


develop in such notes and they may be subject to resale of Britannia Refined Metals Limited which is part of Xstrata plc.restrictions under applicable securities laws. Mr. Wardle has also held various other mining and metallurgical

roles in Australia. He holds a Bachelor of Applied Science inMetallurgy from the South Australian Institute of Technology.Insurance Coverage and Compliance

While the Fund maintains insurance against certain risks, thenature of these risks is such that liability could exceed policy OUTLOOK

limits or could be excluded from coverage. There are also risksagainst which the Fund cannot insure or that it may elect not to The final Purchasing Manager’s Index (‘‘PMI’’) readings for 2012insure for various reasons. The potential costs associated with suggested that manufacturing growth is continuing at a modestany liabilities not covered by insurance, or in excess of insurance pace. This is encouraging given the challenges posed by the UScoverage, or compliance with applicable laws and regulations fiscal policy concerns, financial strains in Europe and the policy-may cause substantial delays and require significant capital induced slowdown in China.outlays, adversely affecting the future business, assets, The US Institute for Supply Management December 2012prospects, financial condition and results of operations of PMI manufacturing index reading was slightly expansionary atthe Fund. 50.7, up from 49.5 in November 2012. In January 2013, the

PMI reading improved further to 53.1. A reading above 50.0 isgenerally considered to be indicative of an expanding economy.Disclosure and Internal Controls

Automotive sales in January 2013 were at a pace ofDisclosure controls and procedures and internal controls over15.3 million units per year which is 9.3% higher thanfinancial reporting are procedures designed to provideJanuary 2012. US spending on private construction in Decemberreasonable assurance that transactions are properly authorized,increased 2.0% from the previous month and 15% compared toassets are safeguarded against unauthorized or improper use,December 2011.and transactions are properly recorded and reported. A control

While the December and January period is seasonally softsystem, no matter how well designed and operated, can provideperiod, zinc demand is expected to steadily build during the firstonly reasonable, not absolute, assurance with respect to thehalf of 2013 as customers experience better order levels andreliability of financial reporting and financial statementrebuild their inventories as the general outlook improves.preparation. Any failure in the Fund’s disclosure controls and

The Fund’s current estimates for 2013 production, sales,procedures and/or internal controls over financial reporting mayprocessing fee and capital expenditures are as follows:have a material adverse impact on the Fund, its financial

condition or its results of operations.Production: 265,000 tonnes

OTHER DEVELOPMENTS Sales: 265,000 tonnesProcessing fee: 39.5 cents per poundCapital expenditures: $46 millionToday, Bob Sippel resigned from the Fund’s Board of Trustees.

Mr. Sippel has been a Board member since April of 2004. Hisexpertise in both the zinc markets and the zinc industry was The Fund’s ability to meet the targets identified above is subjectinvaluable to the Fund. John Swidler, on behalf of the Board to various risks, uncertainties and assumptions, some of whichwould like to thank Mr. Sippel for his support and contribution. are discussed under ‘‘Risks and Uncertainties’’ above and can be

Neil Wardle joined the Board of Trustees today. Mr. Wardle found in the ‘‘Forward-Looking Information’’ below.was appointed Chief Operating Officer of Xstrata Zinc Canada inJuly 2012. Prior to this, he was the Executive General Manager



FORWARD-LOOKING INFORMATION differ materially from the Fund’s current expectations arediscussed throughout this document and in our other continuous

This MD&A, including sections entitled ‘‘Overview’’, ‘‘Results of disclosure materials available on SEDAR at www.sedar.com.Operations’’, ‘‘Key Performance Drivers’’, ‘‘Distribution Policy’’, Examples of such risks, uncertainties and other factors include,‘‘Liquidity and Capital Resources’’, ‘‘Contractual Obligations’’, but are not limited to: (1) the Fund’s ability to operate at normal‘‘Transactions with Related Parties’’, ‘‘Critical Accounting production levels; (2) the dependence upon the continuingEstimates and Changes in Accounting Policy’’, ‘‘Commitments supply of zinc concentrates (terms of the Supply and Processingand Contingencies’’, ‘‘Risks and Uncertainties’’ and ‘‘Outlook’’, Agreement); (3) the demand for zinc metal, sulphuric acid andcontains forward-looking statements and forward-looking copper in cake; (4) the ability to manage sulphuric acidinformation within the meaning of applicable securities laws. inventories; (5) changes to the supply and demand for specificForward-looking statements can generally be identified by the zinc metal products and the impact on the Fund’s realizeduse of words such as ‘‘anticipates’’, ‘‘believes’’, ‘‘plans’’, premiums; (6) changes in future zinc concentrate, zinc grade and‘‘intends’’, ‘‘estimates’’, ‘‘are expected’’, ‘‘is forecast’’, impurity levels and their potential impact on capital expenditure‘‘approximately’’ or variations of such words and phrases, or and working capital requirements, operating costs, productionstatements that certain actions, events or results ‘‘may’’, and recoveries; (7) reliance on Xstrata Canada and certain of its‘‘could’’, ‘‘would’’, ‘‘might’’ or ‘‘will’’ be taken, occur or be affiliates for the management, operation and maintenance of theachieved, or words and expressions of similar nature. Amongst Processing Facility, the Fund and the Operating Trust and creditothers, the Fund has made forward-looking statements for 2013 support in connection with the ABL Facility and Notes; (8) theexpected targets and performance, production, sales, the ability of the Fund to continue to service customers in the sameprocessing fee and capital expenditures, the Fund and the geographic region; (9) general business and economicOperating Trust’s future business plans and operation of the conditions and the condition of financial and credit markets;Processing Facility, future liabilities and obligations of the Fund (10) legislation governing the operation of the Fund including,(including capital expenditures), the ability of the Fund to operate without limitation, air emissions, discharges into water, wasteprofitably after May 2017, the dependence upon the continuing including residue ponds, hazardous materials, workers’ healthsupply of zinc concentrates and competition relating thereto, the and safety, and many other aspects of the Fund’s operations, asability of the Processing Facility to treat a more varied feed well as the impact of current legislation and regulations onquality stream and run at full capacity, anticipated trends in zinc expenses, capital expenditures, taxation and restrictions on theconcentrate supply and demand, smelting capacity, sulphuric operation of the Processing Facility; (11) loan default andacid market demand and supply, zinc concentrate treatment refinancing risk associated with the ABL Facility and Notes;charges, the anticipated financial and operating results of the (12) the impact of costs and liabilities related to the closure,Fund and distributions to Unitholders. The Fund provides this decommissioning, reclamation and rehabilitation of theinformation because they are the key drivers of the business. Processing Facility and surrounding lands, including employeeReaders are cautioned that this information may not be severance, pensions, and environmental and reclamation andappropriate for other reasons. rehabilitation liabilities if an acceptable replacement

These statements and information are based, among others, arrangement is not put in place after the expiration of the Supplyon the Fund’s current assumptions, expectations, estimates, and Processing Agreement; (13) the sensitivity of the Fund’s Netobjectives, plans and intentions regarding projected revenues Revenues to reductions in realized zinc metal prices includingand expenses, the economic and industry environments in which premiums, copper prices, sulphuric acid prices; and thethe Fund operates or which could affect the Fund’s activities, the strengthening of the Canadian dollar vis-a-vis the US dollar;Fund’s ability to attract and retain clients and consumers as well (14) the impact of month prior pricing; (15) the sensitivity of theas the Fund’s operating costs, raw materials and energy supplies Fund’s production costs to increases in electricity rates, otherwhich are subject to a number of risks and uncertainties. energy costs, labour costs and operating supplies used in its

Forward-looking information involves known and unknown operations, and the sensitivity of the Fund’s interest expense torisks, uncertainties and other factors, which may cause the increases in interest rates; (16) potential negative financialactual events, results or performance to be materially different impact from regulatory investigations, claims, lawsuits and otherfrom any future events, results or performance expressed or proceedings; and (17) the other general risks and uncertaintiesimplied by the forward-looking information. As a result, the Fund set out in the Fund’s continuous disclosure documents on filecannot guarantee that any forward-looking statements will with the Canadian Securities Regulatory Authorities.materialize. Assumptions, expectations and estimates made in Forward-looking information contained in this MD&A is basedthe preparation of forward-looking statements and risks that on management’s current estimates, expectations andcould cause the Fund’s actual events, results or performance to assumptions, which management believes are reasonable as of


the current date. You should not place undue importance on processing facility is the second-largest zinc processing facility inforward-looking information and should not rely upon this North America and the largest zinc processing facility in easterninformation as of any other date. Except as required by law, the North America, where the majority of zinc customers are located.Fund does not undertake to update these forward-looking It produces refined zinc metal and various by-products from zincstatements, whether written or oral, that may be made from time concentrates purchased from mining operations. The CEZto time by the Fund or on the Fund’s behalf. processing facility is operated and managed by Canadian

Electrolytic Zinc Limited, a wholly-owned subsidiary of XstrataCanada Corporation.Noranda Income Fund is an income trust whose priority units

trade on the Toronto Stock Exchange under the symbol‘‘NIF.UN’’. The Noranda Income Fund owns the CEZinc Further information about the Noranda Income Fund can beprocessing facility and ancillary assets (the ‘‘CEZinc processing found at www.norandaincomefund.comfacility’’) located in Salaberry-de-Valleyfield, Quebec. The CEZinc


15FEB20132154438822FEB201220150431

Management’s Statement of Responsibility

The accompanying consolidated financial statements of theNoranda Income Fund (the ‘‘Fund’’) have been prepared bymanagement in accordance with International FinancialReporting Standards (‘‘IFRS’’). Financial statements are notprecise, since they include certain amounts based on estimatesand judgments. When alternative methods exist, managementhas chosen those which it deems most appropriate in thecircumstances in order to ensure that the consolidated financialstatements are presented fairly, in all material respects, inaccordance with IFRS.

Management maintains adequate systems of internalaccounting and administrative controls, consistent withreasonable cost. Such systems are designed to providereasonable assurance that the financial information is relevantand reliable, and that the Fund’s assets are appropriatelyaccounted for and adequately safeguarded.

The board of trustees oversees management’s responsibilityfor financial reporting and internal control systems through anaudit committee. This committee meets periodically withmanagement and the external auditors to discuss internalcontrols, auditing matters and financial reporting issues, and tosatisfy itself that each party is properly discharging itsresponsibilities. The committee reviews the consolidatedfinancial statements and reports to the board of trustees. Theexternal auditors have full and direct access to the auditcommittee.

Eva Carissimi Michael BooneChief Executive Officer Chief Financial OfficerCanadian Electrolytic Canadian Electrolytic

Zinc Limited Zinc LimitedNoranda Income Noranda Income

Fund’s Manager Fund’s Manager


22FEB201220112399

Independent Auditors’ Report

OpinionTo the Unitholders of Noranda Income Fund:In our opinion, the consolidated financial statements presentWe have audited the accompanying consolidated financialfairly, in all material respects, the financial position of Norandastatements of Noranda Income Fund, which comprise theIncome Fund as at December 31, 2012 and 2011, and itsconsolidated statements of financial position as atfinancial performance and its cash flows for the years endedDecember 31, 2012 and 2011, and the consolidatedDecember 31, 2012 and 2011 in accordance with Internationalstatements of comprehensive income (loss), changes in netFinancial Reporting Standards.assets attributable to Unitholders and non-controlling interest

and cash flows for the years ended December 31, 2012and 2011, and a summary of significant accounting policies andother explanatory information.

Management’s responsibility for the consolidated financialstatementsManagement is responsible for the preparation and fair

Ernst & Young, LLPpresentation of these consolidated financial statements inMontreal, Canadaaccordance with International Financial Reporting Standards,

and for such internal control as management determines isnecessary to enable the preparation of consolidated financial February 12, 2013statements that are free from material misstatement, whetherdue to fraud or error. 1 CPA auditor, CA, public accounting permit no. A122227

Auditors’ responsibilityOur responsibility is to express an opinion on these consolidatedfinancial statements based on our audits. We conducted ouraudits in accordance with Canadian generally accepted auditingstandards. Those standards require that we comply with ethicalrequirements and plan and perform the audit to obtainreasonable assurance about whether the consolidated financialstatements are free from material misstatement.

An audit involves performing procedures to obtain auditevidence about the amounts and disclosures in the consolidatedfinancial statements. The procedures selected depend on theauditors’ judgment, including the assessment of the risks ofmaterial 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’spreparation and fair presentation of the consolidated financialstatements in order to design audit procedures that areappropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the entity’s internalcontrol. An audit also includes evaluating the appropriateness ofaccounting policies used and the reasonableness of accountingestimates made by management, as well as evaluating theoverall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in ouraudits is sufficient and appropriate to provide a basis for ouraudit opinion.


22FEB20122009135222FEB201220125077

Consolidated Statements of Financial Position

December 31, December 31,($ thousands) Notes 2012 2011

Assets

Current assetsCash 1,303 1,497Accounts receivable

Trade and other receivables 86,101 75,752Xstrata Canada 17 12,246 17,027

Inventories 10 91,697 61,017Income taxes receivable 4,801 24Derivative financial assets 18 712 5,906Prepaids and other assets 1,925 2,254

198,785 163,477

Non-current assetsProperty, plant and equipment 9 270,867 277,135Deferred tax assets 8 7,920 6,506Derivative financial assets 18 57 271

278,844 283,912

477,629 447,389

Liabilities

Current liabilitiesAccounts payable and accrued liabilities

Trade and other payables 29,564 29,596Xstrata Canada 17 42,884 31,199

Income taxes payable 8 5,837 11,106Derivative financial liabilities 18 1,094 7,247Distribution payable 1,562 1,562Bank and other loans 15 15,192 15,000

96,133 95,710

Non-current liabilitiesDerivative financial liabilities 18 61 268Rehabilitation liability 13 24,691 23,606Employee benefits 14 29,442 24,188Bank and other loans 15 80,317 79,216Deferred tax liabilities 8 11,977 20,257

146,488 147,535

Total liabilities excluding net assets attributable to unitholders and non-controlling interest 242,621 243,245

Net assets attributable to unitholders and non-controlling interest 235,008 204,144

Net assets attributable to:Priority Unitholders 11 190,932 165,049Ordinary Unitholders 11 63,645 55,017

254,577 220,066Non-controlling interest (19,569) (15,922)

235,008 204,144

[See accompanying notes]

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

John J. Swidler Barry Tissenbaum


Consolidated Statements of Comprehensive Income (Loss)

($ thousands) Notes 2012 2011

Revenues

Sales 5,17 594,600 662,958

Transportation and distribution costs (16,924) (18,687)

577,676 644,271

Raw material purchase costs 17 288,047 340,446

Revenues less raw material purchase costs 289,629 303,825

Other expenses

Production 7 169,033 181,209

Selling and administration 7 21,139 20,101

Foreign currency (gain) loss (681) 919

Derivative financial instruments (gain) loss 18 (940) 3,473

Depreciation of property, plant and equipment 33,502 34,126

Rehabilitation expense 13 922 4,137

222,975 243,965

Earnings before finance costs and income taxes 66,654 59,860

Finance costs, net 6 7,981 16,110

Earnings before income taxes 58,673 43,750

Current income tax expense 8 15,302 18,958

Deferred income tax recovery 8 (7,652) (3,550)

Earnings attributable to Unitholders and Non-controlling interest 51,023 28,342

Distributions to Unitholders 12 18,750 27,998

Current income tax recovery on distribution 8 (4,136) (7,751)

Increase in net assets attributable to Unitholders and Non-controlling interest 36,409 8,095

Other comprehensive income (loss)

Actuarial loss on employee benefit plans 14 (7,585) (10,776)

Deferred income tax recovery (2,040) (2,679)

(5,545) (8,097)

Comprehensive income (loss) 30,864 (2)

Increase in net assets attributable to:

Priority Unitholders 25,883 9,349

Ordinary Unitholders 8,628 3,116

34,511 12,465

Non-controlling interest 1,898 (4,370)

36,409 8,095

Comprehensive income attributable to:

Priority Unitholders 25,883 9,349

Ordinary Unitholders 8,628 3,116

34,511 12,465

Non-controlling interest (3,647) (12,467)

30,864 (2)



Consolidated Condensed Statements of Changes in Net AssetsAttributable to Unitholders and Non-Controlling Interest

Attributable to

EarningsAttributable

Priority to Unitholders Actuarial LossUnits and and Non- on Employee Non-Ordinary controlling Distributions Benefit, Priority Ordinary controlling

($ thousands) Units interest to Unitholders Net of Tax Total Units Units interest

Balance at January 1, 2012 255,037 320,839 (356,953) (14,779) 204,144 165,049 55,017 (15,922)

Comprehensive income (loss) – 55,159 (18,750) (5,545) 30,864 25,883 8,628 (3,647)

Balance at December 31, 2012 255,037 375,998 (375,703) (20,324) 235,008 190,932 63,645 (19,569)

Attributable to

EarningsAttributable

Priority to Unitholders Actuarial LossUnits and and Non- on Employee Non-Ordinary controlling Distributions Benefit, Priority Ordinary controlling

($ thousands) Units interest to Unitholders Net of Tax Total Units Units interest

Balance at January 1, 2011 255,037 284,746 (350,704) (6,682) 182,397 139,388 46,464 (3,455)

Comprehensive income (loss) – 36,093 (27,998) (8,097) (2) 9,349 3,116 (12,467)

Non-cash distributions – – 21,749 – 21,749 16,312 5,437 –

Balance at December 31, 2011 255,037 320,839 (356,953) (14,779) 204,144 165,049 55,017 (15,922)


Consolidated Statements of Cash Flows

($ thousands) Notes 2012 2011

Operating activities

Comprehensive income (loss) 30,864 (2)

Adjustments:

Depreciation of property, plant and equipment 33,502 34,126

Net change in rehabilitation liability 6,13 1,085 4,787

Deferred income tax recovery (9,692) (6,229)

Derivative financial instruments (gain) loss 18 (2,899) 3,757

Change in fair value of embedded derivatives 18 5,593 (11,254)

Accretion on bank and other loans 6 1,284 6,803

Gain (loss) on sale of assets (380) 746

Non-cash distributions to Unitholders – 21,749

Net change in employee benefits 5,254 17,021

64,611 71,504

Net change in non-cash working capital items (39,297) 55,266

Cash provided by operating activities 25,314 126,770

Investing activities

Purchase of property, plant and equipment (27,013) (27,255)

Proceeds from sale of property, plant and equipment 2,381 1,438

Cash used in investing activities (24,632) (25,817)

Financing activities

Proceeds from bank loans 15 712,107 347,767

Proceeds from issuance of senior secured notes 15 – 90,000

Repayment of bank loans 15 (697,983) (526,283)

Repayment of senior secured notes 15 (15,000) (7,500)

Debt financing costs 15 – (6,838)

Cash used in financing activities (876) (102,854)

Net decrease in cash (194) (1,901)

Cash at beginning of year 1,497 3,398

Cash at end of year 1,303 1,497

Supplemental cash flow information:

Cash interest paid 6,024 8,471

Income taxes paid 21,212 101



Notes to the Consolidated Financial Statements

NOTE 1. CORPORATE INFORMATION The initial term of the SPA will end on May 2, 2017 and willautomatically renew for a five-year term thereafter, unless Xstrata

Noranda Income Fund (the ‘‘Fund’’) is an income trust Canada provides the Partnership with written notice to theestablished under the laws of the province of Ontario, Canada contrary at least 180 days prior. Under any renewal, Xstrataand its Priority Units are publicly traded on the Toronto Stock Canada would act as agent for the Partnership for the purchaseExchange (the ‘‘TSX’’). The registered office is located at of zinc concentrate and the Partnership would pay the market100 King Street West, First Canadian Place, Suite 6900, cost of the zinc concentrate that it receives. Xstrata CanadaP.O. Box 403, Toronto, Ontario, Canada, M5X 1E3. would act as exclusive sales agent for the purchase of zinc

The Fund was created in 2002, initially to acquire from concentrate and the sale of zinc metal and by-products andNoranda Inc., indirectly through the Noranda Operating Trust related hedging and derivative arrangements.(the ‘‘Operating Trust’’) and the Noranda Income Limited Under the terms of an administration agreement between thePartnership (the ‘‘Partnership’’), the CEZinc Processing Facility Fund and Canadian Electrolytic Zinc Limited (the ‘‘Manager’’), a(the ‘‘Processing Facility’’). The Processing Facility produces wholly-owned subsidiary of Xstrata Canada, a managementrefined zinc metal and various by-products from zinc services agreement between the Operating Trust and theconcentrates and is located in Salaberry-de-Valleyfield, Quebec. Manager and an operating and management agreement

As at June 30, 2005, Noranda Inc. changed its name to between the Partnership and the Manager, the Manager providesFalconbridge Limited (‘‘Falconbridge’’) pursuant to a corporate administrative services to the Fund and management services toamalgamation. Falconbridge subsequently changed its name to the Operating Trust and the Partnership, respectively. The initialXstrata Canada Corporation (‘‘Xstrata Canada’’) after being term of these agreements will end on May 2, 2017 and willacquired by Xstrata plc. (‘‘Xstrata’’). Xstrata is a global diversified automatically renew for a five-year term thereafter, unlessmining group listed on the London and Swiss stock exchanges. terminated in accordance with the terms. Upon the termination

On December 7, 2012, the Fund completed an internal of the operating and management agreement, the Partnershipreorganization. Upon completion of the reorganization, the will acquire the Manager from Xstrata Canada.Operating Trust owns all the shares of a newly-formed company,1884699 Ontario Inc. (‘‘Ontario Inc.’’). Ontario Inc. in turn owns NOTE 2. STATEMENT OF COMPLIANCEthe Partnership’s Class A Partnership Units that were previouslyowned by the Operating Trust (Notes 8, 12 and 17). Basis of preparation

The consolidated financial statements of the Fund have beenSupply and processing agreement prepared in accordance with International Financial ReportingPursuant to a 15-year Supply and Processing Agreement (‘‘SPA’’) Standards (‘‘IFRS’’) as issued by the International Accountingsigned on May 3, 2002 between Xstrata Canada and the Standards Board (‘‘IASB’’).Partnership, Xstrata Canada is obligated to sell to the Processing The consolidated financial statements have been prepared onFacility, except in certain circumstances, up to 550,000 tonnes a historical cost basis, except for derivative financial instrumentsof zinc concentrate annually at a concentrate price based on the that have been measured at fair value and the employee benefitsprice of zinc metal on the London Metal Exchange (‘‘LME’’) for which are recognized as plan assets less the present value of the‘‘payable zinc metal’’ contained in the concentrate less a defined benefit obligation. The consolidated financial statementsprocessing fee initially set at $0.352 per pound of that ‘‘payable are prepared in Canadian dollars and all values are rounded tozinc metal.’’ Starting in 2004, the processing fee is the the nearest thousand (CAD$ thousand), except where otherwiseprocessing fee in the previous year adjusted annually (i) upward indicated.by 1% and (ii) upward or downward by 10% of the year-over-year The Board of Trustees approved these consolidated financialpercentage change in average cost of electricity per megawatt statements on February 12, 2013.hour for the Processing Facility. ‘‘Payable zinc metal’’ in respectof a quantity of concentrate is equal to 96% of the assayed zinc Basis of consolidationmetal content on the concentrate under the SPA. The processing The consolidated financial statements comprise the financialfee for 2012 was $0.392 (2011 – $0.389) per pound. statements of the Fund and its wholly-owned subsidiaries and

Under the SPA, Xstrata Canada acts as the exclusive agent for the Manager, a special purpose entity (‘‘SPE’’). All intra-groupthe Partnership to arrange the sale of zinc metal and by-products balances, income and expenses, unrealized gains and losses,and related hedging and derivative arrangements. and dividends resulting from intra-group transactions are

eliminated in full.


The results of subsidiaries acquired or sold are consolidated Consolidation of a special purpose entityfor the periods from or to the date on which the Fund obtains The Manager was incorporated in the province of Quebec oncontrol and continue to consolidate until the date when such December 14, 1961. Since May 3, 2002, the Manager hascontrol ceases. Control is achieved where the Fund has the been operating as a management company that providespower to govern the financial and operating policy of an entity so management and administrative services to the Fund and itsas to obtain benefits from its activities, generally when the Fund subsidiaries. Upon the termination of the operating andhas more than 50% voting power through ownership or management agreement, the Partnership is required to acquireagreements. SPEs are consolidated when the substance of the the Manager from Xstrata Canada and set up a pension plan forrelationship between the Fund and that entity indicates control. the employees of the Manager.Indicators of control include, amongst other factors, having half The Fund has the ability to give directions with respect to theor less of the voting power but having de facto control, the ability operating policies of the Manager, is exposed to the Manager’sto give directions with respect to the operating and financial benefits and risks, and the Manager conducts activities solely onpolicies of the entity concerned, being exposed to the SPE’s behalf of the Fund. Accordingly, the Fund has concluded that thebenefits and risks or when the activities of the SPE are being Manager is an SPE.conducted on behalf of the reporting entity. The consolidation of Losses within the Manager have been attributed to theSPEs is considered at inception, based on the arrangements in non-controlling interest even if that results in a deficit balance.place and the assessed risk exposures at that time.

Non-controlling interests represent the portion of the profit or Use of estimatesloss and net assets not held by the Fund and are presented The key assumptions concerning the future and other keyseparately in the consolidated financial statements. Losses sources of estimation uncertainty which have the mostwithin a subsidiary are attributable to the non-controlling significant effect on the amounts recognized in the consolidatedinterests even if that results in a deficit balance. The financial financial statements are described below.statements of the subsidiaries are prepared using the samereporting period and same accounting policies as the Fund. Impairment of non-financial assets

Impairment exists when the carrying value of a non-financialUse of estimates and judgments asset or cash-generating unit exceeds its recoverable amount,The preparation of the consolidated financial statements in which is the higher of its fair value less costs to sell and its valueconformity with IFRS requires management to make judgments, in use. Management uses the value in use calculation toestimates and assumptions that affect the reported amounts of determine the recoverable amount which is based on arevenues, expenses, assets and liabilities, and the disclosure of discounted cash flow model with cash flows expected to becontingent liabilities, at the date of the financial statements. generated from the Processing Facility over its remaining usefulEstimates and assumptions are continuously evaluated and are life. Cash flows do not include restructuring activities, if any, thatbased on management’s experience and other factors, including the Fund is not yet committed to or significant future investmentsexpectations of future events that are believed to be reasonable that may enhance the non-financial assets’ performance of theunder the circumstances. Uncertainty about these assumptions cash-generating unit being tested. The recoverable amountand estimates could result in outcomes that require a material requires estimates and assumptions such as the discount rate,adjustment to the carrying amount of assets and liabilities foreign exchange rate assumption, useful life of the assets,affected in future periods. availability of concentrate, the price of zinc, copper and sulphuric

acid, zinc premium, capital expenditures, closure andrehabilitation expenditures and operating costs. Therefore, thereJudgmentsis a possibility that changes in circumstances, in particular theIn particular, the Fund has identified the following areas whereavailability of concentrate beyond the term of the SPA, maysignificant judgments, estimates and assumptions are required.impact the recoverable amount calculated by management.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 theyimpact the various accounting policies are described below andalso the relevant notes to the consolidated financial statements.



Taxes (Note 8) The Manager participates in defined benefit pension plansTo determine the extent to which deferred income tax assets can administered by Xstrata Canada. Assets are allocated to thebe recognized, management must estimate the amount of Manager based upon the Pension and Benefits Agreement withprobable future taxable profits that will be available against which Xstrata Canada. Expected returns on assets are based on thedeductible temporary differences. Such estimates are made as asset mix and long-term expected returns.part of the budgets by tax jurisdiction on an undiscounted basis The mortality rate is based on publicly available mortalityand are reviewed at each reporting date. Management exercises tables for Canada. Future salary increases and pension increasesjudgment to determine the extent to which realization of future are based on expected future inflation rates for Canada, averagetaxable benefits is probable, considering factors such as the wage growth and historical information and future expectations.number of years to include in the forecast period and the historyof taxable profits. Rehabilitation liability (Note 13)

Uncertainties exist with respect to the interpretation of The Fund has recognized a rehabilitation liability solely related tocomplex tax regulations and the amount and timing of future the residue ponds on the Processing Facility site. The Fundtaxable income. Given the range of business relationships and assesses its rehabilitation provision at each reporting date.the long-term nature of existing contractual agreements, Significant estimates and assumptions are made in determiningdifferences arising between the actual results and the the provision for rehabilitation as there are numerous factors thatassumptions made, or future changes to such assumptions, will affect the ultimate amount payable. These factors includecould necessitate future adjustments to income taxes already estimates of the extent and costs of reclamation of the residuerecorded. The Fund establishes provisions, based on reasonable ponds and the expected timing of those costs, technologicalestimates, for possible consequences of audits by the tax changes, regulatory changes, cost increases as compared to theauthorities. inflation rates and changes in discount rates (2012 – 2.16%,

2011 – 2.26%). These uncertainties may result in future actualEmployee benefits (Note 14) expenditure differing from amounts currently provided. To theThe cost of defined benefit pension plans and other extent the actual costs and timing of expenditures differ frompost-retirement benefits and the present value of the pension these estimates, adjustments will be recorded in earningsobligation are required to be determined annually using actuarial attributable to Unitholders and non-controlling interest on thevaluations. An actuarial valuation involves making various consolidated statements of comprehensive income (loss). Theestimates and assumptions including the determination of the provision at the reporting date represents management’s bestfuture returns on each different type of asset, discount rate, estimate of the present value of the future rehabilitationfuture salary increases, employee attrition rates, mortality rates, costs required.expected remaining periods of service of employees and future The Fund’s operations are affected by federal, provincial, andpension increases. Due to the complexity of the valuation, the local laws and regulations concerning environmental protection.underlying assumptions, and its long-term nature, a defined The Fund’s provisions for rehabilitation are based on knownbenefit obligation is highly sensitive to changes in these requirements. It is not currently possible to estimate the impactassumptions. All assumptions are reviewed at each on operating results, if any, of future legislative or regulatoryreporting date. developments.

In determining the appropriate discount rate, managementconsiders the interest rate spreads of corporate bonds in Canada Inventorywith at least AA rating or government bonds with similar Inventories are stated at the lower of cost and net realizablematurities. As Canada is not considered to have a deep market in value. Net realizable value is the estimated future selling pricelong-term corporate bonds, the government rate on bonds with the Fund expects to realize when the product is produced andsimilar maturities is used taking into consideration the interest sold, less estimated costs to complete production and bring therate spread on the short- and medium-term corporate bonds, product to sale.with extrapolated maturities corresponding to the expected Stockpiles are measured by estimating the number of tonnesduration of the defined benefit obligation. The underlying bonds added to and removed from the stockpile, the number ofare further reviewed for quality, and those having excessive credit contained pounds is based on assay data, and the estimatedspreads are removed from the population of bonds on which the recovery percentage is based on the expected processingdiscount rate is based, on the basis that they do not represent method. Stockpile tonnages are verified by periodic surveys.high quality bonds.


NOTE 3. PRINCIPAL ACCOUNTING POLICIES For a portion of the Fund’s sales contracts, the sales price isdetermined provisionally at the date of sale, with the final price

The accounting policies set out below have been applied determined at a mutually agreed date (generally between oneconsistently to all periods presented in these consolidated and three months from the date of the sale), generally at afinancial statements. quoted market price at that time. This provisional pricing

arrangement has the characteristics of an embedded derivativeForeign currency which does not qualify for hedge accounting and is recorded atTransactions in foreign currencies are translated at the exchange fair value based on the forward metal prices for the relevantrates prevailing at the date of transaction. Monetary assets and contract period. All subsequent mark-to-market adjustments areliabilities denominated in foreign currencies are translated at recorded in sales revenue up to the date of final settlement.exchange rates at the reporting date. All differences that arise Price changes for shipments awaiting final pricing atare recorded in earnings attributable to Unitholders and period-end could have a material effect on future revenues. As atnon-controlling interest on the consolidated statements of December 31, 2012, there was $8,497comprehensive income (loss). Non-monetary assets measured (December 31, 2011 – $7,700) in revenues that were awaitingat historical cost in a foreign currency are translated using the final pricing. The following table provides an analysis of theexchange rates at the date of the initial transactions. revenues awaiting final pricing as at December 31, 2012

and 2011:RevenueThe Fund recognizes revenue from the sale of refined metals andby-products when all significant risks and rewards of ownership ofthe asset sold are transferred to the buyer, which generallyoccurs upon shipment. Revenue is recognized, at fair value of theconsideration received or receivable, to the extent that it isprobable that economic benefits will flow to the Fund and therevenue can be reliably measured. Revenues from the sale ofby-products are also included in sales revenue.

2012 2011

Average AverageAccountable provisional Accountable provisional

metal content price metal content price(pounds) (US$/pound) (pounds) (US$/pound)

Zinc metal 6,335,048 0.89 4,497,954 0.95Copper in cake 1,064,056 3.59 1,185,930 3.45

Revenues are recorded net of sales taxes. Depreciation is recorded on a straight-line basis over theestimated useful life of the asset taking into account theestimated residual value. Estimates of remaining useful lives,Property, plant and equipmentresidual values and methods of depreciation are reviewed atOn initial acquisition, property, plant and equipment are valued ateach reporting date and adjusted prospectively, if appropriate.cost, being the purchase price and the directly attributable costs

When parts of an item of property, plant and equipment haveof acquisition or construction required to bring the asset to thedifferent useful lives, they are accounted for as separatelocation and condition necessary for the asset to be capable ofcomponents and are depreciated over their useful lives.operating in the manner intended by management. The cost also

The expected useful lives are as follows:includes borrowing costs on qualifying assets under construction,if any, less any applicable government assistance. The capitalizedvalue of a finance lease is also included in property, plant Buildings and plant equipment 10-40 yearsand equipment. Anodes (included in buildings and plant

equipment) 3 yearsMobile equipment 5-10 yearsComputers 4 yearsAutomobiles and trucks 4 years



Capital parts are depreciated when they are put into use over the Leases where the Fund does not assume substantially all ofestimated useful lives of the associated equipment. Insurance the risks and rewards are classified as operating leases.parts are amortized over the estimated useful lives of the Payments made under operating leases are recognized inassociated equipment. earnings attributable to Unitholders and non-controlling interest

When significant parts of property, plant and equipment are on the consolidated statements of comprehensive income (loss)required to be replaced at intervals, the Fund derecognizes the on a straight-line basis over the term of the lease.replaced part, and recognizes the new part with its ownassociated useful life and depreciation. All other repair and Impairment of non-financial assetsmaintenance costs are recognized in earnings attributable to The Fund assesses at each reporting date whether there is anUnitholders and non-controlling interest on the consolidated indication that an asset may be impaired. If there are indicationsstatements of comprehensive income (loss) as incurred. of impairment, a review is undertaken to determine whether the

Expenditure on major maintenance refits or repairs comprises carrying amounts are in excess of their recoverable amounts. Anthe cost of replacement assets or parts of assets and overhaul asset’s recoverable amount is determined as the higher of its faircosts. Where an asset or part of an asset that was separately value less costs to sell and its value-in-use. Such reviews aredepreciated and is now written off is replaced, and it is probable undertaken on an asset-by-asset basis, except where assets dothat future economic benefits associated with the item will flow not generate cash flows independent of other assets, in whichto the Fund through an extended life, the expenditure case the review is undertaken at the cash-generating unit level.is capitalized. The Fund has only one cash-generating unit.

When an item of property, plant and equipment is disposed of If the carrying amount of an asset exceeds its recoverableor when no future economic benefits are expected from its use, it amount, an impairment loss is recorded in earnings attributableis derecognized and the gain or loss on the difference between to Unitholders and non-controlling interest on the consolidatedits carrying value and proceeds from sale is included in earnings statements of comprehensive income (loss) to reflect the assetattributable to Unitholders and non-controlling interest on the at the lower amount. In assessing the value-in-use, the relevantconsolidated statements of comprehensive income (loss). future cash flows expected to arise from the continuing use of

such assets and from their disposal are discounted to theirLeases present value using a market-determined pre-tax discount rateThe determination of whether an arrangement is, or contains, a that reflects current market assessments of the time value oflease is based on the substance of the arrangement at the money and asset-specific risks for which the cash flow estimatesinception date, whether fulfilment of the arrangement is have not been adjusted. Fair value less costs to sell isdependent on the use of a specific asset or assets or the determined as the amount that would be obtained from the salearrangement conveys a right to use the asset, even if that right is of the asset in an arm’s-length transaction betweennot explicitly specified in an arrangement. knowledgeable and willing parties. If no such transactions can be

Leases are classified as financing or operating depending on identified, an appropriate valuation model is used.the terms and conditions of the contracts. Lease agreements An impairment loss is reversed in earnings attributable towhere the Fund assumes substantially all the risks and rewards Unitholders and non-controlling interest on the consolidatedof ownership are classified as finance leases. Upon initial statements of comprehensive income (loss) if there is a changerecognition, the leased asset is measured at an amount equal to in the estimates used to determine the recoverable amountthe lower of its fair value and the present value of the minimum since the prior impairment loss was recognized. The carryinglease payments. Subsequent to initial recognition, the asset is amount is increased to the recoverable amount, but not beyondaccounted for in accordance with the accounting policy the carrying amount, net of depreciation or amortization thatapplicable to that asset. However, if there is no reasonable would have arisen if the prior impairment loss had not beencertainty that the Fund will obtain ownership by the end of the recognized. After such a reversal the depreciation charge islease term, the asset is depreciated over the shorter of the adjusted in future periods to allocate the asset’s revised carryingestimated useful life of the asset and the lease term. Obligations amount, less any residual value, on a systematic basis over itsrecorded under finance leases are reduced by lease payments, remaining useful life.net of imputed interest.


Financial instruments A financial liability is derecognized when the obligation underFinancial assets are classified as either financial assets at fair the liability is discharged or cancelled or expires.value through profit or loss, loans and receivables, Gains and losses on derecognition are recognized in earningsheld-to-maturity investments or available-for-sale financial attributable to Unitholders and non-controlling interest on theassets, as appropriate. Financial liabilities are classified as consolidated statements of comprehensive income (loss).financial liabilities at fair value through profit or loss, otherliabilities, or as derivatives designated as hedging instruments in Financial assets or liabilities at fair value through profit or lossan effective hedge, as appropriate. The Fund determines the Financial assets or liabilities classified as held-for-trading areclassification of its financial assets or liabilities at initial included in the category financial assets or liabilities at fair valuerecognition. When financial assets or liabilities are recognized through profit or loss. Financial assets or liabilities are classifiedinitially, they are measured at fair value. The subsequent as held-for-trading if they are acquired for the purpose of sellingmeasurement of financial assets and liabilities depends on their in the near term. Derivatives are also classified asclassification. held-for-trading unless they are designated as and are effective

Financial assets and liabilities are offset and the net amount hedging instruments. Gains or losses on these items arereported in the statements of financial position when there is a recognized in earnings attributable to Unitholders andlegally enforceable right to offset the recognized amounts and non-controlling interest on the consolidated statements ofthere is an intention to settle on a net basis, or realize the asset comprehensive income (loss).and settle the liability simultaneously. The Fund considers whether a contract contains an

Derivative instruments that are not designated as effective embedded derivative when it becomes a party to the contract.hedging instruments are classified as current or non-current or Embedded derivatives are separated from the host contract if it isseparated into current or non-current portions based on an not measured at fair value through profit and loss and when theassessment of the facts and circumstances (i.e. the underlying economic characteristics and risks are not closely related to thecontracted cash flows). Derivative instruments that are host contract.designated as, and are effective hedging instruments, areclassified consistently with the classification of the underlying Loans and receivableshedged item. The derivative instrument is separated into a Loans and receivables are non-derivative financial assets withcurrent portion and a non-current portion only if a reliable fixed or determinable payments that are not quoted in an activeallocation can be made. market, do not qualify as trading assets and have not been

The Fund financial assets and liabilities are classified and designated as either fair value through profit and loss ormeasured as follows: available-for-sale. Such assets are carried at amortized cost

using the effective interest method, less impairment. Losses areClassification Measurement recognized in earnings attributable to Unitholders and

Loans and non-controlling interest on the consolidated statements ofAccounts receivable receivable Amortized cost comprehensive income (loss) when the loans and receivables areDerivative financial assets Held for trading Fair value derecognized or impaired, as well as through the amortizationDerivative financial process. Trade and other receivables are recognized and carried

liabilities Held for trading Fair value at their original invoiced value and are non-interest bearing, andBank and other loans Other liabilities Amortized cost are adjusted, where appropriate, for provisional pricing or theirAccounts payable and recoverable amount if this differs from the invoiced amount.

accrued liabilities Other liabilities Amortized cost Where the time value of money is material, receivables areDistribution payable Other liabilities Amortized cost discounted and are carried at their present value. A provision is

made where the estimated recoverable amount is lower than thecarrying amount.Derecognition of financial assets and liabilities

A financial asset is derecognized when the rights to receive cashflows from the asset have expired or the Fund has transferred itsrights to receive cash flows from the asset and either hastransferred substantially all the risks and rewards of the asset, orhas neither transferred nor retained substantially all the risks andrewards of the asset, but has transferred control of the asset.



Other liabilities The amount of the loss is measured as the differenceOther liabilities are recognized initially at fair value net of any between the asset’s carrying amount and the present value ofdirectly attributable transaction costs. Subsequent to initial estimated future cash flows (excluding future credit losses thatrecognition, these financial liabilities are measured at amortized have not been incurred) discounted at the financial asset’scost using the effective interest method. Other liabilities are original effective interest rate (i.e. the effective interest ratepresented as current if payment is due within twelve months. computed at initial recognition). The carrying amount of the assetOtherwise, and in cases where the Fund has an unconditional is reduced and the amount of the loss is recognized in theright to defer settlement for at least twelve months after the statements of comprehensive income (loss). Objective evidencereporting period, they are presented as non-current liabilities. of impairment of loans and receivables exists if the counter-partyFinance costs are recognized in earnings attributable to is experiencing significant financial difficulty, there is a breach ofUnitholders and non-controlling interest on the consolidated contract, concessions are granted to the counter-party thatstatements of comprehensive income (loss) using the effective would not normally be granted, or it is probable that the counter-interest method. party will enter into bankruptcy or a financial reorganization.

If, in a subsequent period, the amount of the estimatedimpairment loss increases or decreases because of an eventFair valuesoccurring after the impairment was recognized, the previouslyThe fair value of financial instruments that are traded in activerecognized impairment loss is increased or reduced by adjustingmarkets at each reporting date is determined by reference tothe allowance account. Any subsequent reversal of anquoted market prices or dealer price quotations (Level 1),impairment loss is recognized in earnings attributable towithout any deduction for transaction costs.Unitholders and non-controlling interest on the consolidatedFor financial instruments not traded in an active market, thestatements of comprehensive income (loss), to the extent thatfair value is determined using appropriate valuation techniquesthe carrying value of the asset does not exceed its amortized cost(Level 2). Such techniques may include using recent arm’sat the reversal date.length market transactions; reference to the current fair value of

another instrument that is substantially the same; a discountedcash flow analysis or other valuation models. Other techniques Derivative financial instruments and hedging(Level 3) use inputs not based on observable market data. The Fund periodically uses derivative financial instruments such

An analysis of fair values of financial instruments and further as commodity contracts to hedge the risks associated withdetails as to how they are measured are provided in Notes 18 commodity price fluctuations. Such derivative financialand 19. instruments are initially recognized at fair value on the date on

which a derivative contract is entered into and are subsequentlyre-measured at fair value. Derivative financial instruments areImpairment of financial assetscarried as financial assets when the fair value is positive and asThe Fund assesses at each reporting date whether there is anyfinancial liabilities when the fair value is negative.objective evidence that a financial asset or a group of financial

The Fund periodically uses commodity forward contracts toassets carried at amortized costs are impaired. A financial assethedge the effect of price changes relating to its firm fixedor a group of financial assets carried at amortized cost arecommitments on the commodities it sells. Hedge accounting isdeemed to be impaired if, and only if, there is objective evidencepermitted when there is a high degree of correlation betweenof impairment as a result of one or more events that hasprice movements in the derivative instrument and the itemoccurred after the initial recognition of the asset, such as debtorsdesignated as being hedged. The relationship between theexperiencing significant financial difficulty, and that loss eventFund’s firm fixed sales commitments and the commodity forwardhas an impact on the estimated future cash flows of the financialcontracts purchased to hedge these commitments permits theasset or the group of financial assets that can be reliablyuse of hedge accounting on these fair value hedges.estimated.

The Fund has determined that its derivatives which werecontracted in connection with its inventory management hedgingprogram do not meet the hedging requirements. As a result,these derivatives have been recognized on the consolidatedstatements of financial position as a derivative financial asset orliability with the change in their fair values at each reportingperiod recognized as a gain or a loss in earnings attributable toUnitholders and non-controlling interest on the consolidatedstatements of comprehensive income (loss).


InventoriesFair value hedges are hedges of the Fund’s exposure toInventories are stated at the lower of cost and net realizablechanges in the fair value of a recognized asset or liability thatvalue. Cost of raw materials, work-in-process and finishedcould affect profit or loss. The carrying amount of the hedgedproducts is determined on a weighted average basis and includesitem is adjusted for gains and losses attributable to the risk beingall costs incurred in the normal course of business includinghedged, the derivative is re-measured at fair value, and gainsdirect material and direct labour costs and an allocation ofand losses from both are taken to earnings attributable toproduction overheads, depreciation and amortization and otherUnitholders and non-controlling interest on the consolidatedcosts, based on normal production capacity, incurred in bringingstatements of comprehensive income (loss).each product to its present location and condition.At the inception of a hedge relationship, the Fund formally

Spare parts inventory is valued at the lower of cost and netdesignates and documents the hedge relationship to which therealizable value, where cost is determined using a first-in first-outFund wishes to apply hedge accounting and the riskbasis and includes direct material costs incurred.management objective and strategy for undertaking the hedge.

Any provision for obsolescence is determined by reference toThe documentation includes identification of the hedgingthe aging of items as well as review of specific items in stock. Ainstrument, the hedged item or transaction, the nature of the riskregular review is undertaken to determine the extent of anybeing hedged and how the entity will assess the hedgingprovision for obsolescence. Inventories are categorised,instrument’s effectiveness in offsetting the exposure to changesas follows:in the hedged item’s fair value or cash flows attributable to the• Spare parts;hedged risk. Hedges that are expected to be highly effective in• Raw materials: zinc concentrate to be consumed in theachieving offsetting changes in fair value or cash flows are

production process;assessed on an ongoing basis to determine if they actually have• Work-in-process: items stored in an intermediate state thatbeen highly effective throughout the financial reporting periods

have not yet passed through all the stages of production; andfor which they were designated.• Finished products: zinc metal and by-products that haveWhen an unrecognized firm commitment is designated as a

passed all stages of the production process.hedged item, the subsequent cumulative change in the fair valueNet realizable value is the estimated selling price in theof the firm commitment attributable to the hedged risk is

ordinary course of business less estimated costs to completionrecognized as an asset or liability with a corresponding gain orand the estimated costs necessary to make the sale.loss recognized in earnings attributable to Unitholders and

non-controlling interest on the consolidated statements ofcomprehensive income (loss). The subsequent cumulative Government grantschange in the fair value of the hedging instrument, the Government grants are recognized where there is reasonablecommodity forward contracts, is recognized as an asset or assurance that the grant will be received and all the attachingliability with a corresponding gain or loss recognized in earnings conditions will be complied with. Government grants in respect ofattributable to Unitholders and non-controlling interest on the capital expenditures are credited to the carrying amount of theconsolidated statements of comprehensive income (loss). related asset and are released to earnings attributable to

If the hedged item is derecognized, the unamortized fair value Unitholders and non-controlling interest on the consolidatedis recognized immediately in earnings attributable to Unitholders statements of comprehensive income (loss) in equal amountsand non-controlling interest on the consolidated statements of over the expected useful lives of the relevant assets. Grants thatcomprehensive income (loss). Any gains or losses arising from are not associated with an asset are credited to income so as tochanges in fair value on derivatives that do not qualify for hedge match them with the expense to which they relate.accounting are recorded in earnings attributable to Unitholdersand non-controlling interest on the consolidated statements ofcomprehensive income (loss).



Rehabilitation liability Current income taxThe Fund records a rehabilitation provision for legal and Current income tax assets and liabilities for the current periodconstructive obligations. Provision is made for restoration and for are measured at the amount expected to be recovered from orenvironmental rehabilitation costs in the financial period when paid to the taxation authorities. The tax rates and tax laws usedthe related environmental disturbance occurs, based on the to compute the amount are those that are enacted orestimated future costs and timing of expenditures using substantively enacted, at the reporting date.information available at year end. The provision is discounted Current income tax relating to items recognized directly inusing a pre-tax rate that reflects the risk specific to the other comprehensive income or equity is recognized in otherrehabilitation liability and the unwinding of the discount is comprehensive income. Management periodically evaluatesrecognized in finance costs. At the time of establishing the positions taken in the tax returns with respect to situations inprovision, a corresponding asset is capitalized, where it gives rise which applicable tax regulations are subject to interpretation andto a future benefit, and depreciated over future production from establishes provisions where appropriate.the operations to which it relates. Subsequent changes in theestimated costs are recognized immediately in the statement of Deferred taxcomprehensive income (loss). Deferred tax is recognized using the statement of financial

The estimated future costs of rehabilitation are reviewed on a position method in respect of all temporary differences betweenregular basis for changes to obligations, timing of expenditures, the tax bases of assets and liabilities, and their carrying amountslegislation or discount rates that impact estimated costs. The for financial reporting purposes.cost of the related asset is adjusted for changes in the provision Deferred income tax assets and liabilities are offset if there isresulting from changes in the estimated cash flows or discount a legally enforceable right to offset current tax liabilities andrate and the adjusted cost of the asset is depreciated assets, and they relate to income taxes levied by the same taxprospectively unless the corresponding asset is fully depreciated, authority on the same taxable entity, or on different tax entities,as is the case for the Fund, in which case the change is but they intend to settle current tax liabilities and assets on a netrecognized immediately in earnings attributable to Unitholders basis or their tax assets and liabilities will be realizedand non-controlling interest on the consolidated statements of simultaneously.comprehensive income (loss). Deferred income tax assets and liabilities are presented as

The unwinding of the discount rate is recorded in earnings non-current.attributable to Unitholders and non-controlling interest in the The carrying amount of deferred income tax assets is reviewedconsolidated statements of comprehensive income (loss) as part at each balance sheet date and reduced to the extent that it isof finance costs, net. no longer probable that sufficient taxable profit will be available

to allow all or part of the deferred income tax asset to be utilized.Taxes To the extent that an asset not previously recognized fulfils theIncome tax expense comprises current and deferred tax. Current criteria for recognition, a deferred income tax asset is recorded.income tax and deferred income tax are recognized in earnings Deferred tax is measured on an undiscounted basis at the taxattributable to Unitholders and non-controlling interest except to rates applicable to undistributed profits that are expected tothe extent that it relates to a business combination, or items apply in the periods in which the asset is realized or the liability isrecognized directly in other comprehensive income (loss), in settled, based on tax rates and tax laws enacted or substantivelywhich case the current and/or deferred tax is also recognized enacted at the balance sheet date.directly in other comprehensive income.

The Fund and the Operating Trust are trusts for income tax Employee benefitspurposes and are subject to Canadian income taxes on certain The Manager participates in deferred benefit pension plans andincome distributed to its unitholders at the same combined unfunded post-retirement benefit plans, managed andfederal and provincial corporate tax rate applicable to a Canadian administered by Xstrata Canada.taxable corporation. Income not distributed to unitholders is The Fund accrues its obligations under defined benefit planssubject to a top marginal individual income tax rates. IAS 12 and post retirement benefit plans, net of plan assets, whererequires that current and deferred tax assets and liabilities be applicable. The calculation is performed annually by anmeasured at the tax rate applicable to undistributed profits until independent qualified actuary.such time that the distribution becomes payable. The Fund’scorporate subsidiaries are taxed at the corporate tax rates.


Other provisionsThe service cost of providing pension benefits to employeesProvisions are recognized when the Fund has a present obligationfor the year is determined using the projected unit method taking(legal or constructive), as a result of past events, it is probableinto account management’s best estimate of expected planthat an outflow of resources will be required to settle theinvestment performance, salary escalation, and retirement agesobligation and a reliable estimate can be made of the amount ofof employees, where applicable, and is recognized in earningsthe obligation. Where the effect is material, the provision isattributable to Unitholders and non-controlling interest on thediscounted to net present value using an appropriate pre-tax rateconsolidated statements of comprehensive income (loss).that reflects, where appropriate, the risk specific to the liabilityPast service cost is recognized as an expense on a straightand the unwinding of the discount is included in finance costs.line basis over the average period until the benefits become

vested unless the benefits vest immediately following changes inthe defined benefit plan, in which case the past service cost is Net assetsrecognized immediately in earnings attributable to Unitholders Balance sheet presentationand non-controlling interest on the consolidated statements of In accordance with IAS 32 Financial Instruments: Presentation,comprehensive income (loss). puttable instruments are generally classified as financial

Plan assets are measured at fair value based on market price liabilities. The Fund’s Priority Units are puttable instruments,information and, in the case of quoted securities, the published meeting the definition of financial liabilities in IAS 32. There arebid prices, while plan liabilities are measured on an actuarial exception tests within IAS 32 which could result in classificationbasis using the projected unit credit method and discounted at as equity, however, the Fund’s Priority Units do not meet thean interest rate equivalent to the current rate of return on exception requirements, primarily because the Fund has aCanadian government bonds with equivalent currency and term contractual obligation to distribute taxable income to unit holdersto the plan liabilities, taking into consideration the interest rate on an annual basis (Note 12).spread on corporate bonds with at least AA rating. The Partnership’s Class B Ordinary Units (the ‘‘Ordinary

When the calculation results in a benefit to the Fund, the Units’’) with the attached Special Fund Units (as defined below)recognized asset is limited to the total of any unrecognized past are exchangeable into Priority Units are considered a financialservice costs and the present value of economic benefits liability.available in the form of any future refunds from the plan or Accordingly, the Fund has no instrument qualifying for equityreductions in future contributions to the plan. In order to classification on its consolidated statements of financial position.calculate the present value of economic benefits, consideration The classification of all units as financial liabilities withis given to any minimum funding requirements that apply to any presentation as net assets attributable to unitholders of the Fundplan of the Fund. An economic benefit is available to the Fund if (the ‘‘Unitholders’’) does not alter the underlying economicit is realizable during the life of the plan, or on settlement of the interest of the Unitholders in the net assets and net operatingplan liabilities. results attributable to Unitholders.

When the payment in the future of minimum fundingrequirements related to past service would result in a net defined Balance sheet measurementbenefit surplus or an increase in a surplus, the minimum funding Priority Units and Ordinary Units are carried on the consolidatedrequirements are recognized as a liability to the extent that the statements of financial position at net asset value. The net assetsurplus would not be fully available as a refund or a reduction in value is split based on the number of units outstanding (75% forfuture contributions. Re-measurement of this liability is the Priority Units and 25% for the Ordinary Units) prior to therecognized in other comprehensive income in the period in which distribution deficiency noted in Note 12. Although instrumentsthe re-measurement occurs. classified as financial liabilities are generally required to be

All actuarial gains and losses are recognized directly in net re-measured to fair value at each reporting period, including theassets attributable to unitholders and non-controlling interest embedded derivative relating to the conversion feature of thethrough other comprehensive income. The full pension surplus or Ordinary Units, the alternative presentation as net assetsdeficit is recorded in the consolidated statements of financial attributable to Unitholders reflects that, in total, the interest ofposition. the Unitholders is limited to the net assets of the Fund.



IAS 1 Presentation of Financial Statements – Components ofStatement of comprehensive income (loss) presentationOther Comprehensive IncomeAs a result of the classification of all units as financial liabilities,The amendments to IAS 1 change the grouping of itemsthe consolidated statements of comprehensive income (loss)presented in other comprehensive income (OCI). Items thatrecognize distributions to Unitholders in earnings attributable tocould be reclassified (or ‘‘recycled’’) to profit or loss at a futureUnitholders and non-controlling interest on the consolidatedpoint in time (for example, upon derecognition or settlement)statements of comprehensive income (loss). Thewould be presented separately from items that will never bere-measurement of income taxes on distribution is also recordedreclassified. The amendment affects presentation only andin earnings attributable to Unitholders and non-controllingtherefore has no impact on the Fund’s financial position orinterest on the consolidated statements of comprehensiveperformance. The amendments to IAS 1 are effective for annualincome (loss). In addition, terminology such as Net income hasperiods beginning on or after July 1, 2012. The Fund hasbeen replaced by Increase (decrease) in net assets attributabledetermined adoption of this standard will have no impact on theto Unitholders to reflect the absence of an equity component onFund’s consolidated financial statements.the consolidated statements of financial position.

Presentation of per unit measures IFRS 9 Financial Instruments: Classification andAs a result of the classification of all units as financial liabilities, Measurementthe Fund has no equity instrument; therefore, in accordance with IFRS 9 as issued reflects the first phase of the IASB’s work onIAS 33 Earnings per Share, there is no denominator for purposes the replacement of IAS 39 and applies to the classification andof calculation of per unit measures. measurement of financial assets and financial liabilities as

defined in IAS 39. The standard is effective for annual periodsNon-controlling interest beginning on or after January 1, 2015. In subsequent phases,Non-controlling interest represents the increase in net assets the IASB will address hedge accounting and impairment ofand comprehensive income (loss) attributable to the Manager. financial assets. The adoption of the first phase of IFRS 9 will

have an effect on the classification and measurement of theFund’s financial assets, but will have no impact on classificationAllocation of comprehensive income (loss)and measurements of financial liabilities. The Fund is consideringThe components of comprehensive income (loss) are allocatedthe impact of the adoption of this standard on its consolidatedbetween the Priority Units and Ordinary Units based on thefinancial statements.weighted average number of units outstanding during the

reporting period.IFRS 10 Consolidated Financial StatementsIn May 2011, the IASB released IFRS 10, Consolidated FinancialNOTE 4. NEW STANDARDS ISSUED BUT NOT YET EFFECTIVE

Statements, which replaces a portion of IAS 27, Consolidatedand Separate Financial Statements, that addresses theStandards issued but not yet effective up to the date of issuanceaccounting for consolidated financial statements. It alsoof the Fund’s consolidated financial statements are listed below.addresses the issues covered in SIC-12, Consolidation – SpecialThis listing is of standards and interpretations issued, which thePurpose Entities. The changes introduced by IFRS 10 will requireFund reasonably expects to be applicable at a future date. Themanagement to exercise significant judgment to determineFund intends to adopt those standards when they becomewhich entities are controlled and therefore are required to beeffective.consolidated by a parent, compared with the requirements thatwere in IAS 27. IFRS 10 will be effective for annual periodsbeginning on or after January 1, 2013, with earlier applicationpermitted. The Fund has determined adoption of this standardwill have no impact on the Fund’s consolidated financialstatements as the Fund will continue to consolidatethe Manager.


NOTE 5. OPERATING SEGMENTIFRS 11 Joint ArrangementsIn May 2011, the IASB released IFRS 11, Joint Arrangements,

For management purposes, the Fund is organized into onewhich supersedes IAS 31, Interests in Joint Ventures, andbusiness unit and has one reportable operating segment. AllSIC-13, Jointly Controlled Entities – Non-monetary Contributionsassets and liabilities of the Fund are held in Canada.by Venturers. IFRS 11 removes the option to account for jointly

The following table presents revenue from external customerscontrolled entities (JCEs) using proportionate consolidation.based on their geographic location and product type for the yearsInstead, JCEs that meet the definition of a joint venture must beended December 31, 2012 and 2011.accounted for using the equity method. IFRS 11 will be effective

for the annual periods beginning on January 1, 2013, with earlierYears endedapplication permitted. The Fund has determined adoption of this December 31,

standard will have no impact on the Fund’s consolidated financial 2012 2011statements. Canada 167,562 188,362

United States 414,632 452,173IFRS 12 Disclosure of Interests in Other Entities Other 12,406 22,423IFRS 12 includes all of the disclosures that were previously in 594,600 662,958IAS 27 relating to consolidated financial statements, as well asall of the disclosures that were previously included in IAS 31 and

Zinc 551,153 612,545IAS 28. These disclosures relate to an entity’s interests inSulphuric acid 31,017 29,535subsidiaries, joint arrangements and structured entities. ACopper and other 12,430 20,878number of new disclosures are also required, but will have no

594,600 662,958impact on the Fund’s financial position or performance.

Management determines revenue concentration based onIFRS 13 Fair Value Measurementcustomers who account for more than 10% of revenues.IFRS 13 establishes a single source of guidance under IFRS forRevenue from one customer amounted to $130,558 or 22%all fair value measurements. IFRS 13 does not change when anduring the year ended December 31, 2012entity is required to use fair value, but rather provides guidance(December 31, 2011 – one customer amounted to $144,595 oron how to measure fair value under IFRS when fair value is22%), arising from sales of zinc metal.required or permitted. The standard is effective for the annual

periods beginning on or after January 1, 2013. The Fund isNOTE 6. FINANCE COSTS, NETcurrently assessing the impact that this standard will have on the

financial position and performance, but based on the preliminaryFinance costs, net for the years ended December 31, 2012analysis, no material impact is expected.and 2011 were as follows:

IAS 19 Employee Benefits – Recognition and Disclosure –Years endedDefined Benefit Plans December 31,

In June 2011 the IASB amended IAS 19. Among other changes, 2012 2011the amendments require entities to compute the financing cost Interest on bank and other loans 6,135 8,676component of defined benefit plans by applying the discount rate Accretion on bank and other loans 1,284 6,803used to measure post-employment benefit obligations (usually Accretion of rehabilitation expensethe present value of defined benefit obligations less the fair value (note 13) 564 676of plan assets). Furthermore, the amendments of IAS 19 Interest income (2) (45)enhance the disclosure requirements for defined benefit plans, 7,981 16,110providing additional information about the characteristics ofdefined benefit plans and the risks that entities are exposed tothrough participation in those plans. The amendment to IAS 19will be effective for the Fund’s fiscal years beginning onJanuary 1, 2013. The Fund is currently assessing the impact thatthis standard will have on the financial position and performance,but based on the preliminary analysis, no material impact isexpected on the Fund’s consolidated statement of financialposition.



NOTE 7. EMPLOYEE BENEFITS EXPENSE Income tax expense is composed of the following on theconsolidated statements of comprehensive income loss:

Employee benefits expense included in production and selling2012 2011and administration expense for the years ended

Current income tax expense 15,302 18,958December 31, 2012 and 2011 was as follows:Deferred income tax recovery (7,652) (3,550)

Years ended Income tax expense before distributions 7,650 15,408December 31,

Current income tax recovery on2012 2011

distributions (4,136) (7,751)Wages and salaries (note 17) 51,462 51,064

Income tax expense after distributions 3,514 7,657Benefit costs 9,175 8,344Defined contribution pension costs 644 571

The deferred tax assets and liabilities of the Fund consisted ofPension costs (note 14) 2,729 9,752the following:Post-retirement benefit plan costs

(note 14) 1,104 1,060December 31, December 31,

65,114 70,791 2012 2011

Deferred tax assetsEmployee benefits 7,920 6,506NOTE 8. INCOME TAXES

7,920 6,506

A reconciliation of income tax charge applicable to accounting Deferred tax liabilitiesprofit before income tax at the weighted average statutory Property, plant and equipment 27,026 47,638income tax rate to income tax charge at the Fund effective Bank and other loans – finance lease (194) –income tax rate for the year ended December 31, 2012 and Debt issuance costs 38 1672011 was as follows: Rehabilitation liability (5,412) (9,274)

Eligible capital property (9,481) (18,274)2012 2011

11,977 20,257Earnings before income taxes 58,673 43,750Partnership income allocated to

As at December 31, 2012, the aggregate amount of temporaryOrdinary Units (12,846) (12,974)differences associated with undistributed earnings of subsidiaries45,827 30,776for which deferred tax liabilities have not been recognized isExpected tax charge at the average$37,000. The Fund is in a position to control the timing of thestatutory income tax rate (48.22%) 22,098 14,840reversal of the temporary differences and it is probable that suchEffect of subsidiary tax rate differential (5,747) –differences will not reverse in the foreseeable future.Re-measurement of deferred tax

As a result of an internal reorganization that was completedliabilities at subsidiary tax rateon December 7, 2012, and since Ontario Inc. is not subject todifferential (9,051) –specified investment flow-through (‘‘SIFT’’) rules, deferred taxOther 350 568assets and liabilities were re-measured in accordance with theTax charge at an effective income taxIFRS Standing Interpretations Committee (‘‘SIC’’) Interpretationrate before distributions 7,650 15,408No. 25: Changes in Tax Structure of an Entity, using the tax rateTax recovery on distributions (4,136) (7,751)applicable to a corporation which does not vary depending onTax charge at an effective incomewhether earnings are distributed or not.tax rate 3,514 7,657


NOTE 9. PROPERTY, PLANT AND EQUIPMENT

Land and Plant Mobile Auto andbuildings equipment equipment Computers trucks Total

At January 1, 2012, net of accumulateddepreciation 44,343 231,918 263 569 42 277,135

Additions 462 27,584 271 385 883 29,585Disposals (690) (1,016) – (295) – (2,001)Depreciation charge (2,874) (30,857) (82) (23) (16) (33,852)At December 31, 2012, net of accumulated

depreciation 41,241 227,629 452 636 909 270,867

At January 1, 2011, net of accumulateddepreciation 46,194 238,596 344 586 19 285,739

Additions 1,260 25,676 – 280 39 27,255Disposals (250) (1,934) – – – (2,184)Depreciation charge (2,861) (30,420) (81) (297) (16) (33,675)

At December 31, 2011, net of accumulateddepreciation 44,343 231,918 263 569 42 277,135

At December 31, 2012Cost 144,030 748,979 2,723 3,236 1,273 900,241Accumulated depreciation (102,789) (521,350) (2,271) (2,600) (364) (629,374)Net carrying amount 41,241 227,629 452 636 909 270,867

At December 31, 2011Cost 144,349 737,036 2,496 3,145 390 887,416Accumulated depreciation (100,006) (505,118) (2,233) (2,576) (348) (610,281)

Net carrying amount 44,343 231,918 263 569 42 277,135

Land and buildings as at December 31, 2012 included of $33,502 (December 31, 2011 – $34,126). As atnon-depreciating land amounting to $3,142 December 31, 2012, raw material, work-in-process and finished(December 31, 2011 – $3,799). The carrying value of plant goods were all carried at cost.equipment held under finance leases as at December 31, 2012was $882 (December 31, 2011 – nil). Assets under construction NOTE 11. PRIORITY AND ORDINARY UNITHOLDERS

as at December 31, 2012 were $13,073(December 31, 2011 – $10,339), and are not amortized until December 31, December 31,

2012 2011put in use.37,497,975 Priority Units 190,932 165,04912,500,000 Ordinary Units and SpecialNOTE 10. INVENTORIES

Fund Units 63,645 55,017

December 31, December 31,2012 2011 As at December 31, 2012, the Fund had 37,497,975 Priority

Spare parts 6,895 9,595 Units outstanding. Priority Unitholders can redeem their units atRaw materials 43,681 18,161 a present formula price, to a maximum of $50 per month,Work-in-process 11,571 11,121 subject to the Fund’s banking covenants. Pursuant to the Fund’sFinished products 29,550 22,140 trust indenture as amended and restated (the ‘‘Trust Indenture’’),

91,697 61,017 an unlimited number of Priority Units are issuable. Each PriorityUnit represents an equal, undivided beneficial interest in theFund and in distributions of the Fund. Each Priority Unit isDuring the year ended December 31, 2012, $490,582transferable and entitles the holder thereof to participate equally(December 31, 2011 – $555,781) of inventory was expensedin distributions of the Fund and to one vote.including amortization related to property, plant and equipment



The Partnership has 12,500,000 Ordinary Units outstanding, In December, 2012, the Fund completed an internalwhich are exchangeable into Priority Units on a one-for-one basis reorganization which eliminated the requirement for an ‘‘in-kind’’only after May 2, 2017, or earlier upon the occurrence of certain distribution commencing in fiscal 2012 (Notes 1 and 8).events. Each Ordinary Unit is entitled to receive a cash On December 12, 2011, the board of trustees of thedistribution on a monthly basis in an amount that is equal to the Operating Trust approved an ‘‘in-kind’’ distribution of $21,749 ormonthly cash distribution paid to each Priority Unit, provided $0.58 per unit to the Fund’s Priority Unitholders of record as ateach Priority Unit is first paid an amount that is equal to the December 31, 2011, in accordance with the provisions of themonthly cash distribution of not less than Trust Indenture.$0.08333 per Priority unit (the ‘‘Base Distribution’’) before any Cash distributions on Ordinary Units of the Partnership areamount is paid to holders of Ordinary Units. See Note 12 for subordinated to distributions on Priority Units of the Fund untilfurther details. May 2017 except upon the occurrence of certain events. Each

The 12,500,000 outstanding special voting units of the Fund Ordinary Unit is entitled to receive a cash distribution on alisted above (the ‘‘Special Fund Units’’) provide voting rights in monthly basis in an amount equal to the monthly cashrespect of the Fund to the holder of Ordinary Units and vote with distribution paid to each Priority Unit, provided each Priority Unitthe Priority Unitholders together as one class. All Ordinary Units is first paid an amount that is equal to the monthly cashand Special Fund Units are held by a wholly-owned subsidiary of distribution of not less than $0.08333 per Priority UnitXstrata Canada. (the ‘‘Base Distribution’’) before any amount is paid to the holder

of the Ordinary Units. If, notwithstanding the subordination of theOrdinary Units, the cash available for distribution is not sufficientNOTE 12. DISTRIBUTIONS

to make the Base Distribution on the Priority Units in a month,the amount of the deficiency does not accumulate and is notWhen not restricted and possible, and as may be consideredpaid to holders of the Priority Units. However, if the cash availableappropriate by the Board, the Fund’s policy is to make afor distribution in a month is not sufficient to make a distributionsustainable level of distributions to Unitholders, equal to theon the Ordinary Units that is equal to the distribution on thedistributable cash flows from operations, before variations inPriority Units, the amount of the deficiency does accumulate andworking capital and after permanent debt reductions and suchis to be paid to the holder of the Ordinary Units if and when therereserves as may be considered appropriate by the board ofis excess cash available for distribution, above the Basetrustees of the Operating Trust. The Fund determines the cashDistribution amount, in a subsequent month (the ‘‘Deficiencyavailable for distribution, if any, on a monthly basis for theAmount’’). Any accumulated Deficiency Amount related to theUnitholders of record of the Fund on the last business day ofOrdinary Units is not accrued by the Fund until excess cash iseach calendar month and these distributions are to be paid on oravailable for distribution above the Base Distribution amount andabout 25 days thereafter.a cash distribution is approved by the board of trustees. If at anyThe Fund, as a SIFT, is subject to tax on its ‘‘non-portfoliotime there is an accumulated Deficiency Amount owing on theearnings’’ (as defined in the Income Tax Act (Canada) (‘‘ITA’’)Ordinary Units, any distributions on the Ordinary Units must be(the ‘‘NPE’’) at the same rate as a Canadian corporation provideddeclared on the last business day of the month on which theit distributes a sufficient portion of such earnings to Unitholders.Partnership has distributable cash flow in that month in excess ofThe Fund is required by its Trust Indenture to distribute eachany amount required to be paid by the Partnership to the holdersyear amounts equal to the sum of its non-NPE and a specifiedof the Ordinary Units so as to ensure the declaration of the Basepercentage of its NPE (2012 – 73.1%; 2011 – 71.6%) for theDistribution by the Fund to the holders of Priority Units for thatyear so as, to the extent possible, minimize its liability for taxmonth together with a declaration of an amount equal to theunder the ITA in the year. Such distributions are to be made inBase Distribution by the Partnership to the holders of Ordinarycash, unless the Fund is restricted from distributing cash orUnits for that month, until the Deficiency Amount is paid in full. Insufficient cash is not available, in which case such distributionsthe event of an exchange of Ordinary Units on a one-to-one basisare to be satisfied in whole or in part by the issuance offor Priority Units on or after May 2, 2017 or earlier upon theadditional Priority Units having a value equal to the amount ofoccurrence of an early exchange event (Note 11), anycash which is unavailable for distribution. Following such anaccumulated Deficiency Amount related to the Ordinary Units‘‘in-kind’’ distribution, the Priority Units are automaticallyprior to the exchange is not accrued by the Fund until such timeconsolidated such that each certificate representing a number ofas excess cash is available for distribution above the Baseunits prior to the in-kind distribution of additional units is deemedDistribution and a cash distribution is approved by the board ofto represent the same number of units after the distribution oftrustees. Upon the exchange, the holder of Ordinary Units hasadditional units and the consolidation.the right to receive any distributions declared and not paid on the


NOTE 14. EMPLOYEE BENEFITSOrdinary Units as of that time and a promissory note in theamount of the outstanding accumulated Deficiency Amount.

The Manager participates in defined benefit pension plansSubsequent to an exchange, there is no further accumulation ofmanaged and administered by Xstrata Canada. There is one planthe accumulated Deficiency Amount. As at December 31, 2012for unionized workers and a second plan for staff. The plan forand February 12, 2013, the accumulated Deficiency Amountstaff has been closed to new entrants since 2002. The benefitwas $10,834 and $11,355 respectivelyobligation recorded by the Fund represents the obligations for(December 31, 2011 – $4,584).those employees who have worked for the Manager since theFund’s inception in May 2002.NOTE 13. REHABILITATION LIABILITY

The Manager also participates in unfunded post-retirementbenefit plans that are managed and administered by XstrataDecember 31, December 31,

2012 2011 Canada, for a number of current and former employees. TheOpening balance 23,606 18,819 benefit obligation recorded by the Fund represents theAccretion of reclamation expense obligations for those employees who are working for the Manager

(note 6) 564 676 as of the reporting period or who have retired while working forSite restoration expenditures (401) (26) the Manager.Change in estimates 922 4,137 The Manager’s funding policy is to contribute amountsClosing balance 24,691 23,606 sufficient to meet minimum funding requirements as set forth by

the Pension and Benefits Agreement with Xstrata Canada plussuch additional amounts as the Manager may determine to beThe Fund has recognized a rehabilitation liability solely related toappropriate. The Manager’s share of plan assets is estimatedthe residue ponds within the Processing Facility.based on the Manager’s defined benefit obligations and anyThe Fund has determined the fair value of this rehabilitationadjustments for historical contributions by the Manager.liability as at December 31, 2012, by using a discount rate of

2.16% (December 31, 2011 – 2.26%). The liability accretes toits future value until the obligation is completed. The estimatedrehabilitation expenditures may vary based on changes inoperations, cost of rehabilitation activities, and legislative orregulatory requirements. Although the ultimate amount to beincurred is uncertain, the liability for rehabilitation on anundiscounted basis is estimated to be approximately $38,400.The cash flows required to settle the liability are expected to beincurred from now until 2046.

The principal assumptions used in determining pension and post-retirement benefit obligations for the Manager’s plans areas follows:

December 31, 2012 December 31, 2011

Post- Post-Pension retirement Pension retirement

plans benefit plans plans benefit plans

Rate of salary increases 3.25% 3.25% 3.25% 3.25%Expected rate of return on plan assets 5.50% – 6.20% –Discount rate 3.85% 3.90% 4.35% 4.50%Inflation rate 2.00% – 2.00% –Rate of medical cost increases1 – 8.00% – 8.00%1 Grading down to 4% in and after 2021



The Manager’s share of assets and liabilities of the pension and post-retirement benefit plans and the amounts recognized in the Fund’sconsolidated statements of financial position are as follows:




Defined benefit obligations 75,066 13,476 61,876 12,309Fair value of plan assets (59,100) – (49,997) –

Net employee benefit liability 15,966 13,476 11,879 12,309

The reconciliation of the Manager’s share of net employee benefit asset (liability) movement during the period in the pension andpost-retirement benefit plans are as follows:




Net employee benefit liability (asset), beginning of year 11,879 12,309 (3,451) 10,618Net employee benefit expense 2,729 1,104 9,752 1,060Actuarial loss 6,458 1,127 9,141 1,635Employer contributions (5,100) (1,064) (3,563) (1,004)

Net employee benefit liability, end of year 15,966 13,476 11,879 12,309

The components of Manager’s share of benefit expense recognized in earnings attributable to Unitholders and non-controlling interest onthe consolidated statements of comprehensive income (loss) during the years ended December 31, 2012 and 2011 were as follows:


plans benefit plans plans benefit plans2012 2012 2011 2011

Current service costs 2,899 537 2,739 484Interest costs 2,800 567 2,936 576Expected return on plan assets (net of expected expenses) (2,970) – (3,060) –Plan amendments – – 7,137 –

Net employee benefit expense 2,729 1,104 9,752 1,060

The components of the Manager’s share of actuarial losses recognized in other comprehensive income on the consolidated statementsof comprehensive income (loss) during the years ended December 31, 2012 and 2011 were as follows:


plans benefit plans plans benefit plans2012 2012 2011 2011

Expected return on plan assets (net of expected expenses) 2,970 – 3,060 –Actual return on plan assets 4,368 – 2,742 –

Actual return less expected return on plan assets 1,398 – (318) –Actuarial loss on obligations (8,492) (1,127) (5,671) (1,635)Change in allocation of plan assets 636 – (4,695) –Minimum funding requirements – – 1,543 –

(6,458) (1,127) (9,141) (1,635)


The reconciliation of the present value of benefit obligations and fair value of plan asset movements during the years endedDecember 31, 2012 and 2011 was as follows:




Benefit obligation present value as at January 1 61,876 12,309 44,356 10,618Current service costs 2,899 537 2,739 484Interest cost 2,800 567 2,936 576Plan amendments – – 7,137 –Actuarial losses 8,492 1,127 5,671 1,635Actual benefit payments (1,001) (1,064) (963) (1,004)

Benefit obligation present value at end of year 75,066 13,476 61,876 12,309

Plan assets fair value as at January 1 49,997 – 49,350 –Actual return of plan assets 4,368 – 2,742 –Employer contributions 5,100 1,064 3,563 1,004Benefits paid (1,001) (1,064) (963) (1,004)Change in allocation of plan assets 636 – (4,695) –

Plan assets fair value at end of period 59,100 – 49,997 –

Funded status 15,966 13,476 11,879 12,309Minimum funding requirements – – – –

Net employee benefit liability as at end of year 15,966 13,476 11,879 12,309

Net employee benefit liability (asset) as at January 1 11,879 12,309 (3,451) 10,618

Pre-May 2, 2002A breakdown of the plan assets by major asset category of theThe estimated liability of the pension plans covering the pensionpension benefit plans was as follows:obligation of the Manager’s employees prior to May 2, 2002,

December 31 December 31 was approximately $95,900 as at December 31, 20122012 2011

(December 31, 2011 – $88,900). There was approximatelyEquity securities 43% 36%

$89,400 of assets within the pension plan as atCash and fixed income securities 57% 64%

December 31, 2012 (December 31, 2011 – $74,700). The100% 100%

benefit obligation and plan assets for pre-May 2002 would onlyrevert to the Fund upon the termination of the administration

The overall expected rate of return on assets is determined agreement between the Manager and the Fund andbased on the market expectations prevailing on the date, establishment of a pension plan by the Manager and will beapplicable to the period over which the obligation will be settled. subject to regulatory approval.

The expected contributions to be made in 2013 related to thepension plans are $5,100.



Sensitivity analysis on post-employment and post-retirement The Notes’ governing trust indenture lists events thatbenefits constitute an event of default, should they occur. They includeAssumed health care cost trend rates have a significant effect on the non-payment by the Operating Trust of principal, interest orthe amounts reported for the health care plans. A one other obligations of the Operating Trust in respect of the Notespercentage-point change in assumed health care cost trend and a breach of any covenant pursuant to the ABL Facility creditrates would have the following effects: agreement (discussed below), subject to customary cure periods

where applicable. If any event of default occurs under the Notes’One-percentage-point trust indenture, the holders of the Notes may require the

Increase Decrease Operating Trust to repay any outstanding obligations pursuant toEffect on net employee benefit expense 83 73 the Notes trust indenture.Effect on net employee benefit liability 902 801

ABL revolving facilityNOTE 15. BANK AND OTHER LOANS 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 anDecember 31, December 31,

2012 2011 asset-based credit facility and the loans thereunder are madeSenior secured notes 67,500 82,500 available to the Operating Trust based on a borrowing base testABL revolving facility 30,340 16,213 with the maximum amount available thereunder to be the lesserObligation under finance lease 882 – of (a) $150,000 and (b) the aggregate of (i) 85% of eligibleTotal bank and other loans 98,722 98,713 accounts receivable (90% in the case of insured accountsLess: unamortized deferred financing receivable or that are owed by qualified investment grade

fees (3,213) (4,497) account debtors) plus (ii) the lesser of (A) 70% of the lower ofLess: current portion (15,192) (15,000) cost or fair market value of eligible inventory, and (B) 85% of theLong-term portion 80,317 79,216 appraised net orderly liquidation value of eligible inventory, with

availability from inventory subject to a cap of 100% of availabilityunder clause (i), minus customary priority payables and reserves.Senior secured notesThe borrowing base is tested on a monthly basis so long asOn July 28, 2011, the Operating Trust closed its privateexcess availability is equal to or greater than $15,000 and on aplacement of Notes, for an aggregate principal amount ofweekly basis if excess availability over the most recent 45-day$90,000, bearing interest at 6.875%. The Notes amortize by anperiod is less than $15,000.amount of $7,500 on a semi-annual basis on June 28 and

The borrowing base on the ABL Facility was $113,728 basedDecember 28 of each year prior to December 28, 2016. Theon the Fund’s working capital position as at$15,000 remaining principal balance will be repayable atDecember 31, 2012. As at December 31, 2012, there wasmaturity on December 28, 2016.$30,433 drawn down on the ABL Facility (including letters ofAt any time prior to December 28, 2013, the Operating Trustcredit), leaving an excess availability of $83,295.may redeem all or part of the senior secured notes (the ‘‘Notes’’)

Borrowings under the ABL Facility are available by way ofat a redemption price equal to 100% of the principal amount ofCanadian prime rate advances, US base rate advances, bankers’the Notes redeemed, plus a ‘‘make-whole’’ premium, andacceptances, US dollar Libor advances and Canadian andaccrued and unpaid interest. The Notes are redeemable at theUS dollar letters of credit. The ABL Facility bears interest at ratesoption of the Operating Trust in whole or in part, at any time on orthat vary with the Canadian prime rate, US base rate, theafter: December 28, 2013 at 103.438% of the principalbankers’ acceptance rate and Libor rates plus applicable marginsamount; December 28, 2014 at 101.719% of the principalbetween �0.25% and 2.25% depending on the average excessamount; December 28, 2015 and thereafter at 100% of theavailability for the preceding quarter. The effective interest rate asprincipal amount; plus, in each case, accrued and unpaidat December 31, 2012, including the accretion of deferredinterest to the redemption date. The prepayment options arefinancing costs, is 3.9% (December 31, 2011 – 5%).considered to be closely related to the Notes and are therefore

As at December 31, 2012, $28,737 (Cdn$28,590) wasnot considered to be an embedded derivative.payable in US dollars.


Bridge facilityThe maturity of the ABL Facility is July 28, 2016. The creditOn December 2, 2010, the Operating Trust obtained a bridgeagreement entered into in connection with the ABL Facilityfacility (the ‘‘Bridge Facility’’) for an amount of $250,000 from acontains covenants that restrict the Operating Trust (and thesyndicate of lenders, comprised of a $130,000 term loanFund, the Manager, the Partnership and its general partner, NILPtranche (‘‘Term Loan Tranche’’) and a $120,000 operating line ofGeneral Partner Ltd., as guarantors) in several respects,credit (‘‘Revolving Facility Tranche’’).including their ability to make distributions or repurchase the

Effective June 3, 2011, the Bridge Facility was extended toNotes. The ABL Facility also contains customary representations,December 1, 2011 for a total of $220,000 comprised ofwarranties and covenants and conditions to funding.$120,000 under the Term Loan Tranche and $100,000 underThe ABL Facility credit agreement does not contain financialthe Revolving Facility Tranche. The credit agreement governingcovenants, provided the Fund’s average excess availability overthe Bridge Facility contained covenants that restricted the Fundthe most recent 45-day period is equal to or greater thanin several respects, including its ability to make cash distributions$15,000. In the event that the Fund’s average excess availabilityor redeem or repurchase units. On July 28, 2011 the Bridgeis less than $15,000 for any 45-day period, the Fund will beFacility was fully repaid using the proceeds from the Notes andrequired to maintain (i) adjusted tangible net worth of the Fundthe ABL Facility.and its subsidiaries at a level prescribed in the credit agreement

and (ii) annual capital expenditures at a level not to exceed120% of budgeted annual capital expenditures. NOTE 16. COMMITMENTS AND CONTINGENCIES

The ABL Facility credit agreement lists events that constitutean event of default, should they occur. They include the Leases and purchase commitmentsnon-payment by the Operating Trust of principal, interest or other As at December 31, 2012, the Fund had commitments underobligations of the Operating Trust in respect of the ABL Facility leases requiring annual rental payments as follows:credit agreement, a default under the Notes’ trust indenture thatpermits, or has resulted in, the acceleration of the obligations 2013 628owing to the holders of Notes, and a breach of any covenant 2014 367pursuant to the ABL Facility credit agreement, subject to 2015 543customary cure periods where applicable. If any event of default 1,538occurs under the ABL Facility credit agreement, the ABL Facilitylenders will be under no further obligation to make advances to As at December 31, 2012, the Fund had purchasethe Operating Trust and may require the Operating Trust to repay commitments requiring payments as follows:any outstanding obligations pursuant to the ABL Facility creditagreement. 2013 16,470

The Notes and the ABL Facility are fully and unconditionallyguaranteed, on a senior secured basis (subject to the terms of

Included in the above is $6,393 of purchase commitments toan inter creditor agreement with the lenders under the new ABLrelated parties as described in Note 17. Certain agreements forFacility), by the Fund, the Manager, Ontario Inc., the Partnershipoperating costs require the Fund to make minimum purchases,and NILP General Partner Ltd., the Partnership’s general partner.or be subject to penalties.Under the Notes’ trust indenture and the ABL Facility credit

Included in the above is $14,451 of capital commitmentsagreement, the Fund is permitted to distribute excess cash flows(December 31, 2011 – $9,740) relating to the purchase ofto its Unitholders subject to maintaining the minimum excessreplacement anodes for the cell house, stainless steel for theavailability, compliance with certain financial covenants andsilica treatment project and other plant equipment.other customary restrictions.

The proceeds of the ABL Facility are used for working capitalLitigationand other general corporate purposes, and, together with the netIn August 2004, the Manager was served with a class actionproceeds of the Notes offering, were used to repay all amountsmotion presentable before the Quebec Superior Court,outstanding in respect of the Operating Trust’s prior bridge facilitysubsequent to an accidental discharge of sulphur trioxide. In(described below).June 2008, the Quebec Superior Court dismissed the motion toinstitute a class action. The plaintiff appealed the decision. InAugust 2009, the Quebec Court of Appeal dismissed the appeal.



NOTE 17. RELATED PARTIESIn December 2009, the Manager was served with a newmotion to institute a class action. On March 19, 2012, the

The consolidated financial statements include the financialQuebec Superior Court authorized the motion to institute a classstatements of the Fund, the subsidiaries and the special purposeaction against the Manager. In August 2012, the class actionentity listed in the following table:statement of claim was served upon the Manager and was filed

in Court, and class representative has made a motion toCountry of % Equity Interestrecognize the Fund as a ‘‘mis en cause’’ and add Xstrata and

Name Incorporation 2012 2011Xstrata Canada as co-defendants with the Manager. The Court isSubsidiaries:currently in the process of determining whether the Fund shouldNoranda Income Limitedbe recognized as a ‘‘mis en cause’’ and add Xstrata and Xstrata

Partnership1 Canada 81% 81%Canada as co-defendants with the Manager.1884699 Ontario Inc. Canada 100% –The Manager continues to maintain that the class action suitNoranda Operating Trust Canada 100% 100%is unfounded and intends to vigorously defend the claim.Special Purpose Entity:Canadian Electrolytic ZincAppropriation of land

Limited2 Canada 0% 0%The Fund is currently in discussion with Quebec’s Ministry of1 Represents percentage of taxable income allocated to the Fund’s subsidiaries.Transportation regarding land that the Fund is currently using. 2 Canadian Electrolytic Zinc Limited is a wholly-owned subsidiary of Xstrata Canada and is

consolidated by virtue of being a special purpose entity.This land was appropriated by the provincial government anumber of years ago. The Fund is in discussions for the potential

During the years ended December 31, 2012 and 2011, thepurchase of this land.Company entered into the following transactions in the ordinarycourse of business with Xstrata Canada, its subsidiaries andGuaranteesits affiliates:Some of the Fund’s inceptive agreements, specifically those

related to the acquisition of the Processing Facility and the debt,Years ended

include indemnification provisions in which the Fund may be December 31,required to make payments to Xstrata or lenders for breach of 2012 2011fundamental representations and warranty terms in the Sales of zinc metal 22,180 33,997agreements. As at December 31, 2012, the Fund does not Sales of by-products 31,017 29,698believe these indemnification provisions would require any Purchases of zinc concentrate 317,104 319,436material cash payments by the Fund. Purchases of plant equipment, raw

The Fund indemnifies its trustees and officers against claims materials and operating supplies 5,848 7,742reasonably incurred and resulting from the performance of their Support services 1,246 1,210services to the Fund, and maintains liability insurance for its Sales agency services 1,984 1,158trustees and officers.

No amounts have been recorded for the contingencies December 31,outlined above. 2012 2011

Accounts receivable 12,246 17,027Accounts payable 42,884 31,199

Glencore International AG (‘‘Glencore’’) owns appoximately 34%of Xstrata. Sales to a subsidiary of Glencore included in sales ofzinc metal for the years ended December 31, 2012 and 2011above, were $20,431 and $20,374 respectively. Amounts duefrom Glencore, included in accounts receivable above, were$1,062 and $940 as at December 31, 2012 and 2011,respectively.


The sales to and purchases from related parties are made at The Fund’s derivatives recognized in the consolidated statementsterms equivalent to those that prevail in arm’s length of financial position are as follows:transactions. All amounts due to and from related parties are

December 31, December 31,non-interest bearing and are due in the ordinary course of2012 2011

business. All transactions with Xstrata Canada and affiliatedAssets

companies are carried out in the normal course of operations,Derivative financial asset

and are recorded at fair value.Firm commitments – 5,906Hedges of fixed firm commitments 701 –

Compensation of key management personnel of the FundUS dollar overnight transactions 11 –

During the years ended December 31, 2012 and 2011, the712 5,906

Fund recorded the following as an expense related to executiveLong-term derivative financialmanagement personnel.

assets:2012 2011 Hedges of fixed firm commitments 57 –

Long-term firm commitments – 271Salaries and other short-term benefits 1,320 1,18557 271Employee benefits 46 61

1,366 1,245

LiabilitiesDerivative financial liabilities:NOTE 18. DERIVATIVES AND HEDGESHedges of fixed firm commitments – 5,834Firm commitments 750 –The Fund’s derivatives recognized in the consolidated statementsInventory management program 344 1,413of comprehensive income (loss) are as follows:

1,094 7,247Years ended

Long-term derivative financialDecember 31,liabilities:2012 2011

Hedges of fixed firm commitments – 268(Gain) loss on derivative financialLong-term firm commitments 61 –instruments:

61 268Inventory management program (1,069) 3,572Hedges of fixed firm commitments 129 (99)

(940) 3,473 Inventory management programThe Fund purchases zinc concentrate to be processed eventuallyinto refined zinc metal for sale to customers. As agent of theFund, Xstrata Canada provides the hedging arrangements in theevent that the structure of the Fund’s sales and purchasecontracts does not minimize exposure to changes in zinc pricesduring the period in which the zinc is refined.

The derivatives associated with the Fund’s inventorymanagement program do not meet the requirements for hedgeaccounting. As a result, these derivative financial instrumentshave been recognized on the consolidated statements offinancial position as either a derivative financial asset or liabilitywith the change in their fair value at each reporting period daterecognized as a gain or a loss on derivative financial instruments.As at December 31, 2012, the Fund had sold forwardapproximately 50 million pounds of zinc (December 31, 2011 –bought forward 26 million pounds of zinc).



Embedded derivativesDuring the year ended December 31, 2012, the change inFor the year ended December 31, 2012, the Fund recordedfair value of these derivatives was a gain of $1,069 which was$5,593 as an increase of raw material purchase costs related torecognized in earnings attributable to Unitholders andthe change in fair value, as determined with reference to poolednon-controlling interest on the consolidated statements ofmarket prices (Level 1) of the embedded derivatives resultingcomprehensive income (loss) in loss (gain) on derivative financialfrom the quotational pricing feature of its zinc concentrateinstruments (December 31, 2011 – loss on derivative financialpayables (December 31, 2011 – decrease of $11,254).instruments of $3,571). As at December 31, 2012, the fair

value of these positions, as determined with reference to Level 1,quoted market prices, was a current derivative financial liability of NOTE 19. FINANCIAL INSTRUMENTS

$344 (December 31, 2011 – current derivative financial liabilityof $1,413). Principles of risk management

The Fund’s primary risk management objective is to protect theHedges of fixed firm commitments Fund’s financial position, comprehensive income (loss), andCertain customers request a fixed sales price instead of the LME cash flow in support of providing, when possible, stable monthlyaverage price in the month of shipment. Xstrata Canada enters cash distributions at a sustainable level to Unitholders.into commodity forward and futures contracts on behalf of the The main risks arising from the Fund’s financial instrumentsFund that will allow the Fund to receive the LME average price in are credit risk, liquidity risk, interest rate risk, foreign currencythe month of shipment while customers pay the agreed-upon risk and commodity price risk. These risks arise from exposuresfixed price. Xstrata Canada accomplishes this by settling the that occur in the normal course of business.futures contracts during the month of shipment, which generally The Fund’s significant financial instruments, other thanresults in the realization of the LME average price. In the event derivatives, comprise bank and other loans, and cash and cashthat the futures contracts have to be terminated early, due to the equivalents. The main purpose of these financial instruments iscustomer cancelling a fixed price order, Xstrata Canada has the to finance the Fund’s ongoing operations. The Fund has variousright to charge the customer with the cost of settling the LME other financial assets and liabilities such as accounts receivablesfutures contract. A high degree of correlation between the and accounts payables, which arise directly from its operations.changes in the fair value of the contracts and the fixed sales The fair values of accounts receivable, accounts payable andcommitments permits hedge accounting to be used. accrued liabilities and distribution payable approximate their

As at December 31, 2012, Xstrata Canada had futures carrying values given the short-term maturity of thesecontracts hedging approximately 11 million pounds of zinc instruments.(December 31, 2011 – 79 million pounds) to be sold pursuant From time-to-time, the Fund may use foreign exchangeto firm commitments at fixed prices and delivery dates related to forward contracts and commodity price contracts to managethe Fund. As at December 31, 2012, the fair value of these exposure to fluctuations in foreign exchange and metal prices.contracts as determined with reference to pooled market prices The Fund’s use of derivatives is based on established practices(Level 1) was recognized as a current derivative financial asset of and parameters, which are subject to the oversight of the board$701 and a non-current derivative financial asset of $57 of trustees of the Operating Trust.(December 31, 2011 – current derivative financial liability of$5,834 and non-current derivative financial liability of $268) and Credit riskthe fair value of the firm fixed sales commitments was recognized Exposure to credit risk arises as a result of transactions in theas a current derivative financial liability of $750 and a Fund’s ordinary course of business and is applicable to allnon-current firm derivative financial liability of $61 financial assets. Derivative instruments and similar assets are(December 31, 2011 – current derivative financial asset of with approved counter-party banks and other financial$5,906 and a non-current derivative financial asset of $271). institutions. Counter-parties are assessed prior to, during, and

The net change in fair value of these net positions, after the conclusion of transactions to ensure exposure to creditrepresenting the ineffective portion of the hedge position for the risk is limited to an acceptable level.year ended December 31, 2012 was recognized in earningsattributable to Unitholders and non-controlling interest on theconsolidated statements of comprehensive income (loss) as aloss on derivative financial instruments of $129(December 31, 2011 – gain of $100).


The Fund’s major exposure to credit risk is in respect of trade The requirement for impairment is analyzed at each reportingreceivables. Trade receivable credit risk is mitigated through date on an individual basis for major clients. The calculation isestablished credit monitoring activities. These include conducting based on actually incurred historical data. The Fund’s maximumfinancial and other assessments to establish and monitor a exposure to counterparty credit risk at the reporting date is thecustomer’s creditworthiness, setting customer limits, monitoring carrying value of cash and cash equivalents, accountsexposure against these limits, and in some instances moving the receivables, firm commitments, and derivative financialcustomer to cash-in-advance terms. The Fund does not hold instruments.collateral as security.

Management determines credit risk based on customers who Liquidity riskaccount for more than 10% of accounts receivable. As at Liquidity risk is the risk that the Fund may not be able to settle orDecember 31, 2012 three customers (including Xstrata Canada) meet its obligations on time or at a reasonable price. The Fundrepresented 55% of the accounts receivable balance manages liquidity risk by maintaining adequate cash and cash(December 31, 2011 – two customers (including Xstrata equivalent balances, and by appropriately using the Fund’s ABLCanada) represented 41% of the accounts receivable balance). Facility. The Fund continuously reviews both actual andAs at December 31, 2012 and December 31, 2011 respectively, forecasted cash flows to ensure that the Fund has appropriate$967 and $2,268 of the accounts receivable – trade were revolving facility capacity. The operational, tax, capital andfifteen days past due. regulatory requirements and obligations of the Fund are

considered in the management of liquidity risk.As at December 31, 2012, the Fund had $612 of cash

(excluding cash held by the Manager) and $83,295 of unutilizedABL Facility. See Note 15 for additional information on theFund’s debt position.

The following table summarizes the amount of contractual undiscounted future cash flow requirements for financial instruments as atDecember 31, 2012 (excluding commitments in Note 16):

Q4 2013 andTotal Q1 2013 Q2 2013 Q3 2013 thereafter

ABL revolving facility 30,340 – – – 30,340Senior secured notes 67,500 – 7,500 – 60,000Accounts payable and accrued liabilities 72,448 68,224 1,112 2,200 912Derivative financial liabilities 1,155 615 172 160 208Distribution payable 1,562 1,562 – – –

Total 173,005 70,401 8,784 2,360 91,460

Market risk analysis Interest rate riskMarket risk is the risk that the fair value of the future cash flows Interest rate risk is the risk that the fair value of the future cashof a financial instrument will fluctuate because of changes in flows of a financial instrument will fluctuate because of changesmarket prices. IFRS 7 requires sensitivity analyses that show the in market interest rates. The Fund is exposed to interest rate riskeffects of hypothetical changes of relevant market risk variables primarily as a result of exposures to movements in the short termon the Fund’s earnings. The periodic effects are determined by interest rates on the ABL Facility bearing interest at arelating the hypothetical changes in the risk variables to the floating rate.balance of financial instrument s at the reporting date. The The interest rate sensitivity analysis is based on the followingFund’s primary market exposures are to interest rate risk, foreign assumptions:currency risk and commodity price risk. • for floating rate instruments, statement of comprehensive

income (loss) impacts assume adjustments to interestincome and expense for a 12-month period;

• the balance of interest-bearing financial instruments atreporting date is representative of the balance for the year asa whole and hypothetical interest rate movements aredeemed to apply for the entire reporting period; and



Commodity price risk• the impact of interest rate movements on the carrying valueThe Fund is subject to price risk from fluctuations in marketof employee benefits and rehabilitation liability hasprices of commodities. The Fund uses future contracts tobeen excluded.manage its exposure to fluctuations in commodity prices. TheIf the market interest rates had been 100 basis points higheruse of the future contracts is based on established practices(lower) at December 31, 2012 earnings, before income taxand parameters.would have been $303 (December 31, 2011 – $162)

The Fund’s commodity price risk associated with financiallower (higher).instruments primarily relates to changes in fair value caused bysettlement adjustments to receivables and payables and otherForeign currency riskfinancial instruments, including firm commitments.Foreign exchange risk is the risk that the fair value of the future

The impact of commodity prices has been determined basedcash flows of a financial instrument will fluctuate because ofon the balances of financial assets and liabilities atchanges in foreign exchange rates. The Fund’s foreign exchangeDecember 31, 2012. This sensitivity does not represent therisk arises primarily with respect to the US dollar. The Fund’sstatement of comprehensive income (loss) impact that would berevenue and raw material purchase costs are exposed to foreignexpected from a movement in commodity prices over the courseexchange risk as commodity sales and raw material purchaseof a period of time.costs are denominated in US dollars. The majority of operating

The following represents the financial instruments’ effect onexpenses, principally labour costs and energy costs, are payableearnings before finance costs and income taxes as at and for thein Canadian dollars. The US dollar revenue exposure is higheryear ended December 31, 2012 from a 10% change to metalthan the US dollar raw material purchase cost exposure due toprices based on December 31, 2012 LME forward prices:the realization of zinc metal premiums, the sale of copper in cake• Zinc 10% increase/decrease – $(11,230)/$11,230and sulphuric acid and zinc metal recovery gains in US dollars.• Copper 10% increase/decrease – $380/$(380)The Fund also has exposure to the US dollar for its cash and

cash equivalents, accounts receivable, inventory, accountsCapital managementpayable and accrued liabilities, and the ABL Facility. The FundThe Fund’s capital consists of net assets attributable toattempts to manage the overall economic exposure to theunitholders and non-controlling interest. The Fund’s objectivesUS ollar by matching US dollar assets to US dollar liabilities. Thiswhen managing capital is to ensure the Fund has the capital andcurrency exposure is managed in part through US dollar overnightcapacity to support the Fund’s ability to continue as a goingtransactions. As at December 31, 2012, the Fund had soldconcern, and to enable the Fund to make sustaining and revenueforward US dollars with a notional amount of US$109,000generating capital expenditures. The Fund’s long-term objective(December 31, 2011 – US$66,200) and bought forward dollarsis to maximize unitholder value and, when possible, providewith a notional amount of $108,456stable monthly distributions at a sustainable level to Unitholders.(December 31, 2011 – $67,541). An unrealized gain of $11The Fund’s capital consists of net assets attributable torelated to these open positions was recorded as atunitholders and bank and other loans.December 31, 2012 (December 31, 2011 – an unrealized gain

The Fund’s capital structure reflects the requirements of aof $214).business in the zinc processing industry that has long-term fixedThe impact of foreign currencies has been determined basedprocessing fee supply contracts. The Fund is reducing theon the balances of financial assets and liabilities atamount of debt within the capital structure as it moves closer toDecember 31, 2012. This sensitivity does not represent thethe end of the SPA. The Fund’s investment in working capital isstatement of comprehensive income (loss) impact that would bedirectly correlated to the price of zinc and is funded by theexpected from a movement in foreign currency exchange ratesABL Facility.over the course of a period of time.

The Fund continually assesses the adequacy of its capitalIf the Canadian dollar had gained (lost) 5% against thestructure and capacity and makes adjustments within the contextUS dollar, the increase (decrease) on earnings before financeof the Fund’s strategy, economic conditions and the riskcosts and income taxes would have been $5,880 as at and forcharacteristics of the business.the year ended December 31, 2012.


Transfer Agent and Registrar

Inquiries regarding change

of address, unit transfers,

distributions or lost certificates

should be directed to our

Registrar and Transfer Agent:

Computershare Trust Company

of Canada

1500 University Street

Suite 700

Montréal, Québec

Canada H3A 3S8

Tel: 1-800-564-6253

(North America)

Email:

[email protected]

Head Office

100 King Street West

First Canadian Place

Suite 6900, P.O. Box 403

Toronto, Ontario

Canada M5X 1E3

www.norandaincomefund.com

Processing Facility

860, Gérard-Cadieux Boulevard

Salaberry-de-Valleyfield, Québec

Canada J6T 6L4

Contact

Michael Boone

c/o Canadian Electrolytic

Zinc Limited

Noranda Income Fund’s Manager

Tel: 416-775-1561

Email:

[email protected]

Auditors

Ernst & Young, LLP

Chartered Accountants

Montréal, Québec

Canadian Electrolytic

Zinc Limited,

Noranda Income

Fund’s Manager

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

Noranda Operating Trust Trustees

Manuel Álvarez Dávila 3

Jean Pierre Ouellet 1, 2

François R. Roy 1, 2

John J. Swidler, Chair 1, 2

Barry Tissenbaum 1, 2

Neil Wardle 3

John Whyte 3

1 Member of the Audit Committee2 Member of the Governance and

Human Resources Committee3 Related to Xstrata plc

Exchange Listing

TSX: NIF.UN

Unit Trading Information

Date Open High Low Close

2012 Q1 $ 5.74 $ 6.35 $ 5.55 $ 5.99

2012 Q2 $ 5.98 $ 6.02 $ 4.10 $ 4.48

2012 Q3 $ 4.49 $ 5.25 $ 4.37 $ 4.86

2012 Q4 $ 4.89 $ 5.12 $ 4.35 $ 4.74

2011 Q1 $ 4.62 $ 5.40 $ 3.75 $ 5.00

2011 Q2 $ 5.00 $ 5.80 $ 4.24 $ 4.65

2011 Q3 $ 4.69 $ 6.24 $ 4.69 $ 5.00

2011 Q4 $ 5.25 $ 5.88 $ 4.29 $ 5.69

CORPORATE INFORMATION

100 King Street West

First Canadian Place

Suite 6900, P.O. Box 403

Toronto, ON M5X 1E3

Tel: 416-775-1500 Fax: 416-775-1749

www.norandaincomefund.com

Photos:1. Benoit Leduc, Industrial Mechanic2. Lyne Desrosiers, Process Technician3. Daniel Moise, Central Control Room Operator4. Mélanie Lajoie, Industrial Hygiene Technician

noranda income fund annual report 2012 eng_final... · a wholly-owned subsidiary of xstrata canada...

Documents