Summary

• NIF, an entity designed to provide stable dividends to shareholders, has been oversold due to newly added cautionary language about the end of the supply agreement between Glencore and NIF.
• As a going concern, NIF is valued today at C$5.12 per share, a 73.0% a premium to the current share price.
• In an unlikely conservative liquidation scenario, NIF is valued today at C$3.55 per share, a 19.9% premium to the current share price excluding the value of the smelter or land.

(Editors’ Note: Noranda Income Fund trades on the Toronto Stock Exchange under the ticker NIF-UN.TO, with $CAD 350K average daily trading volume).

Noranda Income Fund (OTC:NNDIF ) (NIF or the fund) owns a zinc smelter (the facility or the smelter) in Quebec, Canada. The fund was spun off from Noranda Inc. (which was since acquired by Glencore plc OTCPK:GLCNF ) in 2002, and was created to take advantage of the unique income fund structure in Canada. Noranda Inc. received C$225 million in proceeds in exchange for 45% of the fund; the IPO valued NIF at C$500 million. Noranda Inc. transferred the facility to NIF and signed an agreement to supply 100% of the fund’s zinc concentrate requirements for processing for 15 years (the SPA or Supply and Processing Agreement) until May 2017. In 2002, the SPA began with a processing fee of C$0.352 per pound of zinc metal and had a 1% price increase per year and an adjustment for cost inflation. The initial price as contemplated in the SPA was considered the market price for processing zinc in 2002. The current price paid under the SPA of C$0.40 per pound of zinc metal is approximately 50% above current market rate.

The fund has been popular with yield-oriented investors as the SPA allows the fund to produce predictable and consistent cash flows and dividends in the typically volatile commodity sector. The fund has traded around C$5.00 since 2010 until its Q3 results were released on November 11, 2014. New cautionary language about the end of the SPA and the future viability of the Smelter without the SPA caused the share price to decline over 50%. The statement is in the FAQ at the end of this document.

The decline in the stock price is overdone. The end of the SPA has been well-known since the creation of the fund and is not a surprise. While the amount of the dividend will be much less predictable beyond the life of the SPA, the current stock price is below the value of all of the most likely scenarios. The fund will most likely have lower cash flows without the SPA but it is a large smelter that has been consistently upgraded, uses low cost hydropower and sits close to tidewater and as such is likely to remain competitive. In addition, with the collapse in the share price, even in the remote liquidation scenario, investors have minimal downside.

Market Environment