Noranda Operating Trust Canada 100% 100% Special Purpose Entity:
The Fund’s derivatives recognized in the consolidated statements Canadian Electrolytic Zinc
of financial position are as follows:
Limited1 Canada 0% 0%
1Canadian Electrolytic Zinc Limited is a wholly owned subsidiary of Xstrata Canada and is
December 31, December 31, January 1,
consolidated by virtue of being a special purpose entity. 2011 2010 2010
Assets During the years ended December 31, the Company entered
Long-term derivative into the following transactions in the ordinary course of business
financial assets: with Xstrata Canada and its subsidiaries:
Hedges of fixed firm
commitments – 377 1,110
Years ended
December 31 Long-term firm
2011 2010 commitments 271 – –
Derivative financial
Sales of zinc metal 33,997 72,135
assets: Sales of by-products 29,698 21,455
Hedges of fixed firm Purchases of zinc concentrate 319,436 335,920
commitments – 3,478 4,409
Purchases of plant equipment, raw
Inventory management materials and operating supplies 7,742 8,914
program – 2,159 –
Support services 1,210 1,164
Sales agency services 1,158 1,239 – 5,637 4,409
Credit support from Xstrata Canada – 402
Firm commitments 5,906 – –
Dec. 31 Dec. 31 Jan. 1
2011 2010 2010 Liabilities
Accounts receivable 17,027 34,113 7,942 Long-term derivative Accounts payable 31,199 36,261 63,418 financial liabilities:
Hedges of fixed firm
Glencore International AG (‘‘Glencore’’) owns appoximately commitments 268 – – 34% of Xstrata. Sales to a subsidiary of Glencore included in Long-term firm
sales of zinc metal for the years ended December 31, 2011 and commitments – 379 1,111 2010 were $20,374 and $41,825 respectively. Amounts due Derivative financial
from Glencore, included in accounts receivable, were $940 and liabilities: $6,806 as at December 31, 2011 and 2010, respectively. Hedges of fixed firm
The sales to and purchases from related parties are made at commitments 5,834 – – terms equivalent to those that prevail in arm’s length Inventory management
transactions. All amounts due to and from related parties are program 1,413 – 3,587 non-interest bearing and are due in the ordinary course of 7,247 – 3,587 business. All transactions with Xstrata Canada and affiliated
companies are carried out in the normal course of operations, Firm commitments – 3,499 4,112 and are recorded at fair value.
Inventory management program As at December 31, 2011, Xstrata Canada had futures The Fund purchases metal in the form of zinc concentrate to be contracts hedging approximately 79 million pounds of zinc processed eventually into refined zinc metal for sale to (December 31, 2010: 23 million pounds) to be sold pursuant to customers. As agent of the Fund, Xstrata Canada provides the firm commitments at fixed prices and delivery dates related to hedging arrangements in the event that the structure of the the Fund. As at December 31, 2011, the fair value of these Fund’s sales and purchase contracts does not minimize exposure contracts as determined with reference to pooled market prices to changes in zinc prices during the period in which the zinc (Level 1) was recognized as a current derivative financial liability is refined. of $5,834 and a non-current derivative financial liability of $268
The derivatives associated with the Fund’s inventory (December 31, 2010: current derivative financial asset of management program do not meet the requirements for hedge $3,478 and non-current derivative financial asset of $377; accounting. As a result, these derivative financial instruments January 1, 2010: current derivative financial asset of $4,409 have been recognized on the consolidated statements of and a non-current derivative financial asset of $1,110) and the financial position as either a derivative financial asset or liability fair value of the firm fixed sales commitments was recognized as with the change in their fair value at each reporting period date a current firm commitment asset of $5,906 and a long-term firm recognized as a gain or a loss on derivative financial instruments. commitment asset of $271 (December 31, 2010: current firm As at December 31, 2011, the Fund had bought forward commitment liability of $3,499 and a long-term firm
approximately 26 million pounds of zinc (December 31, 2010 – commitment liability of $379; January 1, 2010: current firm bought forward 16 million pounds of zinc). commitment liability of $4,112 and a long-term firm
During the year ended December 31, 2011, the change in commitment liability of $1,111).
fair value of these derivatives was a loss of $3,571 which was The net change in fair value of these net positions,
recognized in earnings attributable to Unitholders and representing the ineffective portion of the hedge position for the non-controlling interest on the consolidated statements of year ended December 31, 2011 was recognized in earnings comprehensive income (loss) in loss (gain) on derivative financial attributable to Unitholders and non-controlling interest on the instruments (December 31, 2010: gain on derivative financial consolidated statements of comprehensive income (loss) as a instruments of $5,746). As at December 31, 2011, the fair gain on derivative financial instruments of $100 (December 31, value of these positions, as determined with reference to Level 1, 2010: loss of $300).
quoted market prices, was a current derivative financial liability of
$1,413 (December 31, 2010: current derivative financial asset Embedded derivatives
of $2,159, January 1, 2010: current derivative financial liability For the year ended December 31, 2011, the Fund recorded of $3,587). $11,254 as a decrease of raw material purchase costs related to
the change in fair value, as determined with reference to pooled Hedges of fixed firm commitments market prices (Level 1) of the embedded derivatives resulting Certain customers request a fixed sales price instead of the LME from the quotational pricing feature of its zinc concentrate average price in the month of shipment. Xstrata Canada enters payables (December 31, 2010: increase of $2,501). into commodity forward and futures contracts on behalf of the
Fund that will allow the Fund to receive the LME average price in NOTE 19. FINANCIAL INSTRUMENTS
the month of shipment while customers pay the agreed-upon
fixed price. Xstrata Canada accomplishes this by settling the Principles of risk management
futures contracts during the month of shipment, which generally The Fund’s primary risk management objective is to protect the results in the realization of the LME average price. In the event Fund’s financial position, comprehensive income (loss), and that the futures contracts have to be terminated early, due to the cash flow in support of providing, when possible, stable monthly customer cancelling a fixed price order, Xstrata Canada has the cash distributions at a sustainable level to Unitholders.
right to charge the customer with the cost of settling the LME The main risks arising from the Fund’s financial instruments futures contract. A high degree of correlation between the are credit risk, liquidity risk, interest rate risk, foreign currency changes in the fair value of the contracts and the fixed sales risk and commodity price risk. These risks arise from exposures commitments permits hedge accounting to be used. that occur in the normal course of business.
The Fund’s significant financial instruments, other than Management determines credit risk based on customers who derivatives, comprise bank and other loans, cash and cash account for more than 10% of accounts receivable. As at equivalents. The main purpose of these financial instruments is December 31, 2011 and December 31, 2010, two customers to finance the Fund’s ongoing operations. The Fund has various (including Xstrata Canada) represented 41% and 47%, other financial assets and liabilities such as accounts receivables respectively of the accounts receivable balance. As at and accounts payables, which arise directly from its operations. December 31, 2011 and December 31, 2010 respectively,
The fair values of cash and cash equivalents, accounts $2,268 and $1,939 of the accounts receivable – trade were receivable, accounts payable and accrued liabilities and fifteen days past due and the Fund had recorded an allowance distribution payable approximate their carrying values given the for doubtful accounts of nil and $386, respectively.
short-term maturity of these instruments. The requirement for impairment is analyzed at each reporting From time-to-time, the Fund may use foreign exchange date on an individual basis for major clients. The calculation is forward contracts and commodity price contracts to manage based on actually incurred historical data. The Fund’s maximum exposure to fluctuations in foreign exchange and metal prices. exposure to counterparty credit risk at the reporting date is the The Fund’s use of derivatives is based on established practices carrying value of cash and cash equivalents, accounts and parameters, which are subject to the oversight of the board receivables, firm commitments, and derivative financial of trustees of the Operating Trust. instruments.
Credit risk Liquidity risk
Exposure to credit risk arises as a result of transactions in the Liquidity risk is the risk that the Fund may not be able to settle or Fund’s ordinary course of business and is applicable to all meet its obligations on time or at a reasonable price. The Fund financial assets. Investments in cash and cash equivalents, manages liquidity risk by maintaining adequate cash and cash derivative instruments and similar assets are with approved equivalent balances, and by appropriately using the Fund’s ABL counter-party banks and other financial institutions. Counter- Facility. The Fund continuously reviews both actual and parties are assessed prior to, during, and after the conclusion of forecasted cash flows to ensure that the Fund has appropriate transactions to ensure exposure to credit risk is limited to an revolving facility capacity. The operational, tax, capital and acceptable level. regulatory requirements and obligations of the Fund are
The Fund’s major exposure to credit risk is in respect of trade considered in the management of liquidity risk.
receivables. Trade receivable credit risk is mitigated through Based on the balance sheet as at December 31, 2011, the established credit monitoring activities. These include conducting Fund had $1,497 of cash and cash equivalents and $66,887 of financial and other assessments to establish and monitor a unutilized ABL Facility. As at December 31, 2011, the Fund had customer’s creditworthiness, setting customer limits, monitoring $865 of cash and cash equivalents (excluding cash held by the exposure against these limits, and in some instances moving the Manager) and $66,853 of unutilized ABL Facility. See Note 15 customer to cash-in-advance terms. The Fund does not hold for additional information on the Fund’s debt position.
collateral as security.
The following table summarizes the amount of contractual undiscounted future cash flow requirements for financial instruments as at December 31, 2011:
Q4 2012 and
Total Q1 2012 Q2 2012 Q3 2012 thereafter
ABL revolving facility 16,213 – – – 16,213
Senior secured notes 82,500 – 7,500 – 75,000
Accounts payable and accrued liabilities 60,795 56,717 1,204 1,561 1,313
Derivative financial liabilities 7,515 3,168 2,044 1,433 870
Distribution payable 1,562 1,562 – – –
Market risk analysis The Fund also has exposure to the US dollar for its cash and Market risk is the risk that the fair value of the future cash flows cash equivalents, accounts receivable, inventory, accounts of a financial instrument will fluctuate because of changes in payable and accrued liabilities, and the ABL Facility. The Fund market prices. IFRS 7 requires sensitivity analyses that show the attempts to manage the overall economic exposure to the US effects of hypothetical changes of relevant market risk variables dollar by matching US dollar assets to US dollar liabilities. This on the Fund’s earnings. The periodic effects are determined by currency exposure is managed in part through US dollar overnight relating the hypothetical changes in the risk variables to the transactions. As at December 31, 2011, the Fund had bought balance of financial instruments at the reporting date. The Fund’s forward US dollars with a notional amount of US$66,200 and primary market exposures are to interest rate risk, foreign sold forward dollars with a notional amount of $67,541. An currency risk and commodity price risk. unrealized gain of $214 related to these open positions was
recorded as at December 31, 2011.
Interest rate risk The impact of foreign currencies has been determined based Interest rate risk is the risk that the fair value of the future cash on the balances of financial assets and liabilities at
flows of a financial instrument will fluctuate because of changes December 31, 2011. This sensitivity does not represent the in market interest rates. The Fund is exposed to interest rate risk statement of comprehensive income (loss) impact that would be primarily as a result of exposures to movements in the short term expected from a movement in foreign currency exchange rates interest rates on the ABL Facility bearing interest at a over the course of a period of time.
floating rate. If the Canadian dollar had gained (lost) 5% against the US The interest rate sensitivity analysis is based on the following dollar, the increase (decrease) on earnings before finance costs assumptions: and income taxes would have been $2,445 as at and for the • for floating rate instruments, statement of comprehensive year ended December 31, 2011.
income (loss) impacts assume adjustments to interest
income and expense for a 12-month period; Commodity price risk
• the balance of interest-bearing financial instruments at The Fund is subject to price risk from fluctuations in market reporting date is representative of the balance for the year as prices of commodities. The Fund uses future contracts to a whole and hypothetical interest rate movements are manage its exposure to fluctuations in commodity prices. The deemed to apply for the entire reporting period; and use of the future contracts is based on established practices • the impact of interest rate movements on the carrying value and parameters.
of employee benefits and rehabilitation liability has The Fund’s commodity price risk associated with financial been excluded. instruments primarily relates to changes in fair value caused by If the market interest rates had been 100 basis points higher settlement adjustments to receivables and payables and other (lower) at December 31, 2011 earnings, before income tax financial instruments, including firm commitments.
would have been $162 (December 31, 2010: $1,947) The impact of commodity prices has been determined based lower (higher). on the balances of financial assets and liabilities at
December 31, 2011. This sensitivity does not represent the Foreign currency risk statement of comprehensive income (loss) impact that would be Foreign exchange risk is the risk that the fair value of the future expected from a movement in commodity prices over the course cash flows of a financial instrument will fluctuate because of of a period of time.
changes in foreign exchange rates. The Fund’s foreign exchange The following represents the financial instruments’ effect on risk arises primarily with respect to the US dollar. The Fund’s earnings before finance costs and income taxes as at and for the revenue and raw material purchase costs are exposed to foreign year ended December 31, 2011 from a 10% change to metal exchange risk as commodity sales and raw material purchase prices based on December 31, 2011 LME forward prices: costs are denominated in US dollars. The majority of operating • Zinc 10% increase/decrease – $(6,703)/$6,703 expenses, principally labour costs and energy costs, are payable • Copper 10% increase/decrease – $416/$(416) in Canadian dollars. The US dollar revenue exposure is higher
than the US dollar raw material purchase cost exposure due to the realization of zinc metal premiums, the sale of copper in cake and sulphuric acid and zinc metal recovery gains in US dollars.
Capital management 2. The Fund has elected to recognize all cumulative The Fund’s capital consists of net assets attributable to unamortized actuarial gains and losses from the
unitholders and non-controlling interest. The Fund’s objectives Manager’s employee benefit plans as at January 1, 2010 when managing capital is to ensure the Fund has the capital and in its opening retained earnings. All future actuarial gains capacity to support the Fund’s ability to continue as a going and losses will be recorded in other comprehensive concern, and to enable the Fund to make sustaining and revenue income (loss).
generating capital expenditures. The Fund’s long-term objective 3. The Fund has elected to disclose the following amounts is to maximize unitholder value and, when possible, provide prospectively from the date of transition (IFRS ordinarily stable monthly distributions at a sustainable level to Unitholders. requires the amounts for the current and previous four The Fund’s capital consists of net assets attributable to annual periods to be disclosed): (i) the present value of the unitholders and banks and other loans. defined benefit obligation, the fair value of the plan assets
The Fund’s capital structure reflects the requirements of a and the surplus or deficit in the plan; and (ii) the business in the zinc processing industry that has long-term fixed experience adjustments arising on the plan liabilities and processing fee supply contracts. The Fund is reducing the the plan assets.
amount of debt within the capital structure as it moves closer to In preparing its opening IFRS statement of financial position, the end of the SPA. The Fund’s investment in working capital is the Fund has adjusted amounts reported previously in financial directly correlated to the price of zinc and is funded by the statements prepared in accordance with GAAP. An explanation of ABL Facility. how the transition from GAAP to IFRS has affected the Fund’s
The Fund continually assesses the adequacy of its capital financial position, financial performance and cash flows is set out structure and capacity and makes adjustments within the context in the following tables and the notes that accompany the tables. of the Fund’s strategy, economic conditions and the risk
characteristics of the business. Income taxes
The Fund is subject to tax imposed under the Tax Act on a
NOTE 20. EXPLANATION OF TRANSITION TO IFRS Specified Investment Flow-Through Entities (‘‘SIFT’’) trust and has previously applied GAAP guidance in Emerging Issues As stated in Note 2, these are the Fund’s first consolidated Committee (‘‘EIC’’)-107 and EIC-167 when measuring its annual financial statements prepared in accordance with IFRS. current and future income tax balances. Using this guidance, if IFRS 1 sets out the procedures that the Fund must follow when it the Fund was able to demonstrate intent and ability to distribute adopts IFRS for the first time as the basis for preparing its earnings, then a lower rate of tax was applied to temporary consolidated financial statements. The Fund is required to differences for the measurement of future income taxes and for establish its IFRS accounting policies for 2011 and, in general, the purpose of calculating a current tax provision. Current apply these retrospectively to determine the IFRS opening income taxes and deferred taxes were measured based on tax balance sheet as at the transition date of January 1, 2010. rates and laws that have been ‘‘enacted or substantively
The accounting policies set out in Note 3 have been applied in enacted’’. For the Fund, deferred tax balances were previously preparing the consolidated financial statements for the year calculated using the tax rates that were expected to apply to the ended December 31, 2011, the comparative information reporting period(s) when the temporary differences were presented for the year ended December 31, 2010 and in expected to reverse, based on tax rates enacted or substantively preparation of an opening IFRS statement of financial position at enacted at the end of the reporting period and on the Fund’s January 1, 2010 (the Fund’s date of transition). IFRS 1 also current legal structure. There are no corresponding guidelines permits a number of optional and mandatory exemptions from with respect to a SIFT trust under IFRS and, as a result, the Fund full retrospective application. is required to follow IAS 12.