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Xstrata pulls out of possible acquisition of Noranda Income Fund

|Includes: Xstrata Plc (XSRAF), XSRAY

Xstrata Zinc, a division of Swiss headquartered Xstrata Plc (LSE:XTA) has ended discussions with Canada`s Noranda Income Fund (TSX:NIF.UN) about a possible acquisition of the fund.

 The two companies had entered into a non-binding letter of intent about the potential acquisition of the fund by Xstrata, initially at a cash price of C$3.40 per unit.  The proposed price was improved to C$3.90 on August 30th, but the revised offer was rejected by an Independent Committee set up by Noranda. 

“Xstrata has determined that the parties are unlikely to agree to terms for an acquisition of the Fund and accordingly today provided notice to the Fund that it has terminated the LOI and does not intend to proceed with the proposal,” the London listed mining giant stated this morning.

Xstrata currently owns an effective 25% voting and economic interest in the Noranda Income Fund and manages the Fund's sole operating asset, the CEZinc processing facility in Québec.  Xstrata is also the sole supplier of zinc concentrate to CEZinc.

"Our proposal was based on our ability to consolidate the CEZinc refinery into Xstrata Zinc's global operations to secure its long-term future and on our considered view, as the operators and managers of the asset, of its prospects on a standalone basis,” Xstrata Zinc Chief Executive Santiago Zaldumbide, stated.

Zaldumbide went on to note that the Fund will cease to benefit from its tax-free status on January 1st, 2011, and must also refinance its current debt pile of C$193 million.

"CEZinc faces competition with low-cost processing capacity in China which has driven treatment changes to very low levels.  In the future, when the current supply contract expires, CEZinc will need to source zinc concentrates at a time when existing Canadian and Western world sources are likely to be constrained and Chinese demand is expected to have grown further.  In the light of these uncertainties, Xstrata's proposal would have provided unitholders with the certainty of cash." 

The CEZinc processing facility is located in Salaberry-de-Valleyfield, Quebec,  producing refined zinc metal and various byproducts from zinc concentrates. As of December 31, 2009, the processing facility produced 228,600 tons of zinc metal.

Disclosure: no position