Noranda Income Fund Unit NNDIF

RE:RE:RE:RE:RE:RE:RE:RE:Leverage to zinc prices

[ljp0101]

It doesn't matter who pays for the shipping, just how it gets reflected in the economics.

Spot TCRC is CFR China. If I had concentrate in Canada, I'd need to either pay to ship it to China or accept a lower price from a trader that pays for shipping. Real world concentrate flow are more complicated though and arbing these flows is one way traders make money.

Consider CEZ's position as it receives rail shipments of concentrate from Canada and also imports concentrate from Africa and South America. For the seaborne concentrate, it's probably close to a wash for the producer to ship to China vs Canada so price should be similar. For the domestic concentrate however, the producer would be saying something like your next best alternative is to pay shipping to import concentrate so you should pay us an equivalent price while CEZ is saying to the producer your next best alternative is to pay shipping to China so you should accept a low price.

The difference between these two positions is >50/t so very material. I've never heard commentary from management around this. It's very possible Glencore playing both sides and paying the Canadian mines a CFR Asia less transport cost price and charging CEZ import equivalent prices while pocketing the transport charge they're not paying as margin. Glencore is in a strong negotiating position because: 1) CEZ can't explore alternatives for concentrate purchases due to the terrible supply agreement; 2) Glencore is stronger financially and controls a lot of Canadian concentrate so could play hardball and withhold CEZ's natural concentrate flows even if #1 wasn't true; and 3) CEZ equity is a zero if they close due to environmental liabilities according to management so accepting anything that keeps them in business is better than nothing.