Holders in fund crossfire

The average punter may end up being a casualty in the battle that's underway at Noranda Income Fund.

That battle pits Xstrata Canada, the entity that manages the Quebec zinc smelter using Xstrata ore and that has indicated its intention to buy out the investors for a lowball price, against a bunch of savvy institutional investors who may just be in for a short-term flip.

Caught in the middle are retail investors who own priority units, who want a higher price if necessary, but would rather have a steady stream of income. After all, that's why they bought the units given that they initially received $1 a year in distributions. For the past year, unitholders have received nothing.

"If [the institutional investors] get $8 a share I am not too happy. If they get $12 a share I am happy," said one retail investor who has been watching with interest the recent stronger trading in the units. Since Xstrata mused on July 30 about buying out the priority units -- initially at $3.40 per unit and later at $3.90 per unit -- more than 40% of the float has changed hands. In total that large block of stock is very powerful.

"My conclusion is that strong owners have taken a forceful position," noted the investor, who says the new investors have a shorter time horizon than owners like himself.

Complicating the issue, the fund is operating without any independent trustees, given that three resigned last month. (The fourth died over the summer.) The fund still has three non-independent directors, two of whom work for Xstrata. The fund intends to replace the four independents and has hired a recruiting firm to help.

Presumably the names of the four will be released in the circular for the Nov. 15 special meeting. That meeting was called in response to the demands of a group of institutional investors who want to elect a new group of independent trustees. The individuals to be proposed by the institutional shareholders are under consideration for selection by the fund. It's not known how far talks between the two sides have progressed.

But the trustees have a lot of work to do, including refinancing the fund's existing credit facility. That borrowing expires on Nov. 3, 12 days before the special meeting. So presumably a delicate matter will be handled by non-independent trustees. (One solution would have been for the fund to respond more quickly than it did, get four new trustees and start working on the big issues. The delay hasn't worked for the benefit of the unitholders.)

Once the four independents are appointed they will have a few weeks to work on refinancing the fund's $153.5-million issue of senior secured notes.

Another complication is the codependent relationship between Xstrata and the fund: the former needs the latter's Quebec plant to process its raw ore while the latter needs Xstrata to run the mill and produce distributions for its investors.

And that co-dependency may increase given that Xstrata will need a plant to process ore from its new Bracemac-McLeod mine. If Valleyfield is selected then one retail investor suggests Xstrata and the fund sign a long-term processing agreement, the fund finance the expansion and start paying distributions.

Alternatively, Xstrata could buy the plant and the fund distributes the proceeds. "These are all options that an independent trustee would investigate," said this investor, noting the independent trustees also have to select a new financial advisor.