Xstrata walks away from Noranda offer

Shares of Noranda Income Fund fell nearly 9 per cent on Thursday after Xstrata Zinc, a division of mining giant Xstrata PLC, officially walked away from its takeover offer for the company.

Talks between the two broke off because managers could not agree on price. Although Swiss-based Xstrata increased its original July 30 offer by 15 per cent, to $3.90 per unit, the independent members of Noranda's board of trustees did not support the price. Taking debt into account, the deal value would have totalled about $400-million.

"After a difficult process, we are disappointed that we were not able to reach an agreement," Lisa de Wilde, chair of the board of trustees, said in a statement Thursday.

Currently, Xstrata owns 25 per cent of Noranda and has a contract to supply the company with zinc until 2017, which is processed at Noranda's CEZinc refinery.

"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," Xstrata Zinc chief executive officer Santiago Zaldumbide said in a statement. "Xstrata's proposal would have provided unitholders with the certainty of cash."

Before Thursday, Noranda's units had shot up 34 per cent in a month. However, the fund's stock price started soaring in July, reflecting shareholders' expectations of a pending takeover bid.

Now Noranda faces other possible changes. Hedge funds West Face Capital and Clearwater Capital Management own a combined 10 per cent of outstanding shares and are trying to replace the four independent members of Noranda's seven-member board. The current independents reached a decision on the takeover before waiting for an independent valuation from Canaccord Genuity Corp. It is unclear what the hedge funds hope to achieve.

Before the prospect of an acquisition, Noranda's share price had moved sideways for more than 18 months. Management hired Gryphon Partners as a financial adviser to figure out the best course of action. The fund will now return to options Gryphon originally put forward, including refinancing debt coming due later this year and converting to a corporation before year end.

Noranda Income Fund was originally owned by Noranda Inc. but was spun off in 2002. Before the initial public offering, Noranda Inc. owned and operated the CEZinc smelter and supplied it with zinc for refining. Noranda Inc. was ultimately acquired by Falconbridge Ltd., which was bought by Xstrata in 2006.

NORANDA INCOME (NIF.UN)

Close: $3.75, down 35¢