timminco 2008 annual report

Annual Report 2008

positioned to lead in the solar economy

The amount of the sun’s energy striking the earth in a 40-minute period is equivalent to global energy consumption for an entire year. Through photovoltaics (PV), this energy can be converted directly into electricity with virtually no impact on the environment. Annual solar PV energy production has grown at a compound annual rate of 46% since 2001, reaching 3.8 gigawatts in 2007.

2 The Solar Energy Opportunity

The Solar Energy Opportunity

Solar energy is emerging as the front runner in the race to establish renewable sources of energy.

0

100

200

300

400

500

600

700

800

80 85 90 95 00 05 10 15 20 25 30

Qua

drill

ion

Btu

Projected

Why Renewable Energy?1

Global energy consumption is expected to rise by 50% from 2005 to 2030.

growing energy

demand

Why Solar?

Increasing demand for clean,

renewable energy alternatives

Rising prices for conventional,

non-renewable energy sources

Proven, reliable technology

with cost and logistical

advantages over other

renewable energy alternatives

Government initiatives and subsidies

Declining cost structure –

convergence with electricity

grid prices absent subsidies1 See page 18.

The sun’s energy doesn’t produce carbon dioxide, won’t run out, and it’s free.

Photovoltaic production has nearly doubled every two years, increasing at a compound annual growth rate of 46 percent since 2001.

Annual Global Solar PV Production2

In recent years, the world has become increasingly concerned about the sustainability, the environmental impact and the rising cost of conventional energy sources such as fossil fuels. These concerns have spurred global demand for alternatives that are renewable, environmentally friendly and have the potential to be less expensive. Solar energy has emerged as one of the most viable options based on its reliability, minimal impact on its surroundings and logistical advantages, as well as its broad geographical application compared to other renewable energy sources.

Over the long term, the solar PV energy industry is expected to experience significant growth driven by continued growth in the demand for electricity worldwide, the increasing preference for renewable energy sources and solar’s advan-tages over other “clean” alternatives. This growth is being supported by hundreds of billions of dollars of investment and governmental commitments to increasing the proportion of energy generated by alternative means. Moreover, as related technologies improve and output in the various segments of the value chain increases, solar PV energy is becoming more economical.

0 1,000,000 2,000,000 3,000,000 4,000,000 5000000

48,000 km4,020,000 km

91 square meters

91 square meters

Photovoltaics are 85 times as efficient as growing corn for ethanol. On a 91 m by 91 m (1 hectare) plot of land, enough ethanol can be produced to drive a car 48,000 km per year; by covering the same land with photo cells, a car could travel 4,020,000 km per year.

0

500

1000

1500

2000

2500

3000

3500

4000

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Megawatts

The Solar Energy Opportunity 3

compound annual growth since 2001

46%

2 See page 18.

4 At a Glance

At a Glance

Silicon MetalWith more than 30 years of experience, we are one of North America’s largest producers of silicon metal. Our products are used primarily in the chemical, electronics, aluminum and steel industries, as well as for the production of polysilicon for solar cells. We also direct some of our output to our own production of solar grade silicon.

Timminco has assumed world leadership in the production of upgraded metallurgical silicon (UMSi) for the solar energy industry.

Quartz

Electric ArcFurnace Process

Silicon Metal

Si

ProprietaryPurification

Solar Grade Silicon

UMSi

Solar PanelProduction

Our quartz mining rights provide security of supply.

Quartz is processed into silicon metal.

Some silicon metal is sold for use in the chemical, electronics, aluminum and steel industries.

Patents-pending metallurgical process converts silicon metalto UMSi.

Customers turn our raw solar grade silicon into solar panels.

Raw Material

Silicon Metal

Ingot

Brick

Wafer

Cell

At a Glance 5

Solar Grade SiliconWe produce solar grade silicon using innovative metallurgical purification techniques. Our proprietary patents-pending process allows us to offer our customers, who produce ingots, wafers and cells for the solar photovoltaic industry, an economic alternative to conventional material: upgraded metallurgical silicon (UMSi).

Quartz

Electric ArcFurnace Process

Silicon Metal

Si

ProprietaryPurification

Solar Grade Silicon

UMSi

Solar PanelProduction

Our quartz mining rights provide security of supply.

Quartz is processed into silicon metal.

Some silicon metal is sold for use in the chemical, electronics, aluminum and steel industries.

Patents-pending metallurgical process converts silicon metalto UMSi.

Customers turn our raw solar grade silicon into solar panels.

Raw Material

Silicon Metal

Ingot

Brick

Wafer

Cell

70-acre facility in Bécancour, Québec

Canada

Québec

Bécancour

6 Financial and Operational Highlights

Financial and Operational Highlights

52%

Consolidated Sales EBITDA3

Solar Grade Silicon (net revenue)

Silicon Metal (net revenue)

Magnesium (net revenue)

Solar Grade Silicon24%

Silicon Metal51%

Magnesium25%

61.8 127.7 63.1

Sales by Product Line

$ in millions

In its first full year of operation, our solar grade silicon product line contributed $65 million in gross revenue.

61.8

3.9

2007 2008

127.7

99.9

2007 2008

63.162.4

2007 2008

2007 2008Solar Grade Silicon2%

Silicon Metal60%

Magnesium38%

166.2

252.6

2007 2008

(8.9)

21.3

2007 2008

3 See page 18.

$ in millions $ in millions

Financial and Operational Highlights 7

100

221

Q1 Q2 Q3 Q4

300

424

324%

2008 UMSi shipments

During 2008, we significantly ramped up our solar grade silicon operations, steadily increasing production in each

successive quarter and shipping more than 1,000 mt of UMSi to more than 10 different customers.

Achieved consolidated sales of $252.6M and EBITDA3 of $21.3M

Shipped 1,045 mt of UMSi

Expanded solar grade silicon operations to six lines, adding a seventh subsequent to year end

Increased maximum revolving bank credit line to US$50.0 million

Completed a $25 million common equity private placement (subsequent to year end)

Signed a non-binding LOI to divest remaining magnesium operations (subsequent to year end)

1,045 mt

total shipments quarterly shipment growth (Q1 to Q4)

3 See page 18.

The challenges we faced included managing the construction of a new plant in stages with a sequential start-up of furnaces commissioned, the training of personnel, acquiring the necessary skills to handle new equipment and a new process, and securing a new mix of raw materials. We are continuing the learning process in concert with our customers. The build-out of our solar grade silicon business has positioned Timminco for growth. The rapid deterioration in the global economy, however, has had an adverse impact on our markets in the first quarter of 2009, signifi-cantly dampening the demand for both silicon metal and UMSi.

During my long tenure in the metals industry, I have witnessed a number of market downturns. Experience has taught me that minimizing risk through capital preservation, cost reduction, and inventory management are essential during such periods. Accordingly, we have taken decisive action, implementing a cost containment plan that eliminates non-essential capital expenditures, reduces our working capital requirements and reduces the overall cost structure of our silicon operations. Once the markets return, as they eventually will, Timminco will emerge as a more efficient competitor.

We have temporarily adjusted our output levels of solar grade silicon to bring them in line with customer orders. We have also deferred further expansion of our solar grade silicon capacity until our customers have confirmed orders that exceed our existing capacity. We are working closely with our customers to monitor their needs going forward.

8 Letter to Shareholders

2008 was a transformational year for Timminco. It was the first year of commercial production of upgraded metallurgical silicon (UMSi) for the solar industry. It also marked the disengagement of Timminco from non-core, i.e., non-silicon, related activities. Both events have to be seen in context, as the focus of the Company is now solely on its silicon related activities, resulting in a major sim-plification of the corporate structure and the management process.

The ramp-up in 2008 in the production of UMSi was challenging and slower than originally planned. Nevertheless, we expanded ship-ments from 100 metric tons (mt) in the first quarter to 424 mt in the fourth quarter with total shipments for the year of 1,045 mt. That product line generated $65 million in gross revenue and contributed significantly to the 52% growth in overall sales to $253 million with EBITDA3 of $21 million.

3 See page 18.

Letter to Shareholders 9

We will also temporarily curtail production of silicon metal while continuing to supply silicon metal to customers from existing finished goods inventory.

As part of the transformation of Timminco, during 2008 we also focused on positioning our Magnesium Group for a return to profitability and strategic divestiture. We took a number of important steps forward in this regard, includ-ing the closure of the Haley, Ontario facility, as well as the continued implementation of cost management initiatives. Subsequent to year end, we signed a letter of intent to merge the majority of our magnesium operations with Winca Tech Limited, a leading China-based producer of magnesium products. The transaction is subject to several conditions, including financing and definitive agreements. We expect to maintain a minority ownership in the new entity, which will be known as Applied Magnesium International. We have also begun to wind down operations at our magnesium extrusion facility in Aurora, Colorado, with the expectation of closing that facility later this year. As a result of these actions, we expect to significantly reduce our working capital investment.

By restricting our involvement in the magnesium business following our exit from the aluminum casting business in Norway, the effort to turn Timminco into a silicon company with particular emphasis on the solar industry is now complete.

2008 was a transformational year for Timminco. It was the first

year of commercial production of UMSi for the solar industry.

The solar energy industry is one with significant long-term opportunity. The global demand for energy is steadily increasing and solar energy is expected to play a significant role in the portfolio of renewables. 2009, however, will be a challenging year. It is difficult to predict when market conditions will improve. We have taken steps to minimize risk and to position the Company to weather this difficult environment. Our ongoing efforts to continue to increase the value proposition of our material will support our long-term success as the solar industry rebounds.

Yours truly,

Dr. Heinz C. Schimmelbusch Chairman of the Board and Chief Executive Officer

10 Value Proposition

Silicon Metal

Silicon Metal

2 N 3 N 4 N 5 N 6 N 7 N1 N

Conventional polysilicon process: chemical ultra-refinement

Timminco proprietary metallurgical process

SemiconductorGrade Polysilicon

Reverse Refinement(doping)

Solar Grade Silicon

Solar Grade Silicon (UMSi)

Value Proposition

A SOLAR CELL MADE WITH TIMMInCO’S UMSi

Conventional Process

Timminco Process

Value Proposition 11

For more than three decades, we have been a leading producer of silicon metal. We have leveraged our extensive experience and technical expertise to develop a revolutionary metallurgical-based purification process for the production of solar grade silicon, the primary input in the manufacture of cells for the solar energy industry. Our material, known as upgraded metallurgical silicon, or UMSi, is an economic alternative to the industry standard, polysilicon.

At the core of our value proposition is our pro - prietary, patents-pending process that uses non-chemical production methods to purify silicon metal into upgraded metallurgical silicon. Our process requires significantly less expenditure for equipment and facilities than the conventional process used to produce polysilicon and lower input costs. Polysilicon production is a complex chemical-based process that involves refining silicon metal to a higher purity than is usable for solar cells (as high as 99.9999999% pure). Impurities are then added through a process called “doping” to enable the solar cell to conduct electricity from the solar energy it captures. Producing solar grade

silicon using this process requires extensive capital investment and enormous energy requirements resulting in high per-unit costs.

In contrast, the Timminco process involves purifying silicon metal to greater than 99.999% purity with the appropriate levels of the elements boron and phosphorus. The simplicity of our method and relatively low energy requirements result in capital investments that are as little as one-tenth and production costs that, at large-scale capacity, could be as little as half of those required to produce polysilicon. Moreover, the nature of our process enables us to rapidly ramp up capacity to meet demand.

While our product has been validated by the marketplace, we have only just begun to realize the potential. Continued refinement of our puri-fication process, as well as the development of new methodologies to optimize ingoting, will enable our customers to increase both produc-tion yields and the cell efficiency levels they are achieving with our material. The achievement of these objectives will further enhance the value proposition of our product.

Our breakthrough process for producing solar grade silicon is expected to have a cost advantage over conventional

polysilicon processes based on lower capital investment, lower raw material costs and lower energy consumption.

Proprietary technology

Access to stable, inexpensive hydroelectric power

Ready access to raw material supply

Lower capital investments

Lower production costs

Stable pricing environment

Ability to add capacity quickly

Manufacturer ProductQ-Cells Q6LEP3Canadian Solar e-Module (CS6P, CS6A)

Trina Solar MeSolarPhotowatt PWI400

In 2008, four leading

manufacturers launched

products based on UMSi:

The Emergence of UMSi

12 Operational Review – Silicon Group

$189.5m $31.9m

Operational Review – Silicon Group

Solar Grade Silicon (UMSi)

In 2008, our solar grade silicon operations were focused on three interrelated objectives:

1. Increasing production and shipments of UMSi to meet our customer commitments;

2. Improving the purity of our material to increase its value proposition for our customers; and

3. Expanding our production facility to address market demand.

We made strong progress in each of these areas.

In our first full year of operation, we shipped 1,045 metric tons (mt) of UMSi to our custom-ers, the majority of which was delivered under long-term supply contracts. Shipment volume increased appreciably in each succes-sive quarter, quadrupling from the first to the fourth quarter, the result of both the scale-up of our operations and improvements in the efficiency of our process throughout the course of the year.

Timminco Solar Grade

Silicon

Purity levels achieved

0.5 PPM boron

1.5 PPM phosphorus

Revenue increased 83% over 2007 EBITDA3 increased from $-0.7m to $31.9m

3 See page 18.4 See page 18.

The successful build-out of our solar grade silicon operations in 2008 contributed $65 million in gross revenue and more than $30 million in gross profit4 to the Company’s financial results for the year. It represented in excess of 24% of our consolidated revenue.

Since introducing our UMSi product in late 2007, we have signed long-term supply contracts with seven leading ingot, wafer and cell manufacturers.

As we gain experience with our production pro-cess, we are continually applying new learning and refining our methodologies to improve both our product and our efficiency. During 2008, we made strong progress in increasing the purity of our material, achieving average boron and phosphorus levels of 0.8 and 3.0 parts per million (ppm), respectively, and achieving levels as low as 0.5 ppm and 1.5 ppm. Material of this purity has enabled customers to manufacture cells exclusively using Timminco UMSi, as opposed to blending it with polysilicon.

In support of customer commitments and growing market demand for solar grade silicon, early in 2008 we made the strategic decision

Operational Review – Silicon Group 13

to significantly expand our production capacity from our initial three-line operation. By year end, we commissioned an additional three lines and added one more in the first quarter of 2009. Our ability to rapidly and inexpensively add new capacity is an advantage in the solar grade silicon industry. We have realized our existing capacity with an investment of approxi-mately $100 million.

To date, our priorities have been output levels and quality – scaling up production as rapidly as possible and ensuring that our material meets or exceeds our customers’ specifica-tions. We are now increasingly focused on lowering the cost of producing our material. Our proprietary purification process has cost advantages stemming from low raw material costs and significantly lower require-ments for electricity, the largest input. Our average cost of production for 2008 was $32 per kilogram, declining to $30 per kilogram in the fourth quarter, while absorb-ing start up costs relating to three additional lines. In December, during which we achieved our highest monthly production volume to date, we achieved a cost of $26 per kilogram.

1,045 mt

0.5/1.5 ppm

7

16%

shipments of solar grade silicon

purity levels of boron and phosphorus achieved, respectively

solar cell manu–facturers under multi-year contracts

cell efficiency being achieved by certain customers using our material

Key achievements

The primary focus of our Silicon Group in 2008 was the build-out of our solar grade silicon operations.

An InGOT MADE FROM TIMMInCO UMSi PRIOR TO BEInG CUT InTO BRICKS. PICTURED: REné BOISVERT, PRESIDEnT – SILICOn (LEFT) AnD DOMInIC LEBLAnC, SEnIOR EnGInEER, RESEARCH AnD DEVELOPMEnT (RIGHT).

14 Operational Review – Silicon Group

Subject to production volumes, we expect to appreciably lower our per-unit costs in 2009 through growth in output and improvements in efficiency. We are confident that the low-cost structure of our process will provide us with an advantage in the solar grade silicon market.

Another area of strategic focus is on driving the value proposition of our UMSi for our customers. A critical stage in the manufactur-ing of solar cells is the production of ingots from solar grade silicon. Since we first began shipping our solar grade silicon, we have been working closely with our customers to support their knowledge and capabilities for the production of ingots using our material. To this end, we installed ingoting capabili-ties at our UMSi facility toward the end of 2008 for research and development, as well as quality control purposes. We have made strong progress to date in the optimization of the ingot making process using our material. Our continued efforts in this area will enable our customers to improve the yields they are achieving with our material, thereby lowering their overall cost of production, as well as increase the efficiency levels of the solar cells they are manufacturing with our material. Some of our customers have achieved cell efficiency levels of more than 16%, comparable to those achieved with polysilicon. Working with the Engineering Systems Division of AMG Advanced Metallurgical Group, a leading manu-facturer of the furnaces used for ingoting, we are continuing to develop new processes and methodologies that increase the usefulness of our material for our customers.

The successful build-out of our solar grade silicon operations in 2008 has positioned Timminco to capitalize on the anticipated growth of the solar industry over the long term. The industry, however, is currently being challenged by weakness in the global economy and restrictive credit conditions, which have adversely impacted the demand for solar power installations and caused a build up of inventory throughout the supply chain. As a result, during the first quarter of 2009, we experienced a

decline in orders for UMSi. With little visibility into the timing for the recovery of the solar mar-ket, we have adjusted our business accordingly, lowering our UMSi production to levels that are in-line with customer orders. Concurrently, we have deferred further expansion of our capacity until the market recovers. During this period, we will continue to focus on increasing the value proposition of our material to support our long-term success as the solar industry recovers.

Silicon Metal

With more than three decades of experience, Timminco has established itself as a leading producer of silicon metal and related products, including ferrosilicon. Our facility in Bécancour, Québec, is one of the largest single-site silicon metal production facilities in North America, and benefits from low electricity rates and close proximity to efficient transportation routes and raw material.

In 2008, we shipped more than 45,000 mt of silicon metal to customers in a broad range of industries. Our materials are key inputs in the production of more than 4,000 consumer and industrial products, such as sealants and lubricants, as well as sophisticated electronics components, including computer chip wafers and semi-conductors. Our silicon metal is also used by customers for the production of polysilicon, the most widely used form of solar grade silicon for the manufacture of solar cells.

In recent years, the price of silicon metal has appreciated from the historical lows of approximately US$0.50 per pound reached in 2003 to the US$1.70 to US$1.90 range throughout most of 2008 (prior to the impact of the general macroeconomic environment). The significant price appreciation was the result of the confluence of a number of market conditions, including higher energy costs, a number of independent factors that have con-strained supply, and increased market demand, especially from the solar energy industry, among others. Because our silicon metal operation concludes its annual contracts in the year prior to that in which product is delivered,

Operational Review – Silicon Group 15

we benefited from higher prices in effect in the second half of 2007 compared to late 2006. As a result, our silicon metal product line generated revenue of $128 million, an increase of 28% over the previous year’s total.

The primary focus of our silicon metal product line in 2008 was meeting our volume commitments to our customers. Accordingly, the majority of our production was shipped to customers under contract. Silicon metal, however, is the primary input used in the production of our UMSi and we benefit from the synergies of having the production of both materials at the same site. Accordingly, it is our objective to increasingly use our silicon metal capabilities to supply our own UMSi operations.

Our objective over the long term is to continue to transition part of our operation to support our UMSi production, while at the same time optimizing our customer base to capitalize on the evolving product mix resulting from the transition. Short-term demand, however, has been adversely impacted by the slowdown in the chemical and aluminum industries, as well as the solar industry. In response, we have implemented a cost containment plan under which we will temporarily suspend production of silicon metal until market conditions improve. During this period, we will supply silicon metal to customers from existing finished goods inventory. We will monitor the progress of the silicon metal market and will resume produc-tion as demand warrants.

OnE OF THREE SUBMERGED ARC FURnACES PRODUCInG 99% SILICOn METAL.

16 Commitment to Sustainable Development

As a producer of materials for the solar PV industry, we view ourselves as an integral part of global efforts to reduce dependencies on fossil fuel and other hydro carbon-based energy generation and minimize the environmental impact of energy consumption. Moreover, our low-cost solar grade silicon produced from metallurgical silicon consumes significantly less energy than traditional purification methods for producing solar grade silicon from polysilicon.

As a natural corollary to our strategic focus on the solar PV industry, we are committed to achieving the highest standards of environmen-tal excellence at our manufacturing facilities. The principles of sustainable development will continue to be implemented throughout our organization in future years.

This annual report sets out the principles by which we intend to measure our performance towards these objectives in future years. Specifically, for future sustainable develop-ment reports, we are committed to reporting environmental and safety performance according to the Global Reporting Initiative’s (GRI’s) G3 guidelines for sustainability reporting. The initial indicators that we have identified for data collection and their relation-ship to GRI are outlined below.

Environment – Raw Material Usage

GRI Indicators EN1, EN2

We recognize that efficient use of primary materials and recycled materials is an impor-tant sustainable business practice. We will collect data on our primary and recycled raw material usage as a means to identify opportunities to increase efficiencies in the use of these materials.

Commitment to Sustainable Development

Environment – Energy Usage


Energy efficiency is a key tool in achieving reduced greenhouse gas (GHG) emissions at our manufacturing facilities. Production of silicon metal using electric arc furnaces is a high electrical energy consuming process. The purification of silicon also consumes energy through burning natural gas or other hydrocarbon-based fuels. Careful management and further process development can control or even reduce the amount of energy required to produce and purify metallurgical silicon. Whilst energy efficiency is an important tool to combat climate change, the carbon footprint of our manufacturing sites is significantly affected by the local power suppliers. In Québec, where hydroelectric power is predominant, remarkably low carbon indirect emissions are associated with operations. Future energy consumption data will segregate direct energy versus indirect energy and energy from renewable and non renewable sources. Indirect energy almost exclusively encom-passes the purchase of electricity, while direct energy includes, among others, the onsite combustion of natural gas, gasoline and other oils for heating and transportation purposes.

Environment – Water Management

GRI Indicator EN8

We recognize that prudent use of water reserves is an important sustainable business practice. Even in water abundant areas, careful management of raw water usage can save energy associated with pumping and effluent treatment costs, and can help minimize effects on water quality through the control of discharges. We will collect data on water usage and use this data to identify opportunities for water recycling and water usage reduction projects.

Commitment to Sustainable Development 17

Environment – Climate Change


We recognize that a worldwide response at every level of society, personal, commercial and governmental, is urgently required to address climate change while promoting progress and growth. Reduction of GHG emis-sions is an important sustainability objective. We will collect data on our GHG emissions and use this data to identify opportunities to reduce such emissions relative to the volume of silicon metal and solar grade silicon that we produce.

Over 95% of GHG emissions at our metal-lurgical silicon manufacturing site occur as a result of the production of carbon dioxide as a by-product of the process for making silicon metal. Specifically, carbon-based process materials, such as coal, coke, charcoal and wood chips (C), are combined with quartz (SiO2) in a pyrometallurgical process to create silicon (Si) and carbon dioxide (CO2). Although the production of solar grade silicon produces GHG emissions, studies have shown that the lifetime energy created from a solar PV system significantly exceeds the energy used in its production.

Environment – Emissions to Air


Particulates from furnaces are controlled by baghouses, which are the best and most reliable technology for particulate emission control. We will collect data on our air emis-sions and use that data to identify opportunities to reduce emissions of both particulate and other air pollutants.

Our commitment to sustainable development is a fundamental corporate goal which is essential for delivering long-term value to our shareholders

and to the communities in which we operate.

Environment – Emissions to Water

GRI Indicator EN21

Emissions to water generally result from the discharges of process water. Strategies to re-duce emissions include on-site water recycling, utilizing less input water and using water only in non-contact processes. We will collect data on the volume of water discharged from our facilities and the levels and types of impurities in that water.

Environment – Waste Production

GRI Indicator EN22

We recognize that most waste materials have an intrinsic value resulting either from chemical composition or physical properties. We will continue to seek out either recycling method-ologies or beneficially reuse opportunities for all materials currently disposed as waste. We will collect data on our waste production and set goals for the reduction of wastes.

Safety – Accident Rates

GRI Indicator LA7

The continued health and safety of all employees is a core value of ours. Safety data will be collected to cover all accidents involving our employees at any of our facilities. Lost time accident rates and accident severity rates will be the primary indicators used to assess our performance.

18 Cautionary Note on Forward-Looking Information | Endnotes

Cautionary note on Forward-Looking Information

This Annual Report contains “forward-looking information”, including “financial outlooks”, as such terms are defined in applicable Canadian securities legislation, concerning Timminco’s future financial or operating performance and other statements that express management’s expectations or estimates of future developments, circumstances or results. Generally, forward-looking information can be identified by the use of forward-looking terminology such as “expects”, “targets”, “believes”, “anticipates”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “plans” and variations of such words and phrases, or by statements that certain actions, events or results “may”, “will”, “could”, “would” or “might”, “be taken”, “occur” or “be achieved”. Forward-looking information is based on a number of assumptions and estimates that, while considered reasonable by management based on the business and markets in which Timminco operates, are inherently subject to significant operational, economic and competitive uncertainties and contingencies. Timminco cautions that forward-looking information involves known and unknown risks, uncertainties and other factors that may cause Timminco’s actual results, performance or achievements to be materially different from those expressed or implied by such information, in-cluding, but not limited to: deteriorating global economic conditions; future growth plans and strategic objectives; liquidity risks; limitations under existing credit facilities; long-term contracts for supplying solar grade silicon; solar grade silicon production cost targets; selling prices of solar grade silicon and silicon metal; achieving and maintaining the purity of solar grade silicon; production capacity expansion at the Bécancour facilities; pricing and availability of raw materials for the silicon business; customer capabilities in producing ingots; limited history with the solar grade silicon business; dependence upon power supply for silicon metal production; protection of intellectual property rights; government and economic incentives; closure of the magnesium facilities and the

completion of related proposed transactions; cost and availability of magnesium metal; dependence upon key customers of magnesium extruded and fabricated products; credit risk exposure; customer concentration; equipment failures; labour disputes; foreign currency ex-change; dependence upon key executives and employees; completion and integration of potential acquisitions, part-nerships or joint ventures; risks with foreign operations and suppliers; environmental, health and safety laws and liabilities; transportation disruptions; conflicts of interest; interest rates; intellectual property infringement claims; new regulatory requirements; changes in tax laws; and climate change. These factors are discussed in greater detail in Timminco’s Annual Information Form for the year ended December 31, 2008 and in Timminco’s most recent Management’s Discussion and Analysis, each of which is available via the SEDAR website at www.sedar.com. Timminco provides financial outlooks for the purpose of assisting investors understand manage-ment’s views on Timminco’s potential future financial or operating performance, and readers are cautioned that such information may not be appropriate for other purposes. Although Timminco has attempted to identify important factors that could cause actual results, per-formance or achievements to differ materially from those contained in forward-looking information, there can be other factors that cause results, performance or achieve-ments not to be as anticipated, estimated or intended. There can be no assurance that such information will prove to be accurate or that management’s expectations or estimates of future developments, circumstances or results will materialize. Accordingly, readers should not place undue reliance on forward-looking information. The forward-looking information in this Annual Report is made as of the date of the Management’s Discussion and Analysis included in this Annual Report and Timminco disclaims any intention or obligation to update or revise such information, except as required by applicable law.

1 Source: International Energy Outlook 2008.2 Source: Compiled by Earth Policy Institute from Worldwatch Institute, Vital Signs 2005 (Washington, DC: 2005); Worldwatch Institute, Vital Signs 2007–2008 (Washington, DC: 2008); Prometheus Institute, “23rd Annual Data Collection – Final,” PVNews, vol. 26, no. 4 (April 2007), pp. 8–9; REN21, Renewables 2007 Global Status Report: A Pre-Publication Summary for the UNFCCC COP13 (Paris: December 2007). 3 EBITDA is not a recognized measure under Canadian generally accepted accounting principles (GAAP). The Company’s management believes that, in addition to net income (loss), EBITDA is a useful supplemental measure as it provides investors with an indication of cash available for distribu-tion prior to debt service, past pension service obligations, capital expenditures, income taxes and restructuring cash payments. Investors should be cautioned, however, that EBITDA should not be construed as an alternative to net income determined in accordance with GAAP as an indicator of the Company’s profitability. Also, EBITDA should not be construed as an alternative to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows. The Company’s method of calculating EBITDA may differ from other companies and, accordingly, EBITDA may not be comparable to measures used by other companies. EBITDA is calculated in the manner as described in the Management’s Discussion and Analysis included in this Annual Report.4 Gross profit is not a recognized measure under GAAP. The Company’s management believes that in addition to net income (loss), gross profit is a useful supplemental measure as it provides investors with an indication of the profits generated on products sold to customers before corporate overhead expenses. Investors should be cautioned, however, that gross profit should not be construed as an alternative to net income determined in accordance with GAAP as an indicator of the Company’s profitability. The Company’s method of calculating gross profit may differ from other companies and accordingly, gross profit may not be comparable to measures used by other companies. Gross profit is calculated in the manner as described in the Management’s Discussion and Analysis included in this Annual Report.

Endnotes

Management’s Discussion & Analysis 19

Management’s Discussion & Analysis

This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the audited Consolidated Financial Statements of Timminco Limited (the “Company”) and the notes thereto for the year ended December 31, 2008, which were prepared in accordance with Cana-dian generally accepted accounting principles. This MD&A covers the year ended December 31, 2008 (“fiscal 2008”) and the period October 1 to December 31, 2008 (“fourth quarter 2008”) with comparisons to the year ended December 31, 2007 (“fiscal 2007”) and the period October 1 to December 31, 2007 (“fourth quarter 2007”). All amounts are in Canadian dollars unless otherwise noted. This MD&A is prepared as of March 25, 2009.

OverviewThe Company is divided into two segments: the Silicon Group, which includes the production and sale of silicon metal and solar grade silicon products, and the Mag-nesium Group, which includes the sale of magnesium extruded and fabricated products and specialty non-ferrous metals.

The fourth quarter 2008 saw continued progress towards the Company’s goal of achieving profitable operations through increasing production and sales of solar grade silicon and further expansion of the Company’s solar grade silicon manufacturing facility. The Company’s operations were profitable in fourth quarter 2008 and fis-cal 2008 (before charges for reorganization costs, equity in the loss of Fundo Wheels and the impairment of invest-ment in Fundo Wheels). The reported loss before income taxes in fiscal 2008 includes a reorganization charge relating to the closure of the Company’s Haley, Ontario magnesium manufacturing facility and an asset impair-ment charge relating to the write-down of the Company’s investment in Fundo Wheels AS (“Fundo”).

• Sales for the fourth quarter 2008 were $72.7 million compared to $36.4 million in the fourth quarter 2007, an increase of 100%. The increase is attributable primarily to increased sales of the Company’s Silicon Group reflecting volume growth of solar grade silicon and pricing strength in silicon metal products. For the fourth quarter 2008, the Company’s EBITDA was $6.4 million, compared to an EBITDA loss of $7.3 million in the fourth quarter 2007. For the fourth quarter 2008, the net loss was $1.3 million or $0.01 per share, compared to a loss of $8.8 million or $0.08 per share in the fourth quarter 2007.

• During fiscal 2008 sales increased by 52% from $166.2 million in fiscal 2007 to $252.6 million reflecting the strong growth in sales of solar grade silicon. EBITDA for fiscal 2008 was $21.3 million compared to an EBITDA loss of $8.9 million in fiscal 2007. Net loss for fiscal 2008 was $22.6 million or $0.22 per share compared to a loss of $18.0 million or $0.20 per share for fiscal 2007.

• The Company, through its wholly owned subsidiary Bécancour Silicon Inc. (“BSI”), shipped 424 metric tons of solar grade silicon in the fourth quarter 2008 generating $27.7 million of gross revenue from this product line in the quarter (1,045 metric tons and $64.6 million of gross revenue for fiscal 2008).

• During the fourth quarter 2008, the Company received $4.4 million in deposits from customers in accordance with the terms of solar grade silicon supply contracts. These amounts, which are non-interest bearing pre-payments to be credited against future deliveries of solar grade silicon, will be used to fund the capacity expansion.

• During the fourth quarter 2008, the Company amended its Credit Agreement with Bank of America, N.A. to increase the maximum revolving credit line to US$50.0 million from US$32.8 million. The availability of the revolving credit facility is subject to the borrow-ing base net of a minimum availability requirement of US$2.0 million. The Company intends to use the increased credit line to finance potential increases in working capital in support of the ramp-up of its solar grade silicon production.

• During the third quarter 2008 management determined that there was a permanent impairment in the carrying value of the Company’s equity and loan investment in Fundo. The investment was written down to $nil which is management’s best estimate of its fair value. On January 12, 2009, Fundo commenced bankruptcy proceedings in Norway. The Company’s investment in Fundo is in the form of common equity and convertible loans that are subordinated to other secured parties. As a result of the commencement of these proceed-ings, management does not anticipate recovery of any proceeds from the Company’s investment in Fundo.

Global economic conditions have deteriorated rapidly over the last several months as a result of the financial crisis and recession that negatively impacted markets in North America, Europe and Asia during 2008. These

20 Management’s Discussion & Analysis

developments are having and will likely continue to have a broad-reaching impact on the Company’s businesses and the industries in which they operate. The severity, duration and impact of these developments are not yet fully understood. Many of the Company’s customers are experiencing financial constraints and have reduced or deferred their purchases. In response to this environ-ment, the Company has subsequent to the year end announced certain initiatives in both its Silicon and Magnesium Groups to reduce expenditures and acceler-ate reduction of working capital.

• On February 3, 2009, the Company issued 7,042,000 common shares in an equity offering by way of private placement at $3.55 per share for net proceeds of $24.2 million. The Company’s controlling shareholder, AMG Advanced Metallurgical Group N.V. (“AMG”), subscribed for 3,938,200 shares (55.9% of the offering) and the remaining 3,103,800 shares were issued to other investors. AMG currently holds 50.7% of the total issued and outstanding share capital of the Company. The Company completed this financing as a prudent contingency measure in light of the impact that the cur-rent global economic conditions are having on the solar industry. The additional capital from this financing will strengthen the Company’s financial position by provid-ing the Company with additional liquidity to finance working capital having regards to potentially lower operating cash flows from possible reduced short-term demand from solar grade silicon customers and delays in receipt of outstanding customer deposits.

• On February 18, 2009, the Company announced a non-binding letter of intent with Winca Tech Limited (“Winca”), a leading Chinese-based producer of mag-nesium products, to merge the principal components of the Company’s magnesium and specialty metals business, including its manufacturing facility in Nuevo Laredo, Mexico, with all of Winca’s operations. The Company expects to retain a minority equity interest in the combined business, which will be known as Applied Magnesium International. The proposed merger is subject to a number of conditions, including financing and execution of definitive agreements, and is expected to be completed in the second quarter 2009.

• Also on February 18, 2009, the Company announced that it would wind down production operations at its existing magnesium extrusion facility in Aurora, Colorado and close that facility later in 2009.

• On March 17, 2009, the Company announced that it will temporarily curtail production of silicon metal starting in the second quarter 2009 in recognition of difficult market conditions including reduced demand for silicon metal in the chemical and aluminum industries. The decrease of the Company’s silicon metal production will result in a temporary workforce reduction. During

this period, the Company will supply silicon metal to customers from existing finished goods inventory. The Company will continue to produce solar grade silicon, although at levels that bring production in line with customer orders. The Company will defer further capacity expansion of its solar grade silicon facility pending recovery of demand for solar grade silicon.

StrategyTimminco is focused on creating a profitable, high growth business from the development of its solar grade silicon product line. Building upon its metallurgical silicon operations, the Company purifies metallurgical silicon using a proprietary process to supply solar cell manufac-turers with solar grade silicon, also known as upgraded metallurgical silicon (“UMSi”), which is a lower cost alternative to polysilicon. The Company’s strategy has the following key elements:

• Low cost production based upon a proprietary metallurgical process that consumes significantly less energy than traditional silicon purification methods

• Internal supply of silicon feedstock for purification process to secure supply and control quality and cost

• Lower capital investment for equivalent capacity

• Expansion of productive capacity to meet committed customer demand

• Development of a customer base focused on the use of UMSi to lower the total cost per watt of solar cells delivered into the market

• Ongoing collaboration with customers and the Company’s controlling shareholder, AMG, to develop state-of-the-art techniques for transforming UMSi into high quality ingots for processing into silicon wafers, and allowing customers to lower their total cost per watt by implementing such know-how

During 2008 the Company made progress on all of the key elements of its strategy. Production ramped up sequen-tially throughout 2008 and the average cost of production dropped sequentially despite one-time costs incurred in bringing on new production capacity. Acquisition of new long term customers for UMSi in the first half of the year supported the business case for proceeding with an ex-pansion of production capacity. By year end, the Company had installed one third of the incremental planned capac-ity. Work progressed on securing new sources of high quality raw materials for silicon feedstock production and the Company installed an ingoting furnace that enabled commencement of research and development activities on this downstream activity in the fourth quarter.

Key factors for the Company in further executing its strategy include: continued reduction of unit costs of production, improved quality of UMSi (in terms of parts


Company’s investment in Fundo Wheels AS during fiscal 2008. In the absence of these charges the Company would have reported a profit for both the fourth quarter and fiscal 2008.

Results for the fourth quarter and fiscal 2008 were reduced by a reorganization charge of $1.3 million and $11.9 million, respectively, relating to the closing of the Company’s Haley, Ontario magnesium manufacturing facility and $12.4 million relating to the impairment of the

Summary of Operations($000’s, except per share amounts) Fourth Quarter Fourth Quarter Fiscal 2008 Fiscal 2007 2008 (unaudited) 2007 (unaudited) (audited) (audited)

Sales Silicon 58,535 24,339 189,452 103,748

Magnesium 14,193 12,100 63,111 62,408

Total 72,728 36,439 252,563 166,156

Gross Profit (1) Silicon 15,387 (2,693) 40,068 939

Magnesium 1,196 105 7,955 5,567

Total 16,583 (2,588) 48,023 6,506

Gross Profit Percentage Silicon 26.3% (11.1%) 21.2% 0.9%

Magnesium 8.4% 0.9% 12.6% 8.9%

Total 22.8% (7.1%) 19.0% 3.9%

EBITDA (1) Silicon 11,556 (2,050) 31,935 (677)

Magnesium (2,324) (3,875) (1,999) (2,911)

Corporate / Other (2,825) (1,411) (8,673) (5,322)

Total 6,407 (7,336) 21,263 (8,910)

Net Income (Loss) Silicon 7,499 (3,098) 19,864 (1,590)

Magnesium (3,902) (2,712) (14,668) (4,142)

Corporate / Other (4,875) (3,026) (27,805) (12,304)

Total (1,278) (8,836) (22,609) (18,036)

Loss per common share, basic and diluted (0.01) (0.08) (0.22) (0.20)

Weighted average number of common shares outstanding, basic and diluted 104,275 103,978 104,126 90,080

(1) See “Non-GAAP Accounting Definitions”.

Aurora, Colorado facility, were successfully moved to the Company’s manufacturing facility in Nuevo Laredo, Mexico supported by the Chinese supply chain. These moves have provided the Magnesium Group with a competitive core to be leveraged by a strategic purchaser. Subsequent to year end, the Company announced the closure of its Aurora facility and the signing of a letter of intent with Winca, its primary China-based supplier, to transfer the Company’s magnesium business to a new merged business that would include all of Winca’s magnesium operations and would be majority owned by Winca. Upon closing of this proposed transaction, the Company will have significantly reduced its exposure to the magnesium market, holding only a minority interest in the merged business.

per million of impurities) and development of a “recipe” for the production of high quality ingots from its UMSi that can be shared with its customers. This last factor will be driven by research and development activities by the Company at its Bécancour site and in collaboration with its key equipment suppliers.

The Company has decided to reduce its investment in its magnesium business, and has been pursuing a divestiture and other strategic alternatives during 2008. Given the low manufacturing cost environment in China, the Company successfully commenced sourcing magnesium from China prior to the mid-2008 closure of the Haley, Ontario magnesium manufacturing facilities. In addition, high labour content activities related to water heater anodes, formerly undertaken in the Company’s


Silicon Group

Sales of the Silicon Group were $58.5 million in the fourth quarter 2008, up 140% from $24.3 million in the fourth quarter 2007. For fiscal 2008, Silicon Group sales were $189.5 million compared to $103.7 million in fiscal 2007, an increase of 83%. The increase in sales for the fourth quarter 2008 compared to the same period of 2007 is due to increased sales volume of silicon metal and solar grade silicon and higher average selling prices for silicon metal sales. During fiscal 2008 and the fourth quarter 2008, solar grade silicon gross revenues were $64.6 million and $27.7 million, respectively. Net revenue for solar grade silicon, including a deduction for anticipated returns of scrap, for these periods was $61.8 million and $25.9 million, respectively. The Company shipped 424 metric tons of solar grade silicon material in the fourth quarter 2008, compared to 33 metric tons in the fourth quarter 2007 and 300 metric tons in the third quarter 2008. The average selling price for solar grade silicon sales in the fourth quar-ter was $65 per kilogram and $62 per kilogram for fiscal 2008, compared to $44 per kilogram during fiscal 2007. For fiscal 2008 and the fourth quarter 2008, respectively, the weakness of the Canadian dollar against the U.S. dollar and the Euro had a $6.5 million favourable and an $8.8 million favourable impact on sales, respectively, as the majority of the Silicon Group’s sales are denomi-nated in these currencies. Production of silicon metal was negatively impacted throughout fiscal 2008 due to the reduced efficiency of one of the electric arc furnaces pending receipt of a repaired transformer in the fourth quarter. The Company has made a claim under its insurance policy to recover the income lost during this interruption, $1.0 million of which has been included as a recovery in cost of sales in the fourth quarter 2008. The trans-former was fully operational by December 2008. Sales of regular silicon products for the fourth quarter 2008 were $32.6 million (fourth quarter 2007 – $22.8 million) and for fiscal 2008 were $127.7 million (fiscal 2007 – $99.9 million). The increase in regular silicon product sales in 2008 relates to both volume and increased average selling prices.

Gross profit for the fourth quarter 2008 was $15.4 million or 26.3% of sales, compared to a negative gross margin of $2.7 million or negative 11.1% of sales in the fourth quarter 2007. Cost of sales of the solar grade silicon product are comprised of raw materials, utilities, labour and an allocation of manufacturing overhead expenses, including depreciation. Utilities and labour represent a majority of the cost inputs, as the Company owns mining rights in respect of a quartz quarry, the primary raw material input. Total solar grade silicon product cost of sales for the fourth quarter 2008 and fiscal 2008 were $12.6 million and $33.0 million, respectively. The main contributor to the increase in margin of the Silicon Group was the increase in sales volume of solar grade silicon.

Gross margin for the solar grade silicon product for the fourth quarter 2008 was 54% and for fiscal 2008 was 48%. The gross margin percent increased in the fourth quarter 2008 compared to the gross margin of 42% in the third quarter of 2008 due to the higher average selling prices realized. The average cost of sale per metric ton of solar grade silicon continues to decline and was lower in the fourth quarter 2008 than previous quarters. Management expects the costs of production per metric ton of solar grade silicon to decrease as the expansion of the BSI facility progresses and additional production capacity is brought on stream.

EBITDA of $11.6 million for the fourth quarter 2008 increased significantly compared to the fourth quarter 2007 negative EBITDA of $2.1 million. Similarly, EBITDA of $31.9 million for fiscal 2008 was substantially higher than the negative $0.7 million for fiscal 2007. The increases reflect the shift in sales mix from metallurgical silicon to solar grade silicon, favourable conversion of the U.S. dol-lar and Euro to Canadian dollars and the stronger margins of the solar grade silicon.

Net income for the fourth quarter 2008 and fiscal 2008 ($7.5 million and $19.9 million, respectively) were higher than the net losses for the comparable periods of 2007 ($3.1 million and $1.6 million, respectively). The increase is due to higher profits from the solar grade silicon offset by increased amortization costs of the property, plant and equipment and income taxes.

Magnesium Group

For the fourth quarter 2008, sales of the Magnesium Group were $14.2 million, up 17% from $12.1 million in the fourth quarter 2007. For fiscal 2008, sales were $63.1 mil-lion compared to $62.4 million in fiscal 2007, an increase of 1%. Sales in the fourth quarter 2008 were unfavourably impacted by the weakening United States economy. However, a stronger gross profit percentage resulted from price increases across most of the Group’s product lines, initiated to recover large unfavourable magnesium metal cost increases. Sales volume in metric tons was down 37% compared to the fourth quarter 2007 and 28% for fiscal 2008 compared to fiscal 2007. The volume decrease relates primarily to a decline in North American new housing construction as the Magnesium Group’s principal product lines are new water heater anodes and construc-tion tools. Sales softness in the Magnesium Group’s traditional markets of water heater anodes and construc-tion tools were offset by increased volume in specialty metals markets. The change in exchange rates of the Canadian dollar against the U.S. dollar had an unfavour-able impact on sales of $1.6 million in fiscal 2008 and a $2.5 million favourable impact in the fourth quarter 2008.

Gross profit for the fourth quarter 2008 was $1.2 million or 8.4% of sales, compared to $0.1 million or 0.9% of sales in the fourth quarter 2007. Gross profit for fiscal 2008 was


$8.0 million or 12.6% of sales, compared to $5.6 million or 8.9% of sales in the fourth quarter 2007. Gross profit was positively impacted by price increases realized in the quarter and higher utilization of production facilities, offset by higher magnesium input prices.

Negative EBITDA of $2.3 million for the fourth quarter 2008 compared to negative EBITDA of $3.9 million in the fourth quarter 2007. For fiscal 2008, EBITDA was negative $2.0 million, compared to a negative EBITDA of $2.9 million for fiscal 2007. The decreased losses resulted from a rationalization of the Magnesium Group’s opera-tions in order to lower raw materials and production costs.

For the fourth quarters 2008 and 2007 the net losses were $3.9 million and $2.7 million, respectively. For the fiscal years 2008 and 2007 the net losses were $14.7 million and $4.1 million, respectively. The net results of 2008 are impacted by reorganization costs resulting from the closure of the Haley facility. Due to historical asset impairment charges, depreciation is nominal in all of the reported periods.

Corporate and Other

Corporate and Other EBITDA primarily represents selling and administration expenses of $2.8 million and

$8.7 million for the fourth quarter 2008 and fiscal 2008, respectively, compared to $1.4 million and $5.3 million, respectively, for comparative periods in 2007. The largest portion of the increase was related to higher professional fees and travel related to various strategic initiatives, in addition to smaller increases in various other expense categories.

Closure of Haley FacilityOn June 6, 2008, the Company announced the closure of its Haley, Ontario manufacturing facility. This facility supplied the cast magnesium billet used in the Company’s magnesium extrusion operations in Aurora, Colorado. All of these supplies are now being provided by outsource partners. This facility also produced specialty magnesium granules and turnings which are now produced in the Company’s Nuevo Laredo, Mexico facility.

The closure of the Haley facility has resulted in a charge to earnings of approximately $11.9 million before taxes in fiscal 2008. The charge is lower than the range of costs of $15 to $17 million anticipated when the closure announce-ment was made, although the total cost of the closure over time will be in the expected range as indicated in the table below.

Revised Revisions Revisions reorganization Recognized on in the in the charge Expense to be Cash closure third quarter fourth quarter (December 31, recognized in expendituresCost element ($000’s) (June 30, 2008) 2008 2008 2008) future periods during 2008

Employment termination costs 1,659 970 2,629 n/a 1,333

Pension Expense 4,600 (326) 4,274 7,621 898

Site closure and remediation costs 3,220 824 (136) 3,908 n/a 312

Asset write downs 326 802 1,128 n/a n/a

Total reorganization charge 9,805 824 1,310 11,939 7,621 2,543

Of the anticipated pension expense of $11.9 million related to the Haley facility, more than half relates to the settle-ment of the liability to the pensioners upon wind-up of the plan, when the pension obligation is actually settled, and, accordingly, is not recognized as an expense at the time of closure of the facility.

The balance of the reorganization charge amounting to $7.7 million comprises severance, site closure and remediation costs, asset relocation costs and asset write downs to estimated fair market value. The assets located at the Haley facility were deemed to be impaired as of December 31, 2006 and were written down to $1.25 million at that time. At December 31, 2008, the Company updated its assessment of the fair market value of the Haley land and buildings and deemed they had been impaired by a further $0.8 million.

During the third and fourth quarters 2008, the Company updated the estimated costs relating to the site closure

and remediation costs and increased the provision by $0.8 million and $1.3 million, respectively. The Com-pany also expended $1.3 million in the fourth quarter 2008 ($2.5 million during fiscal 2008) with respect to this reorganization charge, primarily for employee termination costs.

Aluminium Wheels InvestmentFundo Wheels AS (“Fundo”), a Norwegian company with operations located in Høyanger, Norway, is an original equipment manufacturer of cast aluminum wheels for high end European automobile original equipment manufacturers. As at December 31, 2008, the Company held a 45.3% equity interest in Fundo. The remaining 54.7% equity interest in Fundo is held by the community of Høyanger, the Høyangerfondet Foundation and Sogn og Fjordane Fylkeskommune.


Liquidity and Capital ResourcesSummary of Cash Flows

($000’s) Fourth Quarter (unaudited) Fiscal (audited) 2008 2007 2008 2007

Net loss (1,278) (8,836) (22,609) (18,036)

Non-cash adjustments 10,409 2,542 48,807 10,164

Expenditures for benefit plans and various provisions (3,198) (2,961) (6,722) (6,535)

Cash from operations before changes in non-cash working capital 5,933 (9,255) 19,476 (14,407)

Non-cash working capital changes (1) (7,495) (5,752) (63,645) (5,647)

Cash used in operating activities (1) (1,562) (15,007) (44,169) (20,054)

Deposits 4,415 – 45,534 –

Capital expenditures (28,535) (7,400) (80,134) (22,611)

Increase (decrease) in bank indebtedness 27,090 (306) 51,418 (26,222)

Issuance of common shares 139 (55) 255 111,863

Cash from financing activities (2) 27,229 (361) 51,673 85,641

Other investing and financing activities (3) 440 (3,544) (3,006) (9,166)

Net change in cash during the period 1,987 (26,312) (30,102) 33,810

Cash and cash equivalents and short term investments – beginning of period (4) 2,525 60,926 34,614 804

Cash and cash equivalents and short term investments – end of period (4) 4,512 34,614 4,512 34,614

(1) “Non-cash working capital changes” and “Cash used in operating activities” exclude “Deposits” which have been expressed as a separate line item in the Summary of Cash Flows.

(2) “Cash from financing activities” excludes “Decrease in long term debt” and “(Decrease)/increase in loans from affiliated company”.(3) “Other investing and financing activities” consist of “Development costs capitalized”, “Investment in Fundo Wheels AS”, “Investment in

convertible notes”, “Decrease in long term receivables”, “Proceeds on disposal of property, plant and equipment”, “Cash flows from (used in) financing activities – Other”, “decrease in long term debt” and “(Decrease)/increase in loans from affiliated company”.

(4) “Cash and cash equivalents and short term investments” includes short term investments representing surplus cash from the 2007 common share issuance invested in one year interest bearing deposits.

The Company has from time to time provided subordinated debt financing to Fundo. On February 12 and July 11, 2008 the Company advanced funds to Fundo to address short term working capital deficits while Fundo pursued potential new sales opportunities in the automotive industry and continued the development of its hybrid wheel technology. Throughout the summer of 2008 the automotive industry experienced a significant decrease in overall demand for the standard wheels manufactured and sold by Fundo. By the end of the third quarter 2008,

the Company determined that it would no longer fund Fundo’s working capital deficits. Fundo’s management attempted to secure additional capital and liquidity; however, it was ultimately unsuccessful. In the third quarter 2008, the Company’s investment in Fundo, consisting of equity and loans, was written down to $nil, which was management’s best estimate of its fair value. On January 12, 2009, Fundo commenced bankruptcy proceedings in Norway.

Cash Flows Before Financing Activities

The Company’s operations consumed cash flows of $1.6 million in the fourth quarter 2008 compared to con-suming cash flows of $15.0 million in the same quarter in the prior year. For fiscal 2008 the Company’s operations consumed $44.2 million compared to consumption of $20.1 million in fiscal 2007. In both the fourth quarter 2008 and fiscal 2008 the Company generated positive cash from operations before changes in non-cash work-ing capital of $5.9 million and $19.5 million, respectively.

The consumption of cash during fiscal 2008 is largely attributable to the growth of the Company’s solar grade silicon product line. Accounts receivable have increased $17.6 million due to the higher average selling price of solar grade silicon and the increased sales volumes. For fiscal 2008, Magnesium Group accounts receivable increased $0.7 million as increased magnesium costs were passed on to customers. The inventories increase of $55.9 million was driven by both the Silicon Group ($46.3 million) and the Magnesium Group ($9.6 million).


were $1.1 million lower due to lower sales than the third quarter 2008. Throughout the fourth quarter, receivables were generally collected within credit terms and bad debts were minimal. Inventories increased $14.8 mil-lion from the third quarter 2008. Substantially all of the increase is attributable to the Silicon Group with a $0.6 million decrease in the Magnesium Group. Silicon metal purchases have increased in anticipation of the commissioning of new solar grade silicon production lines in the fourth quarter 2008 and the seasonal pur-chase of raw materials before the closure of shipping lanes. In the Magnesium Group, the price for magnesium metal decreased relative to the third quarter 2008 and the quantity of magnesium in inventories was decreased. This was offset by the conversion of the United States dollar carrying value due to the weakening Canadian dollar exchange rate. Accounts payable and accrued liabilities increased $10.2 million compared to the third quarter 2008: $8.9 million for the Silicon Group and $1.3 million for the Magnesium Group. The Silicon Group increase relates to the plant expansion and the timing of payments for inventory purchases related to the expanded plant capacity.

Results of operations in both the fourth quarter 2008 and fiscal 2008 reflect the growth in revenue from solar grade silicon that has generated cash flow from operations before changes in working capital.

For fiscal 2008, the Silicon Group has been building inventories in support of the growth of the solar grade silicon product line as additional production lines are commissioned and anticipated to be put into service in future periods. Inventory increases reflect silicon metal required to support the ramp-up of the solar grade silicon facilities while concurrently supplying silicon metal customers, plus accumulation of intermediate products that will either be consumed in the manufacture of silicon once additional production capacity has been brought on- line or will be sold subsequent to the quarter end. A portion of the increase is also the result of seasonal purchases of raw materials prior to the closure of shipping lanes in the winter. Inventories for the Magnesium Group increased during fiscal 2008 due to the increased unit cost of magnesium and an increase in raw materials inventory in transit as the supply chain was changed in anticipation of the closure of the Haley facility. The increase in accounts payable and accrued liabilities of $13.0 million for fiscal 2008 reflects the increased inventory purchases of the Silicon Group and the timing of payments related to the plant expansion ($10.7 million) and the timing of inventory purchases for the Magnesium Group ($2.3 million).

In the fourth quarter 2008, accounts receivable increased by $1.7 million. Sales to Silicon Group customers were higher in the fourth quarter 2008 resulting in accounts receivable increasing $2.8 million compared to the third quarter 2008. Magnesium Group accounts receivable

Customer Deposits

Received Fiscal 2008(1)

Contracted currency 110.0 million

US$4.0 million

CAD$25.8 million

Canadian dollar equivalent $45.5 million

(1) Fiscal 2008 amounts have been converted at historical exchange rates to Canadian dollar equivalents.

BSI received $45.5 million in deposits during fiscal 2008, including $4.4 million received during the fourth quarter 2008, from its customers under the terms of solar grade silicon supply contracts. These amounts, which are non-interest bearing pre-payments to be credited against future deliveries of solar grade silicon under such contracts, are being used to fund the capacity expansion. In the event of an early termination or completion of a supply contract, any remaining balance on the deposits would be returned to the customer within a specified time period. If the remaining amount is not repaid within the specified time period it becomes interest bearing at rates specified in the contract. One such supply contract will be completed at the end of 2009, and unless the Company concludes a contract extension with this customer, up to

$17.9 million of the deposits will be repayable early in the first quarter 2010. As of December 31, 2008, $1.9 million has been drawn down against deposits through ship-ments of finished product to customers.

The global economic downturn has negatively impacted the solar industry in general and has resulted in weak-ened liquidity of certain market participants. Under the terms of existing supply contracts the Company has contractual commitments from certain customers to pay additional deposits. There is significant uncertainty as to whether these deposits will be received. The Company is in discussions with its customers regarding alternatives to these contractual commitments in the context of facili-tating requests that may serve to maintain and enhance long-term customer relationships. The outcome of these


discussions may include a renegotiation of certain terms and conditions that preserves the economic return to the Company while adjusting deposits, advances and timing of delivery to better reflect the current environment.

Capital Expenditures

The Company operates in a capital-intensive manufactur-ing industry. Capital expenditures are incurred to expand capacity for new product lines, maintain capacity, comply with safety and environmental regulations, support cost reductions and foster growth.

During the fourth quarter 2008, the Company invested $28.5 million in capital assets, of which approximately $20.0 million was in respect of the expansion of its solar grade silicon production capacity. For fiscal 2008, the Company acquired $80.1 million of capital assets, of which approximately $67.0 million related to the construction of its solar grade silicon facilities in Bécancour, Québec.

In the first quarter 2008, the Company announced plans to expand its nominal production capacity for solar grade silicon to 14,400 metric tons per year. This expansion, the construction of which commenced in the second quarter 2008, includes: the installation of additional lines of purification equipment in the existing silicon metal production facility to enable processing of silicon metal

in liquid form as a “first pass”; the reconfiguration of equipment at the existing three line purification facility and the installation of new purification equipment in such facility and in another new purification facility all of which will produce “second pass” and “third pass” material; and the construction of new buildings for packaging and shipping, maintenance and employee services, all of which will be located at the Company’s Bécancour site. To date, the Company has installed and commissioned seven of a planned total of 12 purification lines. Construction of the new and expanded buildings and the commissioning of the new and reconfigured equipment for this expansion were originally expected to be completed by mid 2009. However, the Company announced on March 17, 2009 that it will defer further capacity expansion of its solar grade silicon facility until orders for solar grade silicon in excess of current capacity are confirmed by its customers.

The Company believes it has sufficient liquidity to finance the expected capital expenditures for its current expansion plans for its solar grade silicon production in Bécancour. Sources of financing include proceeds from the private placement of common equity of $24.2 million which closed on February 3, 2009, the Company’s credit facilities, further solar grade silicon customer deposits, if any, cash flow from operations and cash on hand. See “Credit Facilities” and “Customer Deposits” below.

The Company uses its credit facility to finance working capital requirements. As it develops a steady history of operating earnings and as credit markets stabilize in the future, the Company will evaluate seeking term debt financing to fund its capital assets. Since 2004, the Company has funded its expansion from the issuance of convertible debentures and share capital to its major-ity controlling shareholder and public shareholders.

The Company’s controlling shareholder, AMG Advanced Metallurgical Group N.V. (“AMG”), has consistently owned more than 50% of the total common shares outstanding and has participated in financings to maintain its majority control. Although AMG has expressed its intent to main-tain a majority controlling position in the Company, there can be no assurance that AMG will always participate in future equity financings.

Capitalization

Total Capitalization

($000’s) December 31, 2008 December 31, 2007

Convertible notes 7,392 5,897

Credit facility 51,439 21

Common shares 199,688 199,281

Total capitalization 258,519 205,199


Credit Facilities

Summary of Credit Facility

($ millions) December 31, 2008(2) December 31, 2007(2)

Total facility US$50.0 US$32.8

CAD$61.2 CAD$32.4

Borrowing base US$50.0 US$25.6

CAD$61.2 CAD$25.3

Facilities available (1) US$48.0 US$23.6

CAD$58.8 CAD$23.3

Less:Facilities drawn US$41.8 US$ nil

CAD$51.2 CAD$ nil

Undrawn facilities US$6.2 US$23.6

CAD$7.6 CAD$23.3

(1) Net of a minimum availability requirement of US$2.0 million.(2) Amounts converted at a rate of 1.2246 at December 31, 2008 and 0.9881 at December 31, 2007.

The Company has a Credit Agreement dated April 15, 2005 (as amended, the “Credit Agreement”) with Bank of America, N.A. (the “Bank”). The Credit Agreement principally includes a revolving line of credit (the “Revolver”) for US$50.0 million as of December 31, 2008. The Revolver currently bears interest at the U.S. prime rate plus bank margin of 1.25% (6.25% as at December 31, 2008) and does not require minimum repayments. The Credit Agreement expires on March 31, 2010. The Revolver is secured by the assets of the Company.

The Credit Agreement currently includes a financial covenant requiring the Company to maintain a minimum EBITDA level on a rolling 12-month basis. The Company is currently in compliance with this covenant as of December 31, 2008. As a result, the Company presently is able to utilize the total availability under the Credit Agreement. Total availability is equal to (i) the lesser of the borrowing base and the revolving credit commit-ment under the Revolver, minus (ii) the amount borrowed under the Revolver, which was US$41.8 million as of December 31, 2008. The Company is also required to maintain a minimum availability of at least US$2.0 million at all times. The Credit Agreement previously included other financial covenants, including minimum fixed charge coverage ratios. These covenants have been revised or waived from time to time. The covenant relating to the Company’s fixed charge coverage ratio ceased to apply as of and from June 30, 2008.

Equity Financings

On April 30, 2007, the Company completed a public offer-ing of 11,500,000 common shares at a price of $2.60 per share, resulting in gross proceeds of $29.9 million. Net proceeds of the offering, which were $27.8 million, were used primarily for the construction of the new solar grade silicon production facility in Bécancour, Québec, and for general corporate purposes.

On September 27, 2007, the Company completed a public offering of 5,014,334 common shares at a price of $8.50 per share, resulting in gross proceeds of $42.6 million. Concurrently with the public offering, the Company completed a private placement of 5,136,140 common shares to AMG, the Company’s controlling shareholder, resulting in gross proceeds of $43.7 million. Net proceeds of the public offering and private placement, which were $83.6 million, were used primarily for additional produc-tion capacity expansion for solar grade silicon at the Bécancour facility and to further the Company’s objective to increase the purity of its solar grade silicon production beyond the 99.999% material presently produced. The balance of the net proceeds was used for repayment of bank debt and for general corporate purposes.

On February 3, 2009, the Company completed an equity offering by way of private placement of 7,042,000 common shares at a price of $3.55 per share, resulting in gross proceeds of $25.0 million. AMG acquired 3,938,200 com-mon shares in this offering. Net proceeds, which were $24.2 million, were used for general corporate purposes including repayment of funds drawn on the Company’s revolving credit facility.


Current amount Lender Amount Borrowed Date of Note outstanding

ALD International US$3.0 million August 31, 2006 US$2.65 million

ALD International CAD$4.5 million March 1, 2007 CAD$4.5 million

Contractual Obligations as at December 31, 2008

($000’s) Total Less than 1 Year 1 to 3 Years 4 to 5 Years Thereafter

Bank Debt 51,439 51,439 – – –

Operating Leases 2,507 683 391 358 1,075

Due to an Affiliate 7,661 7,661 – – –

Deposits 43,604 25,568 18,036 – –

Defined benefit pension funding obligations 13,822 2,469 5,507 5,846 –

Capital asset purchase commitments 17,678 17,678 – – –

Reorganization obligations 1,345 760 172 142 271

Environmental obligations 8,828 1,634 1,812 469 4,913

Other Long Term Obligations 1,643 250 1,039 354 –

Total Contractual Obligations 148,527 108,142 26,957 7,169 6,259

losses of approximately $9.8 million incurred in 2008. Such losses are due to a combination of: (i) an investment loss of approximately 20% of the market values of the plans’ assets due to negative investment returns during 2008 – as of December 31, 2008, such market values totalled $30.6 million; and (ii) a solvency liability loss of approximately 6% in the plans’ liabilities during 2008, due to changes in prescribed actuarial assumptions. However, this increase in estimated annual funding contributions starting in 2011, which is based on December 31, 2008 market data, does not take into account any potential gains or losses that may arise in 2009 and 2010. The Company’s pension expenses associated with the Silicon plans for 2009 are expected to be approximately $2.4 million.

With respect to the inactive plans, two plans are in the final stages of settlement and wind up (“inactive wind-up plans”) and one is in the early stages of settlement (“Haley plan”). The inactive wind-up plans have assets of less than $0.5 million and are anticipated to require cumulative payments of less than $0.4 million to settle the plans. These plans have been terminated as of December 31, 2008 and further actuarial valuations are not required for the purposes of funding if they are terminated as sched-uled. An actuarial valuation of the Haley plan was last performed as of January 1, 2007. The Haley plan ceased having active members as of August 1, 2008, and a wind-up valuation is currently being performed as of that date. Based on a January 1, 2008 update to the prior actuarial valuation, the Company made funding contribu-tions to this plan throughout 2008 both in respect of accruals for service up to August 1, 2008, and special

Defined Benefit Pension Plan Obligations

The Company directly and through its wholly-owned subsidiaries sponsors five defined benefit pension plans. However, only two such plans have active members. These are contributory defined benefit pension plans for employees in the Company’s Silicon Group (“Silicon plans”). The remaining three defined benefit pension plans, which have no active members, are for former employees of former operations of the Company and are in the process of being wound up (“inactive plans”). The notes to the Company’s audited financial state-ments for the year ended December 31, 2008 reflect an aggregate unfunded deficit of $16.3 million (for the year ended December 31, 2007 – $12.8 million) in respect of its defined benefit pension plans.

With respect to the Silicon plans, the most recent actuarial valuations were performed as of December 31, 2007, and the next actuarial valuations will be performed no later than December 31, 2010. Based on the actuarial valuations updated as at December 31, 2008, the plans have an aggregate unfunded deficit of $9.2 million on a solvency basis (December 31, 2007 – $10.9 million). The Company expects that funding contributions will be made to these plans in the amount of approximately $2.6 million in both 2009 and 2010, which are comparable to the fund-ing contributions made in 2008. The Company’s actuaries estimate that annual funding contributions to these plans could increase to as much as $4.6 million for each of the years 2011 to 2013, based on the actuarial valuations as of December 31, 2007 and taking into consideration actuarial

Convertible Notes

The Company currently owes the following amounts to ALD International LLC (“ALD International”), which is a controlled subsidiary of Safeguard International Fund, LP

(“Safeguard”). Such borrowings were made pursuant to the terms and conditions of certain convertible promis-sory notes, as are described below under “Related Party Transactions – Convertible Notes”.


payments to address the funding deficit. Until the wind-up valuation report is completed and approved by the Financial Services Commission of Ontario, the Company will continue to contribute special payments to the Haley plan in accordance with the January 1, 2008 update. These payments are expected to be $1.5 million in 2009. The Company will be required to make contributions to fully fund the deficit within five years after approval of the wind-up report, whose approval is not expected until the latter half of 2009. For the year ended December 31, 2008, the Company recognized an estimated pension curtail-ment expense of $4.3 million and will record a pension settlement expense in a future fiscal period which currently is estimated to be $7.6 million. This expense will be recognized upon final settlement of the pension liabilities and determination of the actual deficit in the Haley plan upon completion of the wind-up process. Until the final settlement of the pension liabilities, this expendi-ture will change based on gains or losses that may arise prior to completion of the wind-up process, based on fluctuations in market values of assets and investment returns and changes in actuarial assumptions and data experience in respect of the Haley plan.

There are various risks to the Company related to its obligations to the defined benefit plans:

i. There is no assurance that the plans will be able to earn the assumed rates of return. The Company assumed the Haley plan will be settled in approxi-mately five years; accordingly, the actuarial valuation assumed five year bond yields. The Silicon plans are active ongoing defined benefit plans. Therefore, long term bond yields and equity returns were assumed in the latest actuarial valuation.

ii. Market driven changes may result in changes in the discount rates and other variables which would result in the Company being required to make contributions in the future that differ significantly from the current estimates. The Company is currently remitting annual special payments of $1.5 million to address the funding deficit in the Haley plan. If equity markets decline below current levels, the Company may be required to remit material payments to this plan prior to settle-ment. Currently, it is anticipated that contributions to the Silicon plans will increase from current annual remittances of $2.6 million to $4.6 million in 2011. If equity market values change significantly in the interim period, then the required annual contributions may increase or decrease significantly.

iii. There is measurement uncertainty incorporated into the actual valuation process. The Company and its actuarial advisors believe they have applied conserva-tive valuation parameters in the derivation of the plans’ obligations. If those assumptions are incorrect, then future calculations of the plans’ obligations could be materially different.

All of these risks may materially change the Company’s future contribution requirements and the pension expense it will recognize in future period statements of operations.

Foreign Exchange and Foreign Currency Contracts

On an annualized basis, approximately 90% of the Com-pany’s sales are denominated in U.S. dollars or Euros. For reporting purposes all foreign currency sales and expenses are converted to the Canadian dollar equivalent at the exchange rate applicable at the time of the transac-tion. While the Company has historically been exposed to swings in foreign exchange rates, and will continue to be exposed to some extent, it is increasingly endeavouring to reduce these risks through foreign exchange contracts. As at December 31, 2008, the Company had outstanding exchange contracts to sell 112.0 million over the 12 month period to December 2009 at a weighted average rate of 1.5801 and US$9.0 million over the same period at an average rate of $1.2365. The counterparty to the contracts is a multinational commercial bank.

Related Party TransactionsIn March 2007, Safeguard reorganized its indirect holdings in the Company, by contributing 40,909,093 common shares of the Company to AMG and increasing its ownership interest in AMG to 89.7%. In June 2007, Safeguard’s ownership interest in AMG increased to 91.5%. In July 2007, Safeguard sold a portion of its shares of AMG and retained 40.2% of the outstanding share capital of AMG. In October 2007, Safeguard sold a further portion of its shares of AMG, such that Safeguard’s ownership interest in AMG reduced to 26.6%. In addition, AMG has entered into a call option agreement with ALD International (the “AMG Call Option Agreement”), pursuant to which AMG may, at its option, require ALD International to instruct the Company to issue to AMG any common shares issuable upon the conversion of certain convertible promissory notes issued by BSI, as described below under “Convertible Notes”. The Company was not a party to any of the foregoing transactions among AMG, Safeguard or ALD International. However, the Company did enter into the transactions described below with one or more of these parties.

As at December 31, 2008, AMG directly held 52,559,733 common shares of the Company, representing 50.4% of the total issued and outstanding shares. Subsequent to the Company’s equity offering that was completed on February 3, 2009, AMG directly held 56,497,933 common shares of the Company, representing 50.7% of the total issued and outstanding shares.

Fundo Wheels

In the fourth quarter 2008, the Company purchased $1.7 million in finished goods inventory (aluminum


wheels) from Fundo under an arrangement whereby Fundo agreed to resell such inventory on behalf of the Company to Fundo’s existing customers and remit the proceeds from such sales to the Company. In connection with this arrangement, AMG unconditionally agreed to pay the Company an amount equal to any shortfall in the actual proceeds from the sales of such inventory. Fundo defaulted on its obligations to the Company and, pursuant to the Company’s demand under the guarantee, AMG paid the Company $1.7 million plus interest at 7%.

ALD Vacuum Technologies

In fiscal 2008, BSI purchased a furnace and equipment spare parts from ALD Vacuum Technologies GmbH, a wholly-owned subsidiary of AMG, for $1.6 million. This equipment, which facilitates the production of ingots from solar grade silicon, was purchased on arm’s length terms and is being used by BSI for quality control purposes and for research and development activities.

Private Placements

The Company issued common shares to AMG in private placement transactions that were concluded concurrently with equity offerings on September 27, 2007 and February 3, 2009. See above under “Liquidity and Capital Resources – Equity Financings”.

Convertible Notes

On August 31, 2006, the Company issued a convertible promissory note in exchange for US$3.0 million, which is held by ALD International (the “August 2006 Note”). On March 1, 2007, BSI borrowed $4.5 million from ALD International (the “March 2007 Note”). The notes are

repayable on demand, bear interest at the U.S. prime rate plus 1%, are secured against the assets of BSI, and are subordinated to the indebtedness due to the Bank under the Credit Agreement. Each note may be settled, at the lender’s option, in cash or common shares of the Company (or a combination thereof); the conversion price of the August 2006 Note is $0.40 per share and the conversion price of the March 2007 Note is $0.42 per share. See “Liquidity and Capital Resources – Convertible Notes” above for a summary of the outstanding amounts under these notes, and see “Capital Structure” below for a summary of the common shares issuable upon the conversion of these notes.

On July 23, 2007, US$0.35 million of the principal amount of the August 2006 Note was converted into common shares of the Company. As a result, AMG increased its ownership position in the Company to 50.6% by exercising its option under the AMG Call Option Agreement to acquire the 913,500 common shares that were issued upon such conversion.

Executive Management

Both Dr. Schimmelbusch and Mr. Spector are members of the Management Board of AMG, and are also members of the executive committee of the general partner of Safeguard, which controls ALD International.

The Company and Allied Resources Corporation (“Allied”) share the cost of John Fenger, President – Light Metals of the Company. During fiscal 2008, the Company contrib-uted $0.4 million to the cost of the remuneration of Mr. Fenger (for the year ended December 31, 2007 – $0.5 million). Dr. Schimmelbusch is both the Chairman and CEO of the Company and the Chairman of Allied.

Capital StructureAs at December 31, 2008, the common shares issued and reserved were as follows:

Description Number of Shares

Common shares 104,413,588

Common shares issuable upon the exercise of options 11,349,000

Common shares issuable upon conversion of notes payable 18,827,261

Common shares on a fully diluted basis 134,372,349

As at December 31, 2008, a total of 11,349,000 common shares were subject to outstanding options granted under the Company’s Share Option Plan established in 2004 (the “2004 Option Plan”), with exercise prices ranging from $0.29 – $15.45. If exercised, 11,349,000 common shares of the Company would be issued. As of December 31, 2008, 2,174,000 options had met the vesting criteria of which 2,161,500 are in-the-money based on the Decem-ber 31, 2008 TSX closing price of $3.53 per common share. The maximum number of common shares avail-able for options under the 2004 Option Plan is 7,332,175,

representing approximately 7.0% of the Company’s issued and outstanding shares as at December 31, 2008.

Measured at the December 31, 2008 noon exchange rate, as quoted by the Bank of Canada, of $1.2246 CAD$/US$, the balance of the August 2006 Note is convertible into 8,112,975 common shares of the Company (based on the March 25, 2009 Bank of Canada noon exchange rate of $1.2245 CAD$/US$ – 8,112,313 common shares). The March 2007 Note is convertible into 10,714,286 shares of the Company. See “Related Party Transactions – Convertible Notes” above.


On November 11, 2008, the Board of Directors approved a new share option plan (the “2008 Option Plan”) as part of certain incentive compensation arrangements. Options granted under the 2008 Option Plan have an exercise price at no less than the fair market value of the Company’s common shares at the time of the grants, and have a nine-year vesting schedule with 50% becoming exercisable only after the fifth anniversary of the grant date, and the remaining 50% vesting equally on the sixth through ninth anniversary dates. The options will expire ten years after the grant date. The maximum number of common shares available for options under the 2008 Option Plan is 10 million, representing approximately 9.6% of the Company’s issued and outstanding shares as at December 31, 2008. This new share option plan is subject to approval by the Company’s shareholders at the 2009 annual general and special meeting, and is also subject to Toronto Stock Exchange approval. Options to purchase 7 million common shares of the Company were granted under the 2008 Option Plan. As of March 25, 2009, there has been no material change in the number of common shares issuable upon the exercise of options pursuant to either the 2004 Option Plan or the 2008 Option Plan.

On February 3, 2009, the Company issued 7,042,000 common shares at a price of $3.55 per share, resulting in gross proceeds of $25.0 million. Net proceeds of the private placement, which were $24.2 million, were used for general corporate purposes including repayment of funds drawn on the Company’s revolving credit facility.

Risks and Uncertainties The Company’s businesses are subject to significant risks and uncertainties. These risks and uncertainties, together with certain assumptions, also underlie the forward-looking statements made in this MD&A and may cause the Company’s actual results to differ materially from its expectations. Described below are some of the more significant risks that could affect the Company’s results.

Global Economic Uncertainty

Global economic conditions have deteriorated rapidly over the last several months as a result of the financial crisis that erupted in North America, Europe and Asia during 2008. These developments, which include the collapse of certain financial institutions, significant tightening of credit, loss of consumer and investor confidence and recession, are having and will likely continue to have a broad-reaching impact on the Company’s businesses and the industries in which they operate. The severity, duration and extent of such impact are not yet fully understood. Many of the Company’s customers are experiencing financial constraints and have reduced or deferred their purchases. Such customers may continue to curtail or delay their purchases, which would reduce the Company’s revenues, or may experience even more

severe financial difficulties, which could significantly increase the Company’s credit risk or reduce the Com-pany’s liquidity. Moreover, the pace of deterioration of economic conditions has continued to accelerate since the end of fiscal 2008, particularly impacting the stock markets, which have experienced unprecedented volatil-ity. If these circumstances persist or deteriorate further, the Company’s ability to raise capital in the debt or equity markets could be significantly limited, which could restrict the Company’s ability to pursue its strategies or financial objectives. Any one of these developments could have a material adverse effect on the Company’s financial position, results of operations and liquidity.

Risks Relating to the Silicon Group

Customer Commitments for Solar Grade Silicon

The Company has several long-term commercial contracts with customers for the supply of solar grade silicon. These contracts provide for certain volume purchase and delivery commitments by the customers and the Company, respectively, during specified periods over the term of each contract. Based on its current production capacity and expansion plans, and experience to date in fulfillment by customers of their volume pur-chase commitments, the Company expects to be able to satisfy all of its volume delivery commitments regarding solar grade silicon. However, actual customer fulfill-ment of volume purchase commitments in the future is uncertain, as many customers under long-term contracts for solar grade silicon have recently reduced their orders due to the current market downturn. A shortfall in the volumes of solar grade silicon actually purchased by these customers relative to the Company’s expectations, or changes in the timeframes within which these customers take delivery, or an inability by the Company to satisfy the volume requirements under these contracts or other purchase orders with its customers could have a material adverse effect on the Company’s financial position, results of operations and liquidity.

The Company’s contracts with customers also provide for specifications for the solar grade silicon to be delivered, and various quality control and testing methodologies to verify compliance with such specifications. Such specifications, quality controls and testing methodologies are changing and are expected to evolve as the Company and its customers continue to build experience in using the Company’s solar grade silicon for solar photovoltaic applications.

Certain contracts also provide for the customer to make advance payments, or deposits, to the Company. The Company has received $45.5 million in such deposits during fiscal 2008, and existing contractual commitments provide for additional deposits to be made by certain customers, in some cases conditional upon certain events or circumstances arising under the terms of the contract.


In the event of an early termination or completion of a supply contract, any remaining balance on the deposits would be returned to the customer within a specified time period. If the remaining amount is not repaid within the specified time period it becomes interest bearing at rates specified in the contract. In addition, the global economic downturn has negatively impacted the solar industry in general and has resulted in weakened liquidity of certain market participants, which has created significant uncertainty as to whether the remaining deposits will be received. The Company is in discussions with its customers regarding alternatives to these contractual commitments in the context of facilitating requests that may serve to maintain and enhance long-term customer relationships, including a renegotiation of certain terms and conditions. However, there is no assurance that the Company will be able to preserve the economic return to the Company while adjusting deposits, advances and tim-ing of delivery to better reflect the current environment.

Any inability of the Company to address customer issues, whether regarding delivery volumes, quality or deposits, may delay or reduce deliveries of solar grade silicon, or result in termination of one or more of the long-term commercial contracts, including a repayment of deposits, any of which could also have a material adverse effect on the Company’s financial position, results of operations and liquidity, including in the case of termination of a long-term commercial contract, possible repayment on account of the remaining deposit.

The Company’s revenue recognition policy provides that revenue from long-term solar silicon contracts will be recorded net of an adjustment for estimated returns of scrap material. This estimate will fluctuate, with appro-priate adjustments to the return provision, depending on changes in the Company’s experience with the return rate and other assumptions, including the prevailing market price for scrap material relative to the value of the credit customers would receive from the Company for returned material. A significant change in the return rate or other assumptions underlying the Company’s estimates could have a material adverse effect on the Company’s results of operations.

Solar Grade Silicon Production Costs

The Company anticipates that its variable cost of production for solar grade silicon will fluctuate in the short-term, as it continues to refine and optimize produc-tion processes at its new manufacturing facilities. The Company has established production cost targets for the purification of solar grade silicon based on long term production levels which it has not yet achieved principally because it is still in the production ramp-up stage.

The key factors that will influence the Company’s achieve-ment of its target include:

• Quality of silicon metal feedstock – Lower impurity levels in the silicon metal that the Company uses as a feedstock for the purification process will provide higher yields of solar grade silicon per volume input into the process.

• In-house production of molten silicon metal feedstock – Cost reductions should be achieved once the current expansion project is complete and the Company is able to utilize molten silicon metal produced at its own facility as feedstock for the purification process as this is expected to enable the Company to eliminate one cycle of re-melting and purification.

• Scale – The Company expects to realize cost savings per kilogram when the current level of production of solar grade silicon is expanded to a planned level of 14,400 metric tons per year, based upon spreading overhead costs across a larger volume, and production efficiencies related to a more flexible plant configuration.

• Continuous process improvement – The Company expects to realize numerous small process improve-ments over time to enable it to lower production costs.

• Customer Requirements – The specific purity levels required by the Company’s current and future customers of solar grade silicon will impact the amount and nature of the processing that the Company would have to perform.

There is no assurance of the timing and extent to which the Company will be able to achieve its solar grade silicon production cost targets.

Expansion of Solar Grade Silicon Production Capacity

The Company has plans to eventually expand its produc-tion facilities in Bécancour to a nominal production capacity for solar grade silicon of 14,400 metric tons per year. This expansion will involve risks, including potential delays in construction of the new facilities and commissioning of equipment, and unanticipated costs and changes in design that may cause the Company’s capital budget for the project to be exceeded. There may also be delays in achieving the full production capacity while the Company is in the ramp-up stage in the new facilities. Failure to complete this expansion or to achieve the anticipated production capacity within the expected timeframe and on budget could have a material adverse effect on the Company’s financial position, results of operations and liquidity.

Protection of Intellectual Property Rights

The success of the Company’s solar grade silicon produc-tion and sales depends to a large degree on the protection and development of its intellectual property rights, including proprietary technology, information, processes and know-how. Such protection is based on trade secrets and patents, including two patents pending in respect of


the Company’s manufacturing process for the production of solar grade silicon. The Company has received favour-able preliminary reports from the international patent examiners in respect of two of its key patent applications. As well, the Company attempts to protect its trade secrets through physical security measures, as well as confidentiality agreements with customers, suppliers and key employees. The Company also enters into licensing arrangements in respect of third parties’ intellectual property rights, and collaborates with key equipment sup-pliers in the development of technologies that enhance the Company’s product offering. The Company could also be liable to third parties in respect of any infringements of their patents or other intellectual property rights. There is no assurance that the Company has adequately protected or will be able to adequately protect its valuable intel-lectual property rights, or will at all times have access to all intellectual property rights that are required to conduct its business or pursue its strategies, or that the Company will be able to adequately protect itself against any intellectual property infringement claims.

Purity of Solar Grade Silicon

The Company is currently able to produce solar grade silicon at a purity level of 99.999%, or “five nines”, with levels of phosphorus and boron that are contemplated under existing contracts. The Company has achieved a boron level of 0.5 parts per million and a phosphorus level of 1.5 parts per million, and is striving to consistently maintain these levels. Achieving and maintaining these levels could allow customers to increasingly utilize unblended versions of the Company’s solar grade silicon in their manufacturing activities, which could enhance the Company’s competitive advantage and may allow for increased selling prices and margins. However, achieving and maintaining these levels may also increase the Company’s production costs for solar grade silicon. The Company intends to invest certain resources to achieve improvements in purity levels of its solar grade silicon. However, there is no assurance that the Company will consistently achieve these or any higher purity levels for its solar grade silicon.

Solar Grade Silicon and Silicon Metal Selling Prices

Some of the long-term commercial contracts for solar grade silicon provide for renegotiations on pricing in certain circumstances. These pricing negotiations will be significantly influenced by the prevailing market price of solar grade silicon, and there is a risk that such prevailing market price will decline, whether as a result of any addi-tional UMSi or polysilicon production capacity becoming available or due to declining demand. Such a price decline on incremental volumes could have a material adverse effect on the Company’s financial position, results of operations and liquidity.

The Company’s revenues, earnings and cash flows from the sale of silicon metal are sensitive to changes in market prices. In order to manage some of the price volatility related to these products, the Company enters into contractual arrangements to fix the selling prices for certain periods, generally a calendar year, where possible. However, the Company may not be able to reduce its exposure to such metal price risks.

Pricing and Availability of Raw Materials

Coal is a significant raw material in the production of silicon metal, and the market price of coal is an important factor influencing the Company’s cash flows and earn-ings. The price of coal has risen in the last few years, and more significantly since the beginning of this year, principally due to supply shortages. The Company has its own internal supply of quartz which is the source of the silicon. The Company has determined that alternate suppliers of quartz have superior quality for the produc-tion of solar grade silicon feedstock and accordingly has begun to procure more quartz from third party suppliers. The Company also buys silicon metal in the spot (or open) market to balance its production and thus is subject to fluctuations in market price, which has increased due to supply and demand forces. An increase in the pricing for, or limitations on the availability of, these raw materials could have a material adverse effect of the Company’s financial position, results of operations and liquidity.

Importance of Customer Capabilities in Producing Ingots

The next step in the solar value chain downstream from the Company is the transformation of solar grade silicon into ingots which are cut into “bricks”. The Company has discovered that there is a significant range of experience in its customer base with respect to this vital transforma-tion. The quality of the resulting solar wafers can be quite different depending upon the process adopted for ingot making. To that end, the Company is collaborating with third parties and its affiliates to develop processes to optimize the quality of ingots and bricks made from its solar grade silicon. There is no assurance that such development efforts will be successful or that customers will adopt appropriate processes, and therefore there remains a risk that certain customers will not achieve the results they expected from solar grade silicon.

Limited History with Solar Grade Silicon

Although the Company has experience in producing sili-con metal, it has relatively limited history and experience in producing solar grade silicon. As such, the Company’s historical financial results do not provide a meaningful basis for evaluating its future financial performance.


Power Supply

The production of silicon metal is energy intensive and the Company is dependent upon the continuous supply of electricity from third parties for its smelting and other operations in Bécancour. During the first quarter of 2007, the Company suffered an interruption in electricity service, and has since taken measures to mitigate the likelihood of such interruptions in the future. However, there is no assurance that the Company will not be subject to power interruptions in the future.

Risks Relating to the Magnesium Group

Closure of Facilities and Completion of Proposed Transactions with Winca

The Company intends to wind down production operations at its existing magnesium extrusion facility in Aurora, Colorado and close that facility later in 2009. The Company also intends to pursue the transactions contemplated by the non-binding letter of intent with Winca announced on February 18, 2009 that would involve the transition of certain aspects of the Company’s magnesium and specialty metals business and assets to a new merged business, to be known as Applied Magnesium Interna-tional (“AMI”). The closure of the Aurora magnesium extrusion operations will result in severance payments and other cash closure costs of approximately $3 million, which will be incurred in 2009, and the Company expects to record charges in the first half of 2009 relating to these costs. The majority of the production assets of the Aurora facility were deemed to be impaired during 2006 and written down to fair market value at that time. To the extent that estimated proceeds of disposition, if any, are less than the carrying value of such assets, a charge will be taken in the first half of 2009. The Company expects to recover a significant portion of its investment in working capital as the Magnesium Group’s operations are wound down and the remaining business is transitioned to AMI. The Company expects to generate net cash proceeds from these announced plans during 2009. However, the actual closure costs may exceed the Company’s expecta-tions, and the actual proceeds from disposition of working capital items may not meet the Company’s expectations. Moreover, the proposed transactions with Winca are subject to a number of conditions, including financing and execution of definitive agreements, and are expected to be completed in the second quarter 2009. A failure to complete such transactions on the expected timetables, if at all, could further increase the Company’s severance payments and other cash closure costs relating to the Magnesium Group, or further reduce the proceeds from disposition of working capital items. Any of these events could have a material adverse effect of the Company’s financial position, results of operations and liquidity.

Pricing and Availability of Magnesium Metal

The market price of magnesium metal has a significant impact on the Company’s cash flows and earnings. In the past few years, the price of magnesium metal has significantly increased. The Company purchases the majority of its magnesium metal and is subject to pricing cycles dictated by overall supply and demand for this raw material. Suppliers have demanded increased selling prices for magnesium metal, despite existing supply contracts, and, as a result, there is no assurance that such contracts will fully protect the Company against magnesium price risks. The Company also purchases magnesium in U.S. dollars, but is subject to pricing adjustments based on the exchange rate between the U.S. dollar and the Chinese Renminbi for a portion of its magnesium purchases. The Company attempts to pass on increased magnesium metal costs to its customers. However, existing customer contracts may limit the timing or amount of any adjustments and price increases reduce the competitiveness of the Company’s products.

The Company is currently dependent on the supply of magnesium metal from a number of third party suppliers in Russia and China, and has outsourced certain magne-sium production functions to such suppliers as part of its ongoing manufacturing cost reduction initiatives. Financial difficulties or operational constraints affect-ing any such supplier may adversely affect its ability to continue to produce and supply a sufficient quantity of magnesium metal or to perform outsourced production functions. There is no assurance that any efforts the Company may take in response to or in anticipation of supply constraints will effectively mitigate the Company’s exposure to supply chain risk for its magnesium business.

Other Risks

Financing for Capital Expenditures

The Company’s growth plans will require capital expenditures. The Company is expanding its solar grade silicon production facilities in Bécancour, and may also require capital expenditures for acquisitions, mergers, business combinations, joint ventures, or strategic business alliances or partnerships in respect of its businesses or investments. The Company expects to fund its requirements for capital expenditures from common equity, term debt, credit facilities, operating cash flows and cash balances. However, these sources of financing may not be available to the Company when required in the amounts needed or on acceptable terms. The Company’s existing credit agreement also limits the Company’s financial flexibility in a number of ways, including restrictions on the Company’s ability to incur additional indebtedness, to sell assets, to create liens or other encumbrances, to incur guarantee obligations, to


make certain payments, investments, loans or advances, and to make acquisitions or capital expenditures beyond certain levels.

Foreign Exchange

The majority of the Company’s products are priced in U.S. dollars and Euros. The Company reports its results in Canadian dollars, and a substantial portion of the oper-ating costs of the silicon business is in Canadian dollars. Consequently, the Company’s earnings and cash flows are sensitive to changes in exchange rates. The Company enters into foreign exchange contracts from time to time to mitigate its foreign currency risk relating to certain cash flow exposures. However, there is no assurance that such foreign exchange contracts will fully protect the Company against foreign exchange risks.

Customer Concentration

The Company has traditionally had several large custom-ers, the loss of any of which could have a material adverse effect on the financial position, results of operations and liquidity of the Company. At December 31, 2008, one cus-tomer accounted for 14% of total sales (for the year ended December 31, 2007 three customers accounted for 39% of total sales). Not all of the Company’s key customers are subject to long-term contracts. Some of the existing long-term customer contracts for the Magnesium Group are currently under renegotiation, and the Company is experiencing significant pricing pressure as a result of increased competition.

Environmental Liabilities

The Company is, and historically has been, involved in businesses that may be deemed to be hazardous to the environment and subject to extensive and changing laws and regulations governing, among other things, emissions to air, discharges and releases to land and water, the generation, handling, storage, transportation, treatment and disposal of wastes and other materials, and the remediation of contamination caused by discharges of waste and other material. The Company has accrued $5.8 million as at December 31, 2008 for future costs relating to site restoration and closure of certain of its former facilities and operations. The actual cost for such site restoration and closure in the future could be higher than the amounts estimated. The Company’s estimate for this future liability is also subject to change based on amendments to applicable laws, the nature of ongoing operations, the timing of future closures and technological innovations. In addition, a violation of environmental or health and safety laws could lead to, among other things, a temporary shutdown of the Company’s facilities or the imposition of fines, penalties or additional costly compli-ance or remediation procedures.

Interest Rate Risk

The Company is exposed to interest rate risk to the extent that cash and short term investments, bank indebted-ness, convertible notes receivable and amounts due to an affiliated company are at floating rates of interest. The Company’s maximum exposure to interest rate risk is based on the effective interest rate and the current carrying value of these assets and liabilities. The Company monitors the interest rate markets to ensure that appropriate steps can be taken if interest rate volatil-ity compromises the Company’s cash flows. However, the Company may not be able to reduce its exposure to all such interest rate risks.

Credit Risk

Accounts receivable, convertible notes and long term receivables are subject to credit risk exposure and the carrying values reflect management’s assessment of the associated maximum exposure to such credit risk. Substantially all of the Company’s accounts receivable are due from customers in a variety of different industries and, as such, are subject to normal credit risks in their respective industries. The Company regularly monitors customers for changes in credit risk. Where available, the Company has insured its accounts receivable under credit insurance policies to offset the increased credit risk environment. However, since all customers may not qualify for credit insurance the Company may not be able to reduce its exposure to all such credit risks.

Liquidity Risk

Liquidity risk arises through excess financial obligations over available financial assets due at any point in time. The Company’s objective in managing liquidity risk is to maintain sufficient readily available sources of funding in order to meet its liquidity requirements at any point in time. The Company attempts to achieve this by maintain-ing cash positive operations and through the availability of funding from committed credit facilities. As at December 31, 2008, the Company was holding cash and cash equivalents of $4.5 million and had undrawn lines of credit available of US$6.2 million. On October 21, 2008, the Credit Agreement was amended to increase the total maximum credit lines to US$50.0 million. Subsequent to the year end the Company raised $24.2 million in a common equity private placement to further strengthen its overall liquidity. If sufficient sources of funding are not available in the future, the Company may not be able to fully implement its growth plans or strategic objec-tives, which could have a material adverse effect on the Company’s business or investments.


Critical Accounting EstimatesThe preparation of the Company’s financial statements in accordance with Canadian generally accepted account-ing principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting year. Due to the inherent uncertainty involved with making such estimates, actual results reported in future periods could differ from those estimates. Significant estimates include the following:

Pension Return and Discount Rates

The estimated return and discount rate affect the pension expense and liabilities. These estimates are made with the assistance of the Company’s actuaries to ensure that the estimates are reasonable and consistent with those of other Companies in our industry. The estimated return on plan assets is subject to change on an annual basis based on the anticipated returns of the plan assets, the return of equities and fixed income securities held by the plan and the performance of public securities markets. The discount rate is subject to change based on the age and changes in composition of the plan members and long term bond rates. A one percent change in either rate would have a material impact on the pension liabilities. The significant ongoing volatility in the global financial markets, particularly since the end of fiscal 2008, could significantly increase the Company’s pension liabilities. This could have a material adverse effect in the Company’s liquidity and results of operations.

Revenue Recognition

The terms of the Company’s solar silicon contracts provide certain customers with limited rights of return. Revenue from such contracts is recorded net of an adjustment for estimated returns. The Company’s estimate of returns requires assumptions to be made regarding the market price for solar silicon scrap in concert with actual experience of returns received. Should this estimate and these experiences change, the return provision will be adjusted in the period.

Asset Retirement Obligations

The Company’s asset retirement obligations involve various estimates of the cost of a variety of activities often many years in the future. The Company engages independent consultants to assist in the estimation of closure and remediation costs. Furthermore, the asset retirement obligation is a discounted balance. Currently the Company discounts the estimated cash flows at 9%. A 1% change in the discount rate will change the obligation by approximately $0.3 million.

Fair Market Value of Assets at Haley, Ontario

The Company is in the process of closing its Haley, Ontario manufacturing facility and anticipates disposing of all the assets related to that operation including land, buildings and manufacturing equipment. As at the date of the closure, management has made estimates of the expected net proceeds from the future disposal of these assets. These estimates are based upon management’s experience with the disposal of other physical assets at this site in 2007. As the closure process proceeds management will employ the services of an appraisal firm to establish an orderly liquidation process. Management currently estimates the fair market value of the land, equipment and buildings at Haley to be approximately $0.7 million. During fiscal 2008, the carrying value of the buildings at Haley was reduced by $0.8 million to their estimated scrap value. The value of the property is impaired by the ongoing environmental remediation underway at the site.

Accounting ChangesEffective January 1, 2008, the Company has adopted the new recommendations of the CICA Handbook Section 3031, “Inventories”, Section 1535, “Capital Disclosures”, Section 3862, “Financial Instruments – Disclosures”, Section 3863, “Financial Instruments – Presentation” and Section 1400, “General Standards on Financial Statement Presentation”. The impact that the adoption of these sections has had on the Company’s financial statements is outlined below.

Inventories

CICA Section 3031, “Inventories”, was issued in June 2007 and replaces existing Section 3030 of the same title. It provides guidance with respect to the determination of cost and requires inventories to be measured at the lower of cost and net realizable value. Reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories is now required. The cost of the inventories should be based on a first-in, first-out or a weighted average cost formula. Techniques used for the measurement of cost of inven-tories, such as the standard cost method, may be used for convenience if the results approximate cost. The new standard also requires additional disclosures including the accounting policies used in measuring inventories, the carrying amount of the inventories, amounts recognized as an expense during the period, write-downs and the amount of any reversal of any write-downs recognized as a reduction in expenses. The adoption of this section had no material impact on the Company’s consolidated financial statements. The Silicon Group uses a weighted average cost methodology and the Magnesium Group


applies a standard cost methodology on a FIFO basis that approximates actual cost. See Notes 2 and 5 to the Company’s consolidated financial statements.

Capital Disclosures

CICA Handbook Section 1535, “Capital Disclosures”, requires disclosure of an entity’s objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital and whether the entity has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance. See Note 19 to the Company’s consolidated financial statements regarding these disclosures.

Financial Instruments Disclosures

CICA Handbook Section 3862, “Financial Instruments – Disclosures”, increases the disclosures currently required that will enable users to evaluate the signifi-cance of financial instruments for an entity’s financial position and performance, including disclosures about fair value. In addition, disclosure is required of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about liquidity risk and market risk. The quantitative disclosures must also include a sensitiv-ity analysis for each type of market risk to which an entity is exposed, showing how net income and other compre-hensive income would have been affected by reasonably possible changes in the relevant risk variable. See Note 17 to the consolidated financial statements.

Financial Instruments Presentation

CICA Handbook Section 3863, “Financial Instruments – Presentation”, replaces the existing requirements on presentation of financial instruments which have been carried forward unchanged to this new section. See Note 17 to the Company’s consolidated financial statements.

General Standards on Financial Statement Presentation

CICA Handbook Section 1400, “General Standards on Financial Statement Presentation”, has been amended to include requirements to assess and disclose an entity’s ability to continue as a going concern. This section had no impact on the Company’s consolidated financial statements.

Transitional Adjustment

Adoption of these standards was on a prospective basis without retroactive restatement of prior periods.

Disclosure Controls and ProceduresThe Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for establishing and main-taining adequate disclosure controls and procedures,

as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109). Disclosure controls and procedures are designed to provide reasonable assurance that informa-tion required to be disclosed in filings under securities legislation is accumulated and communicated to management, including the CEO and CFO as appropriate, to allow timely decisions regarding public disclosure. They are also designed to provide reasonable assurance that all information required to be disclosed in these filings is recorded, processed, summarized and reported within the time periods specified in securities legislation. The Company regularly reviews its disclosure controls and procedures; however, they cannot provide an absolute level of assurance because of the inherent limitations in control systems to prevent or detect all misstatements due to error or fraud.

The Company’s management, including the CEO and CFO, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2008. Based on this evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective as of December 31, 2008.

Internal Control over Financial ReportingManagement is responsible for establishing and main-taining adequate internal control over financial reporting, as defined in NI 52-109. Internal control over financial reporting means a process designed by or under the supervision of the CEO and CFO, and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that: (1) pertain to the maintenance of records that in reason-able detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) are designed to provide reasonable assurance that transac-tions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of manage-ment and directors of the Company; and (3) are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

All internal control systems have inherent limitations and therefore internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements due to error or fraud.


The Company’s management, including the CEO and CFO, conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2008 using the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework. Based on this evaluation, the CEO and CFO have concluded that the Company’s internal control over financial reporting was effective as of December 31, 2008.

Changes in Internal Control over Financial Reporting

During 2008, the Company implemented a number of initiatives that served to strengthen its system of internal control over financial reporting (“ICFR”) including imple-mentation of a formal testing program of key controls in conjunction with the Company’s 52-109 certification program, increased staffing in key financial roles that served to improve the level of financial expertise in the Company and strengthen segregation of duties, updating policies related to disclosure and insider trading and developing a policy on costing of inventory for new inven-tory items arising from the Company’s solar grade silicon product line. Additionally, a change in the scope of ICFR occurred with the closing of the Company’s manufactur-ing site in Haley, Ontario which had been an accounting centre. The evaluation of the effectiveness of ICFR was conducted following a reassessment of key internal controls incorporating these changes. There have been no other changes in the Company’s ICFR during the year ended December 31, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR.

Recent Accounting Pronouncements Issued But Not Yet Adopted

Goodwill and Intangible Assets

In February 2008, the CICA approved Handbook Section 3064, “Goodwill and Intangible Assets”, replacing previous guidance. The new section establishes stan-dards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to initial recognition. Standards concerning goodwill are unchanged. This new standard is applicable to fiscal years beginning on or after October 1, 2008. The Company is reviewing this standard, and has not yet determined the impact, if any, on the consolidated financial statements. In conjunction with this new standard, Handbook Section 1000, “Financial Statement Concepts”, has been amended to eliminate references that might be interpreted by some as permitting the recognition of assets that would not otherwise meet the definition of an asset or the recogni-tion criteria.

Business Combinations

In January 2009, the CICA approved Handbook Section 1582 “Business Combinations”, replacing existing Section 1581 by the same name. It establishes standards for the accounting for a business combination. It provides the Canadian generally accepted accounting principles equivalent to International Financial Reporting Standard IFRS 3 Business Combinations (January 2008). The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. The CICA recommends that entities plan-ning business combinations in the fiscal year beginning on or after January 1, 2010 adopt these new standards early to avoid restatement on transition to IFRS in 2011. Early adoption of the new standard is permitted.

Consolidated Financial Statements

In January 2009, the CICA approved Handbook Section 1601, “Consolidated Financial Statements” and Handbook Section 1602, “Non-controlling Interests” replacing existing Section 1600, “Consolidated Financial Statements”. This Section establishes standards for the preparation of consolidated financial statements. The Section applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. The CICA recommends that entities planning business combinations in the fiscal year beginning on or after January 1, 2010 adopt these new standards early to avoid restatement on transition to IFRS in 2011. Early adoption of the new standard is permitted.

Non-controlling Interests

In January 2009, the CICA approved Handbook Section 1602, “Non-controlling Interests”. It establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of International Financial Reporting Standard IAS 27, “Consolidated and Separate Financial Statements (January 2008)”. The Section applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. The CICA recommends that entities planning business combinations in the fiscal year beginning on or after January 1, 2010 adopt these new standards early to avoid restatement on transition to IFRS in 2011. Early adoption of the new standard is permitted.

Credit Risk and the Fair Value of Financial Assets and Financial Liabilities

In January 2009, the CICA Emerging Issues Committee issued EIC-173, “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”. It requires an entity to consider its own credit risk and the credit risk of the counterparty in determining the fair value of


financial assets and financial liabilities, including deriva-tive instruments. This EIC is applicable retrospectively without restatements of prior periods to all financial assets and liabilities measured at fair value in interim and annual financial statements for periods ending on or after January 20, 2009. Retrospective application with restate-ment of prior periods is permitted but not required. The application of incorporating credit risk into the fair value may result in entities re-measuring the financial assets and financial liabilities as at the beginning of the period of adoption with any resulting difference recorded in retained earnings except when derivatives in a fair value hedging relationship are accounted for by the short cut method (the difference is adjusted to the hedged item) and for derivatives in a cash flow hedging relationship (the difference is recorded in accumulated other compre-hensive income).

International Financial Reporting Standards (“IFRS”)

In February 2008, the Accounting Standards Board “AcSB” confirmed that Canadian GAAP for publicly traded enterprises will be converted to IFRS effective in calendar year 2011. IFRS uses a conceptual framework similar to Canadian GAAP but there are significant differences on recognition, measurement and disclosures. In the period leading up to the changeover, the AcSB will continue to issue accounting standards that are converged with IFRS such as IAS 2, “Inventories” and IAS 38, “Intangible Assets”, thus mitigating the impact of adopting IFRS at the changeover date.

The Company currently converts its internal financial statements to IFRS in order to report to its parent company and therefore has identified the significant differences between Canadian GAAP and IFRS in its accounts. In terms of the IFRS conversion process, the Company has therefore substantially completed the diagnostic stage. A formal review and documentation of IFRS accounting policy choices was performed on the parent company’s adoption of IFRS effective with its fiscal 2005 results. The Company will review and update these documents during fiscal 2009 to prepare for its formal adoption of IFRS. It is anticipated that the Company will adopt the same IFRS accounting policies that are used to report to its parent company on a retroactive basis.

Since the Company reports IFRS compliant financial results to its parent company, management has determined that the current information technology infrastructure will be sufficient for IFRS conversion and ongoing reporting requirements. Additionally, the Canadian accounting functions are sufficiently aware of IFRS reporting require-ments in preparation for a formal implementation on January 1, 2011. It is not anticipated that the implementation of IFRS will have a significant effect on the Company’s control environment, internal controls over financial reporting or disclosure controls and procedures. The

implementation of IFRS is not anticipated to result in material differences in the calculation of bank covenants as they are currently defined in the credit agreement.

The Company intends to formalize its IFRS conversion plan during fiscal 2009.

OutlookTimminco’s strategy in 2009 is to organically grow its solar grade silicon product line through increased production from the completion of the expansion of its Bécancour, Québec production facilities.

The long term growth of the Company’s solar grade silicon product line is dependent upon the quality of the product and the manufactured cost of the product relative to competing materials. The Company has ongoing initiatives to improve its performance in both of these key metrics. With respect to product quality, improvements are a function of (i) the impurity level of raw materials used to produce silicon metal feedstock, (ii) suppliers’ ability to provide consistent quality of these raw materials over time, and (iii) the knowledge and experience of and recipe used by the Company’s customers in producing ingots. The Company has procured raw materials for its silicon metal production that meet the quality require-ments for UMSi feedstock, and it is working with its suppliers to ensure consistent quality in each delivery. Additionally, the Company is undertaking research and development efforts in the area of ingot making processes, which the Company believes will assist its customers in achieving optimal outcomes in using UMSi. With respect to manufactured cost of the product, the Company achieved an average cost for the fourth quarter 2008 of $30 per kilogram. The Company expects further improvement in cost beyond the level achieved in the fourth quarter 2008 primarily from the elimination of one re-melt step from the current three step re-melt process. The primary impact of one less re-melt is a reduction in the amount of silicon required per unit of final production (an increase in yield). Costs will also improve further through minor adjustments to the process (industrial learning) that is expected to further improve yield and through spreading of fixed overhead across larger volumes (labour and capital efficiency).

The Company shipped 424 mt of solar grade silicon in the fourth quarter 2008, an increase of 41% over levels achieved in the third quarter 2008. The Company will continue to ramp-up production of solar grade silicon in 2009 as new productive capacity is installed in keeping with customer orders. The Company exited 2008 with six production lines in operation and commissioned a seventh line in the last week of January 2009. When the expansion is completed, the Bécancour plant will comprise 12 production lines in total with a cumulative nominal capacity of 14,400 metric tons per year.


The global economic downturn that began in 2008 has negatively impacted demand for and installations of solar power systems. Demand for solar power systems, whether large scale industrial power plants or small scale residential systems, is dependent upon financial incentives and project financing. The liquidity crunch in international banking and financial markets has con-strained available financing for new solar projects which in turn has created a surplus of inventory throughout the solar value chain. In this environment it is difficult to judge short term shipment volume for the Company’s solar grade silicon product as the Company’s customers manage inventory and demand levels downstream from the Company. During 2008 the Company shipped 1,045 metric tons of solar grade silicon generating revenue of $65 million. Given the current industry environment the Company is working closely with its customers to monitor the progress of their business development plans so that the Company and its customers can ramp up volumes shipped into the market in a cost effective manner. As a result of this environment, the Company has deferred the completion of its expansion project beyond the targeted timeframe of mid-2009. There is also the potential that customer contracts may be amended to reduce volumes committed during 2009 and 2010 and/or adjust the timing and amount of customer deposits owing to the Company.

While the Company is focused on the high-value opportunity presented by the solar grade silicon market, the Company is reducing its investment in the Magnesium Group. The closure of the Haley, Ontario facility in July 2008 was a milestone event in reducing such investment. Morever, the impact of the recession in the United States throughout 2008 as reflected in lower volumes shipped in each successive quarter led the Company to conclude that the extruded products manufactured in the Aurora, Colorado facility were not providing sufficient margin to cover the overhead costs associated with that facility. Accordingly the Company has subsequent to the year end announced its intention to close the Aurora facility. Additionally the Company concurrently announced the signing of a letter of intent with Winca, its primary China-based supplier, to transfer its magnesium business to a new merged business in which the Company would hold only a minority interest, representing a significant reduction in the Company’s investment in and exposure to the magnesium market. The Company will wind down its Aurora operations over the first half of 2009 in conjunction with an integrated plan with Winca to support extruded products customers from alternative low-cost locations.

For 2008 as a whole the Company achieved operational profitability (net income before charges for reorganization costs, the equity in the loss of Fundo Wheels and the impairment of investment in Fundo Wheels). Provided that economic conditions stabilize in the course of 2009, the Company expects that the revenue from its solar grade

silicon product line will enable the Company to maintain this operational profitability in 2009 as a whole.

Cautionary Note on Forward-Looking InformationThis MD&A contains “forward-looking information”, in-cluding “financial outlooks”, as such terms are defined in applicable Canadian securities legislation, concerning the Company’s future financial or operating performance and other statements that express management’s expecta-tions or estimates of future developments, circumstances or results. Generally, forward-looking information can be identified by the use of forward-looking terminology such as “expects”, “targets”, “believes”, “anticipates”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “plans” and variations of such words, or by statements that certain actions, events or results “may”, “will”, “could”, “would” or “might”, “be taken”, “occur” or “be achieved”. Forward-looking information is based on a number of assumptions and estimates that, while considered reasonable by management based on the business and markets in which Timminco operates, are inherently subject to significant operational, economic and competitive uncertainties and contingencies. Timminco cautions that forward-looking information involves known and unknown risks, uncertainties and other factors that may cause Timminco’s actual results, performance or achievements to be materially different from those expressed or implied by such information, including, but not limited to: deteriorating global economic conditions; future growth plans and strategic objectives; liquidity risks; limitations under existing credit facilities; long-term contracts for supplying solar grade silicon; solar grade silicon production cost targets; selling prices of solar grade silicon and silicon metal; achieving and maintaining the purity of solar grade silicon; production capacity expansion at the Bécancour facilities; pricing and availability of raw materials for the silicon business; customer capabilities in producing ingots; limited history with the solar grade silicon business; dependence upon power supply for silicon metal production; protection of intellectual property rights; government and economic incentives; closure of the magnesium facilities and the completion of related proposed transactions; cost and availability of magnesium metal; dependence upon key customers of magnesium extruded and fabricated products; credit risk exposure; customer concentration; equipment failures; labour disputes; foreign currency exchange; dependence upon key executives and employees; completion and integration of potential acquisitions, part-nerships or joint ventures; risks with foreign operations and suppliers; environmental, health and safety laws and liabilities; transportation disruptions; conflicts of interest; interest rates; intellectual property infringement claims; new regulatory requirements; changes in tax laws; and


Other InformationAdditional information relating to the Company, including the Company’s Annual Information Form for the year ended December 31, 2008, is available at www.sedar.com.

Quarterly Financial Information

(CAD$ 000’s except 2008 2008 2008 2008 2007 2007 2007 2007per share amounts) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Sales Silicon 58,535 51,162 45,024 34,731 24,339 30,011 25,446 23,952

Magnesium 14,193 17,828 18,264 12,826 12,100 14,549 16,925 18,834

Total 72,728 68,990 63,288 47,557 36,439 44,560 42,371 42,786

Gross Profit (1)

Silicon 15,387 10,107 10,104 4,470 (2,693) 943 704 1,985

Magnesium 1,196 3,358 2,170 1,231 105 2,152 2,248 1,062

Total 16,583 13,465 12,274 5,701 (2,588) 3,095 2,952 3,047

Gross Profit Percentage Silicon 26.3% 19.8% 22.4% 12.9% (11.1%) 3.1% 2.8% 8.3%

Magnesium 8.4% 18.8% 11.9% 9.6% 0.9% 14.8% 13.3% 5.6%

Total 22.8% 19.5% 19.4% 12.0% (7.1%) 6.9% 7.0% 7.1%

EBITDA (1)

Silicon 11,556 8,770 9,137 2,472 (3,875) 513 1,509 1,176

Magnesium (2,324) 134 66 125 (2,050) (608) 776 (1,029)

Corporate / Other (2,825) (2,015) (2,590) (1,243) (1,411) (1,831) (894) (1,186)

Total 6,407 6,889 6,613 1,354 (7,336) (1,926) 1,391 (1,039)

Net Income (Loss) Silicon 7,499 5,603 5,750 1,012 (3,098) 113 992 403

Magnesium (3,902) (830) (9,869) (67) (2,712) (889) 573 (1,114)

Corporate / Other (4,875) (18,500) (2,929) (1,501) (3,026) (3,803) (3,067) (2,408)

Total (1,278) (13,727) (7,048) (556) (8,836) (4,579) (1,502) (3,119)

Earnings (loss) per common share, basic and diluted (0.01) (0.13) (0.07) (0.01) (0.08) (0.05) (0.02) (0.04)

Weighted average number of common shares outstanding, basic and diluted (000’s) (2) 104,275 104,147 104,082 103,999 103,978 93,932 86,913 75,133

Working capital (excluding available cash items and bank indebtedness) 49,326 58,351 48,200 39,215 32,363 28,799 27,594 20,943

Total assets 303,022 242,547 207,203 185,674 187,281 186,865 115,047 102,647

Total bank debt 51,439 24,349 10,003 11 21 327 9,744 23,115

Total long term liabilities 52,561 48,594 28,433 25,057 26,196 22,673 22,903 22,838

(1) See Non-GAAP Accounting Definitions (2) No dividends were paid during any of the quarters

climate change. These factors are discussed in greater detail in Timminco’s Annual Information Form for the year ended December 31, 2008, which is available on SEDAR via www.sedar.com. Although Timminco has attempted to identify important factors that could cause actual results, performance or achievements to differ materially from those contained in forward-looking information, there can be other factors that cause results, performance or achievements not to be as anticipated, estimated or in-tended. There can be no assurance that such information will prove to be accurate or that management’s expecta-

tions or estimates of future developments, circumstances or results will materialize. Accordingly, readers should not place undue reliance on forward-looking information. The forward-looking information in this MD&A is made as of the date of this MD&A and Timminco disclaims any intention or obligation to update or revise such informa-tion, except as required by applicable law.

In addition, the Company has withdrawn certain previ-ously disclosed material forward-looking information as disclosed in its news release dated November 11, 2008, which is available on SEDAR via www.sedar.com.


Non-GAAP Accounting DefinitionsEBITDA

EBITDA (“Earnings Before Interest, Taxes, Depreciation and Amortization”) is not a recognized measure under GAAP. Management believes that, in addition to net income (loss), EBITDA is a useful supplemental measure as it provides investors with an indication of cash available for distribution prior to debt service, past pension service obligations, capital expenditures, income taxes and restructuring cash payments. Investors should

Gross Profit

Gross profit is not a recognized measure under GAAP. Management believes that, in addition to net income (loss), gross profit is a useful supplemental measure as it provides investors with an indication of the profits generated on products sold to customers before corporate overhead expenses. Investors should be

cautioned, however, that gross profit should not be construed as an alternative to net income determined in accordance with GAAP as an indicator of the Company’s profitability. The Company’s method of calculating gross profit may differ from other companies and accordingly, gross profit may not be comparable to measures used by other companies. Gross profit is calculated as follows:

be cautioned, however, that EBITDA should not be construed as an alternative to net income determined in accordance with GAAP as an indicator of the Company’s profitability. Also, EBITDA should not be construed as an alternative to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows. The Company’s method of calculating EBITDA may differ from other companies and, accordingly, EBITDA may not be comparable to measures used by other companies. EBITDA is calculated as follows:

EBITDA By Quarter

2008 2008 2008 2008 2007 2007 2007 2007($000’s) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Net loss (1,278) (13,727) (7,048) (556) (8,836) (4,579) (1,502) (3,119)

Add back (subtract): Income taxes 1,611 2,035 1,968 84 (1,299) (348) 305 132

Impairment of Fundo Wheels AS (1,415) 13,845 – – – – – –

Equity in the loss (earnings) of Fundo Wheels AS 1,415 1,822 (59) (103) 1,376 1,295 955 172

Impairment of property, plant and equipment 1,025 – 326 – – – – –

Loss (gain) on the sale of property, plant and equipment 5 (375) – – 15 (10) 44 (75)

Interest 796 549 253 12 573 546 634 931

Amortization of intangible assets 170 138 137 138 137 138 137 138

Amortization of property, plant and equipment 2,525 1,509 1,412 1,430 986 828 672 660

Reorganization costs 970 824 1,659 – (397) – 26 8

Environmental remediation costs (136) – 3,220 – – 78 – –

Pension curtailment costs (326) – 4,600 – – – – –

Stock-based compensation 1,215 269 145 349 109 126 120 114

EBITDA 6,407 6,889 6,613 1,354 (7,336) (1,926) 1,391 (1,039)

Gross Profit By Quarter

2008 2008 2008 2008 2007 2007 2007 2007($000’s) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Sales 72,728 68,990 63,288 47,557 36,439 44,560 42,371 42,786

Cost of goods sold 56,145 55,525 51,014 41,856 39,027 41,465 39,419 39,739

Gross profit (loss) 16,583 13,465 12,274 5,701 (2,588) 3,095 2,952 3,047

Management’s Responsibility for Financial Statements 43

Management’s Responsibility for Financial Statements

The financial statements of Timminco Limited are prepared by management which is responsible for their fairness, integrity and objectivity. The financial state-ments have been prepared in accordance with Canadian generally accepted accounting principles. Preparation of the financial statements necessarily requires some esti-mates, and these reflect management’s best judgment. Management has established systems of internal control which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce reliable accounting records for the preparation of financial information.

The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Audit Committee of the Board of Directors, currently composed of three independent directors, meets with management and representatives of the external auditors to satisfy itself that responsibilities are properly discharged and to review the financial statements. The Audit Committee is also responsible for, after completing its review, recommending the financial statements to the Board of Directors for approval and recommending the appoint-ment of external auditors.

The financial statements are examined by the external auditors in accordance with Canadian generally accepted auditing standards. These standards provide for the review of internal accounting control systems and the testing of transactions to the extent the auditors deem appropriate. The external auditors have full and free access to the Audit Committee of the Board. Management recognizes its responsibility for conducting the Com-pany’s affairs in compliance with established financial standards and applicable laws and the maintenance of proper standards of conduct in its activities.

(signed) Dr. Heinz C. Schimmelbusch Chairman of the Board and Chief Executive Officer March 25, 2009

(signed) Robert J. Dietrich Executive Vice President – Finance and Chief Financial Officer March 25, 2009

44 Auditors’ Report

Auditors’ Report

To the Shareholders of Timminco Limited

We have audited the consolidated balance sheets of Timminco Limited (the “Company”) as at December 31, 2008 and 2007, and the consolidated statements of operations, comprehensive loss, deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain rea-sonable assurance whether the financial statements are free of material misstatement. An audit includes examin-ing, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial posi-tion of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Ernst & Young LLP Chartered Accountants Licensed Public Accountants

Toronto, Canada, March 10, 2009 (except as to Note 23, which is as of March 17, 2009)

Consolidated Balance Sheets 45

Consolidated Balance Sheets

As at December 31 2008 2007

(in thousands of Canadian dollars)

ASSETSCurrent AssetsCash and cash equivalents $ 4,512 $ 19,463

Short term investments (Note 4) 116 15,151

Accounts receivable (Note 17) 37,243 19,086

Inventories (Note 5) 95,920 40,082

Prepaid expenses and deposits 2,353 1,841

Future income taxes (Note 14) 3,235 3,923

143,379 99,546

Long term receivables 1,329 1,012

Property, plant and equipment (Note 6) 130,847 43,591 Investment in Fundo Wheels AS (Note 13) – 11,502

Employee future benefits (Note 15) 510 3,940 Future income taxes (Note 14) 5,825 5,975

Intangible assets (Note 7) 4,305 4,888

Goodwill 16,827 16,827

$ 303,022 $ 187,281

LIABILITIESCurrent Liabilities Bank indebtedness (Note 8) $ 51,439 $ 21

Accounts payable and accrued liabilities (Note 17) 61,087 31,750

Current portion of deposits (Note 10) 25,568 –

Due to affiliated companies (Notes 9 and 12(b)) 7,661 5,897

Future income taxes (Note 14) – 40

Current portion of long term provisions (Note 11) 2,501 779

148,256 38,487

Other long term liabilities 195 300

Deposits (Note 10) 18,036 –

Employee future benefits (Note 15) 19,080 18,026

Future income taxes (Note 14) 9,284 4,470

Long term provisions (Note 11) 5,966 3,400

200,817 64,683

SHAREHOLDERS’ EQUITYCapital stock (Note 12) 199,688 199,281

Equity component of convertible notes (Note 12(b)) 2,521 2,521

Contributed surplus (Note 12(c)) 5,069 3,243

Deficit (104,205) (81,596)

Accumulated other comprehensive loss (Note 18) (868) (851)

102,205 122,598

$ 303,022 $ 187,281

The accompanying notes are an integral part of these consolidated financial statements.Please see Note 20 regarding Commitments and Contingencies.

On behalf of the Board:

(signed) (signed) Dr. Heinz C. Schimmelbusch Mickey M. YaksichDirector Director

46 Consolidated Statements of Operations and Comprehensive Loss/Consolidated Statements of Deficit

Consolidated Statements of Operations and Comprehensive Loss

Years ended December 31 2008 2007

(in thousands of Canadian dollars, except for loss per share information)

Sales $ 252,563 $ 166,156

Expenses Cost of goods sold (Note 5) 204,540 159,650

Selling and administrative 23,747 16,557

Amortization of property, plant and equipment 6,706 3,146

Amortization of intangible assets 583 550

Interest (Notes 8, 9, 12 and 13) 1,610 2,684

Foreign exchange loss (gain) 4,991 (672)

Income (loss) before the undernoted 10,386 (15,759)

Environmental remediation costs (Notes 3 and 11) (3,908) (78)

Reorganization (costs) recovery (Notes 3 and 11) (2,629) 363

Defined benefit plan curtailment costs (Notes 3 and 15) (4,274) –

Gain on sale of property, plant and equipment (Note 6) 370 26

Equity in the loss of Fundo Wheels AS (Note 13) (3,075) (3,798)

Impairment of capital assets (Note 6) (1,351) –

Impairment of investment in Fundo Wheels AS (Note 13) (12,430) –

Loss before income taxes (16,911) (19,246)

Income tax expense (recovery) (Note 14) Current 89 146

Future 5,609 (1,356)

5,698 (1,210)

Net loss $ (22,609) $ (18,036)

Other comprehensive income (loss), net of income taxes Loss on foreign exchange forwards realized in net loss in the period – 979

Unrealized loss on translating financial statements of self-sustaining foreign operation (17) (493)

Comprehensive loss $ (22,626) $ (17,550)

Loss per common share – basic and diluted $ (0.22) $ (0.20)

Weighted average number of common shares outstanding – basic and diluted (Note 12(b)) 104,126,099 90,079,950

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Deficit



Deficit, beginning of year $ (81,596) $ (63,560)

Net loss (22,609) (18,036)

Deficit, end of year $ (104,205) $ (81,596)


Consolidated Statements of Cash Flows 47

Consolidated Statements of Cash Flows



Cash flows from (used in) operating activities Net loss $ (22,609) $ (18,036)

Adjustments for items not requiring cash Amortization of property, plant and equipment 6,706 3,146

Amortization of intangible assets 583 550

Accretion of convertible debt 681 825

Stock-based compensation (Note 12(c)) 1,978 469

Reorganization costs (recovery) (Note 11) 2,629 (363)

Environmental remediation costs (Note 11) 3,908 78

Defined benefit plan curtailment costs (Notes 3 and 15) 4,274 –

Benefits plan expense (Note 15) 4,362 2,913

Gain on disposal of property, plant and equipment (370) (26)

Unrealized foreign exchange loss 1,591 –

Future income taxes 5,609 (1,226)

Equity in the loss of Fundo Wheels AS (Note 13) 3,075 3,798

Impairment of capital assets (Note 6) 1,351 Impairment of investment in Fundo Wheels AS (Note 13) 12,430 –

Deposits from customers (note 10) 45,534 –

Defined benefit pension plan contributions (Note 15) (4,365) (4,303)

Expenditures charged against provision for reorganization (Note 11) (1,921) (2,004)

Expenditures charged against other long term provisions (Note 11) (436) (228)

Change in non-cash working capital items (Increase) decrease in accounts receivable (18,275) 810

Increase in inventories (55,882) (7,145)

(Increase) decrease in prepaid expenses and deposits (512) 319

Increase in accounts payable and accrued liabilities 12,954 369

Decrease in deposits (Note 10) (1,930) –

1,365 (20,054)

Cash flows from (used in) investing activities Capital expenditures (Note 6) (80,134) (22,611)

Development costs capitalized (Note 7) – (1,176)

Decrease (increase) in short term investments 15,035 (15,151)

Investment in Fundo Wheels AS (Note 13) – (1,838)

Investment in convertible notes (Note 13) (4,020) (4,782)

Increase in long term receivables (199) (939)

Proceeds on disposal of property, plant and equipment 434 772

Other (86) (12)

(68,970) (45,737)

Cash flows from (used in) financing activities Issuance of common shares (Note 12) 255 111,863 Increase (decrease) in bank indebtedness (Note 8) 51,418 (26,222)

Repayment of other liabilities and long term debt (102) (4,403)

Increase in loans from affiliated company (Note 12(b)) 1,083 3,212

52,654 84,450

Net increase (decrease) in cash during the year (14,951) 18,659

Cash and cash equivalents, beginning of year 19,463 804

Cash and cash equivalents, end of year $ 4,512 $ 19,463

Supplemental cash flow information Cash paid during the year: Interest $ 509 $ 1,507

Income taxes $ 58 $ 219


48 Notes to Consolidated Financial Statements

notes to Consolidated Financial Statements(in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2008 and 2007

1. Nature of Operations

Timminco Limited (the “Company” or “Timminco”) is a global supplier of silicon metal for the electronics, chemical and aluminum industries and solar grade silicon for the solar industry. Other businesses include the production and marketing of magnesium extruded and fabricated products and magnesium, calcium and strontium alloys. Timminco’s products are used in a broad range of specialized industrial applications and industries. The Company manages its business along two principal business segments: the production and sale of silicon metal and solar grade silicon products (the “Silicon Group”) and the sale of magnesium extruded and fabricated products and specialty non-ferrous metals (the “Magnesium Group”). AMG Advanced Metallurgical Group N.V. (“AMG”) is the controlling shareholder of the Company (see Note 16).

See note 19 for a discussion of the Company’s liquidity and capital management strategy.

2. Summary of Significant Accounting Policies and Change in Accounting Policy

Basis of consolidation

The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles and include the accounts of Timminco and all of its subsidiaries. Intercompany transactions are eliminated on consolidation.

Investments in companies which the Company is able to significantly influence are accounted for using the equity method. Under the equity method, the original cost of the shares is adjusted for the Company’s share of post-acquisition earnings or losses less dividends.

Use of estimates

The preparation of the Company’s financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial state-ments, and the reported amounts of revenue and expenses for the reporting period. Due to the inherent uncertainty involved with making such estimates, actual results re-ported in future periods could differ from those estimates. Significant estimates include provisions for environmental remediation, goodwill impairment, long-lived asset impairment, economic lives of mining assets and mine closure and site remediation costs, valuation allowance of future income tax assets, valuation of inventories, pension asset returns and employee future benefit discount rates. In arriving at these estimates, management consults with outside experts as it deems necessary.

Foreign currency translation

The Company’s functional currency is the Canadian dollar. Foreign currency transactions are translated into Canadian dollars at rates in effect at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at each year end. Exchange gains or losses are included in net earnings (for the year ended December 31, 2008 – $1,384 loss; 2007 – $508 loss).

The assets and liabilities of the Company’s integrated foreign operations are translated using the temporal method. Under this method, monetary assets and liabilities are translated at year end rates of exchange, non-monetary assets and liabilities are translated at historic rates of exchange and income statement items are translated at average rates prevailing during the year. Exchange gains and losses are of a current nature and are included in income (for the year ended December 31, 2008 – $256 gain; 2007 – $926 loss).

The assets and liabilities of the Company’s self-sustaining foreign operations are translated using the exchange rate in effect at the period end and revenues and expenses are translated at the average rate during the period. Exchange gains and losses on translation of the Company’s net equity investment in these operations are deferred as a separate component of comprehensive income.

Financial instruments

All financial instruments are classified into one of the fol-lowing five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are included in the consolidated balance sheets and are measured at fair value with the exception of loans and receivables, invest-ments held-to-maturity and other financial liabilities, which are measured at amortized cost. Subsequent measurement and recognition of changes in fair value of financial instruments depend on their initial classification. Held-for-trading investments are measured at fair value and all gains and losses are included in net income in the period in which they arise. Available-for-sale financial assets are measured at fair value with revaluation gains and losses included in other comprehensive income until the asset is derecognized or impaired. The Company has classified its cash and cash equivalents, which includes highly liquid marketable securities with less than 90 days to maturity at the time of purchase, as held-for-trading. Short term investments, which includes marketable secu-rities with maturities of three months or more at the time of purchase, are classified as held-for-trading. Receivables are classified as loans and receivables. Foreign forward exchange contracts, included in prepaid expenses and deposits, and convertible notes receivable are classified as held-for-trading. The Company’s investment in Fundo

Notes to Consolidated Financial Statements 49

Wheels AS is accounted for under the equity method. Unrealized gains and losses from the translation into Canadian dollars of this equity investment are presented as a separate component of other comprehensive income (loss). Accumulated other comprehensive income (loss) is presented as a separate component of shareholders’ equity in the Consolidated Balance Sheets. Accounts pay-able and accruals and short-term debt, including interest payable, are classified as other financial liabilities.

Financial instruments such as bonds and debentures convertible at the holder’s option into common shares of the Company take the form of a debt security but include both liability and equity components. On initial recognition of this type of financial instrument, the carrying amount ascribed to the holder’s right of conversion is presented as a separate component of equity on the balance sheet. This equity component is fair valued using the Black-Scholes option pricing model. The fair value of the liability component is determined based on discounted cash flows. The initial accounting values for the liability and equity components are determined by pro rating the pro-ceeds based on the relative fair value of the components. Interest expense on the liability component is determined using the effective interest rate method.

Derivatives

Derivative financial instruments are mainly used to manage the Company’s exposure to foreign exchange market risks. They consist of forward foreign exchange contracts. Derivative financial instruments are measured at fair value, including those derivatives that are embed-ded in financial or non-financial contracts that are not closely related to host contracts.

Derivatives are carried at fair value and are reported as assets where they have a positive fair value and as liabili-ties where they have a negative fair value. Non-financial derivatives are carried at fair value unless exempted from derivative treatment as a normal purchase and sale. The Company has reviewed all significant contractual arrangements and determined there are no material non-financial derivatives that need to be carried at fair value.

Embedded derivatives

Derivatives embedded in other financial instruments or contracts are separated from their host contracts and accounted for as derivatives when their economic characteristics and risks are not closely related to those of the host contract; the terms of the embedded derivative are the same as those of a free standing derivative; and the combined instrument or contract is not measured at fair value, with changes in fair value recognized in interest and other expenses, net. These embedded derivatives are measured at fair value. The Company does not account for embedded foreign currency derivatives in host contracts that are not financial instruments separately from the

host contracts when the currency that is commonly used in contracts to purchase or sell non-financial items in the economic environment is that currency in which the transaction takes place. As at December 31, 2008 and 2007 the Company does not have any outstanding contracts or financial instruments with embedded deriva-tives that require bifurcation.

Determination of fair value

The fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of a financial instrument on initial recognition is the transaction price, which is the fair value of the consider-ation given or received. Subsequent to initial recognition, the fair values of financial instruments that are quoted in active markets are based on bid prices for financial assets held and offer prices for financial liabilities. When independent prices are not available, fair values are determined by using valuation techniques which refer to observable market data. These include comparisons with similar instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants.

Hedges

Designation as a hedge is only allowed if, both at the inception of the hedge and throughout the hedge period, the changes in the fair value of the derivative financial instruments are expected to substantially offset the changes in the fair value of the hedged item attributable to the underlying risk exposure.

The Company formally documents all relationships between the hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. This process includes linking all derivatives to forecasted foreign currency cash flows or to a specific asset or liability. The Company also formally documents and assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative financial instruments that are used in hedging transactions are highly effective in offsetting the changes in the fair value or cash flows of the hedged items. There are three permitted hedging strategies:

• Fair value hedges – The Company has designated cer-tain interest-rate swap and forward foreign exchange contracts as fair value hedges. In a fair value hedge relationship, gains or losses from the measurement of derivative hedging instruments at fair value are re-corded in net income, while gains or losses on hedged items attributable to the hedged risks are accounted for as an adjustment to the carrying amount of hedged items and are recorded in net income.


• Cash flow hedges – The Company has designated forward foreign exchange contracts and interest-rate swap agreements as cash flow hedges. In a cash flow hedge relationship, the portion of gains or losses on the hedging item that is determined to be an effective hedge is recognized in other comprehensive income, while the ineffective portion is recorded in net income. The amounts recognized in other comprehensive income are reclassified in net income when the hedged item affects net income. However, when an anticipated transaction is subsequently recorded as a non-financial asset, the amounts recognized in other comprehensive income are reclassified in the initial carrying amount of the related asset.

• Hedge of net investments in self-sustaining foreign operations – The Company has designated certain cross-currency interest-rate swap agreements, long-term debt and intercompany loans as hedges of its net investments in self-sustaining foreign operations. The portion of gains or losses on the hedging item that is determined to be an effective hedge is recognized in other comprehensive income, while the ineffective por-tion is recorded in net income. The amounts recognized in other comprehensive income are reclassified to net income when corresponding exchange gains or losses arising from the translation of the self-sustaining foreign operations are recorded in net income.

The portion of gains or losses on the hedging item that is determined to be an effective hedge is recorded as an adjustment of the cost or revenue of the related hedged item. Other gains and losses on derivative financial instruments are recorded in other expense (income), or in financing income or financing expense for the interest component of the derivatives or when the derivatives were entered into for interest rate management pur-poses. Hedge accounting is discontinued prospectively when it is determined that the hedging instrument is no longer effective as a hedge, the hedging instrument is terminated or sold, or upon the sale or early termination of the hedged item.

As at December 31, 2008 and 2007, the Company has not designated any hedge transactions.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and short term deposits with maturities of less than 90 days.

Inventories

For the Silicon Group, raw materials, work in process, finished goods and stores inventories are valued at the lower of cost and net realizable value, using a weighted average cost. For work in process and finished goods, costs include all direct costs incurred in production including direct labour and materials, freight, directly

attributable manufacturing overhead costs and property, plant and equipment amortization.

For the Magnesium Group, raw materials, work in process and finished goods inventories are valued at the lower of cost and net realizable value, with cost being determined applying a standard cost methodology that approximates actual cost on a first-in first-out basis. For work in process and finished goods, costs include all direct costs incurred in production including direct labour and materials, freight, directly attributable manufactur-ing overhead costs and property, plant and equipment amortization.

Inventory is written down to net realizable value at the time its carrying value exceeds net realizable value. Reversals of previous write-downs to net realizable value are recognized when there is a subsequent increase in the value of the inventories.

Property, plant and equipment

Property, plant and equipment (“PP&E”) is stated at cost less accumulated amortization. Amortization is provided on a straight-line basis over the estimated useful life of the assets as follows:

Buildings 20 to 25 yearsRoads and sidings 33 yearsPlant equipment 2 to 10 yearsOffice equipment 3 to 7 yearsComputer software 5 yearsMobile equipment 3 yearsLeasehold improvements Over the lease periodMachinery and equipment under capital leases 10 years

No amortization is taken on construction in progress until placed into service.

Deferred charges representing direct costs incurred for major overhauls of furnaces are amortized over periods from 12 to 122 months depending on the estimated useful life of the overhaul.

Intangible assets

Purchased intangible assets, which consist of technology and customer relationships, are recorded at cost less accumulated amortization. Expenditures incurred to develop a new raw material feedstock for solar grade silicon production that meet the criteria for deferral are recorded at cost as deferred development costs.

Intangible assets are amortized on a straight-line basis over the estimated useful lives of the related assets as follows:

• Technology – 10 years• Deferred development costs – 3 years• Customer relationships – 10 years


No amortization is taken on the deferred development costs until the corresponding property, plant and equip-ment was commercially functional.

Goodwill

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values.

Goodwill is not amortized and is tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary.

The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case, the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination, using the fair value of the reporting unit as if it was the purchase price. When the carrying amount of reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.

Impairment of long-lived assets

Long-lived assets, including PP&E subject to amortiza-tion and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recover-able. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The asset and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Research and development expenditures

Research costs, other than capital expenditures, are expensed as incurred. Development costs are expensed as incurred unless they meet the criteria for deferral and

amortization. During 2008, the Company recorded a net research and development expense of $296 (2007 – net recovery of $1,189) through the Governments of Canada and Québec research and development credit programs. The net amount has been recorded in cost of goods sold.

Employee future benefits

The Company accrues its obligations under employee benefit plans and the related costs, net of plan assets, as services are rendered. The costs of the Company’s defined benefit plans are determined periodically by independent actuaries. The benefit plan costs charged to earnings for the year include the cost of benefits provided for services rendered during the year, using actuarial cost methods as permitted by regulatory bodies and management’s best estimates of expected plan invest-ment performance, salary escalation and retirement ages of employees. For the purpose of calculating the actual return on plan assets, those assets are valued at fair value. For the purpose of calculating the expected return on plan assets, a market-related value of assets is used. The Company’s policy is to amortize past service costs and the net actuarial gain or loss in excess of 10% of the greater of the accrued benefit obligations and the market-related value of assets over the expected average remaining service life of the employees.

Deposits

Certain customers advance cash deposits to the Company under the terms of supply agreements to secure future delivery of finished solar grade silicon. The total cash advance is reflected in the consolidated balance sheet as deposits. The amounts are non-interest bearing pre-payments to be applied against accounts receivable resulting from the delivery of solar grade silicon under such contracts. Deposits are recorded on receipt of cash and are drawn down as finished goods are shipped to customers. The liability is extinguished after all product has been delivered or on termination of the contract.

Income taxes

The Company accounts for income taxes using the asset and liability method of accounting for income taxes. Under the asset and liability method, future income tax assets and liabilities are recognized for the future tax conse-quences of temporary differences (differences between the accounting basis and the tax basis of the assets and liabilities) and are measured using the currently enacted, or substantively enacted, tax rates expected to apply when the differences reverse. A valuation allowance is recorded against any future income tax asset if it is more likely than not that the asset will not be realized. Income tax expense or benefit is the sum of the Company’s provision for current income taxes and the difference between the opening and ending balances of the future income tax assets and liabilities.


Asset retirement obligations

The Company records the fair value of a liability for an asset retirement obligation in the year in which it is incurred and when a reasonable estimate of fair value can be made. Changes in the obligation due to the passage of time are recognized in income as an operating expense using the interest method. Changes in the obligation due to changes in estimated cash flows are recognized as an adjustment of the carrying amount of the related long-lived asset that is depreciated over the remaining life of the asset.

Comprehensive income

The Company’s comprehensive income/loss is composed of net income/loss and other comprehensive income/loss (“OCI/L”). OCI/L includes the deferred loss on the foreign exchange forward contracts (see discussion under “Hedges” above) and their reclassification in the statements of operations during the period, as well as the foreign currency gain/loss on the Company’s investment in Fundo Wheels AS.

Equity

Accumulated other comprehensive income (“AOCI”) is included on the consolidated balance sheet as a separate component of shareholders’ equity.

Revenue recognition

The Company recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the related receivable is prob-able, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.

The terms of the Company’s new solar silicon contracts provide certain customers with specified rights of return. Revenue from such contracts is recorded net of an adjustment for estimated returns of scrap material. The Company’s estimate of returns requires assumptions to be made regarding the market price for solar silicon scrap in concert with actual experience of returns received. Should this estimate and these experiences change, the return provision will be adjusted in the period.

Stock-based compensation and other stock-based payments

Shareoptionplans– The Company has share option plans for key employees and directors. All awards are accounted for under the fair value method. Under the fair value method, compensation cost is measured at fair value at the grant date using a Black-Scholes option pricing model. Compensation cost is recognized as selling, general and administrative expense on a straight-line basis over the vesting period with a corresponding increase to contributed surplus. Consideration paid by employees on the exercise of stock options is recorded as share capital.

Deferredshareunitplan– The Company has a deferred share unit plan (“DSU Plan”) for members of the Board of Directors. Under the DSU Plan, each director is required to receive a minimum of 40% of his or her annual com-pensation in the form of notional common shares of the Company called deferred share units (“DSUs”). The issue price of each DSU is equal to the market value of a com-mon share which, for the purposes of the DSU Plan, is based on the weighted average share price at which com-mon shares of the Company trade on the Toronto Stock Exchange during the five trading days prior to the last day of the quarter in which the DSUs are issued. A Director may elect to have up to 100% of his or her compensation in the form of DSUs, provided that such election is made no later than November 30 preceding the calendar year in respect of which such election is to apply.

The DSU account of each Director includes the value of dividends, if any, as if reinvested in additional DSUs. DSUs are only redeemable in cash, upon each director’s retirement or resignation from the Board of Directors. The value of the DSUs, when redeemed in cash, will be equivalent to the market value of the common shares at the time of redemption. The value of the outstanding DSUs as at December 31, 2008, was $271 representing the equivalent of 76,699 common shares of the Company (2007 – $nil). Compensation cost and changes in the value of earned DSUs is recognized as selling, general and administrative expense as the DSUs are earned (for the year ended December 31, 2008 – $271; 2007 – $nil).

Income (loss) per common share

Basic income (loss) per share is computed by dividing net loss by the weighted average shares outstanding during the year. Diluted income (loss) per share is computed similarly to basic income (loss) per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, warrants and convertible notes, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options, warrants and convertible notes were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the year.

The conversion of outstanding stock options, warrants and convertible notes has not been included in the determination of loss per share as to do so would have been anti-dilutive.

ACCOUnTInG CHAnGES

Effective January 1, 2008, the Company has adopted the new recommendations of the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3031, “Inventories”, Section 1535, “Capital Disclosures”, Section 3862, “Financial Instruments – Disclosures”, Section 3863, “Financial Instruments – Presentation” and


Section 1400, “General Standards on Financial Statement Presentation”. The impact that the adoption of these sections has had on the Company’s consolidated financial statements is outlined below.

Inventories

CICA Handbook Section 3031, “Inventories”, was issued in June 2007 and replaces existing Section 3030 of the same title. It provides guidance with respect to the determina-tion of cost and requires inventories to be measured at the lower of cost and net realizable value. Reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories is now required. The cost of the inventories should be based on a first-in, first-out or a weighted average cost formula. Techniques used for the measurement of cost of inven-tories, such as the standard cost method, may be used for convenience if the results approximate cost. The new standard also requires additional disclosures including the accounting policies used in measuring inventories, the carrying amount of the inventories, amounts recognized as an expense during the period, write-downs and the amount of any reversal of any write-downs recognized as a reduction in expenses. The adoption of this section had no material impact on the Company’s consolidated financial statements. The Silicon Group uses a weighted average cost methodology and the Magnesium Group applies a standard cost methodology on a FIFO basis that approximates actual cost.

Capital Disclosures

CICA Handbook Section 1535, “Capital Disclosures”, requires disclosure of an entity’s objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital and whether the entity has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance. Note 19 has been added to the Company’s consolidated financial statements regarding these disclosures.

Financial Instruments – Disclosures

CICA Handbook Section 3862, “Financial Instruments – Disclosures”, increases the disclosures currently re-quired that will enable users to evaluate the significance of financial instruments for an entity’s financial position and performance, including disclosures about fair value. In addition, disclosure is required of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about liquidity risk and market risk. The quantitative disclosures must also include a sensitivity analysis for each type of market risk to which an entity is exposed, showing how net income and other compre-hensive income would have been affected by reasonably possible changes in the relevant risk variables which have been disclosed in Note 17.

Financial Instruments – Presentation

CICA Handbook Section 3863, “Financial Instruments – Presentation”, replaces the existing requirements on presentation of financial instruments which have been carried forward.

General Standards on Financial Statement Presentation

CICA Handbook Section 1400, “General Standards on Financial Statement Presentation”, has been amended to include requirements to assess and disclose an entity’s ability to continue as a going concern. This section had no impact on the Company’s consolidated financial statements.

Transitional Adjustment

Adoption of these standards was on a prospective basis without retroactive restatement of prior periods.

RECEnT ACCOUnTInG PROUnOUnCEMEnTS

Recent accounting pronouncements issued and not yet effective:

Goodwill and Intangible Assets

In February 2008, the CICA approved Handbook Section 3064, “Goodwill and Intangible Assets”, replacing previous guidance. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to initial recognition. Standards concerning goodwill are unchanged. This standard is effective for interim and annual financial statements beginning on or after October 1, 2008. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements. In conjunction with this new standard, Handbook Section 1000, “Financial Statement Concepts”, has been amended to eliminate references that might be interpreted by some as permit-ting the recognition of assets that would not otherwise meet the definition of an asset or the recognition criteria.

Business Combinations

In January 2009, the CICA approved Handbook Section 1582, “Business Combinations”, replacing existing Section 1581, by the same name. It establishes standards for the accounting for a business combination. It provides the Canadian generally accepted accounting principles equivalent to International Financial Reporting Standard IFRS 3 Business Combinations (January 2008). The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. The CICA recommends that entities plan-ning business combinations in the fiscal year beginning on or after January 1, 2010 adopt these new standards early to avoid restatement on transition to IFRS in 2011. Early adoption of the new standard is permitted.

Consolidated Financial Statements

In January 2009, the CICA approved Handbook Section 1601, “Consolidated Financial Statements” and Handbook Section 1602, “Non-controlling Interests” replacing existing Section 1600, “Consolidated Financial Statements”. This Section establishes standards for the preparation of consolidated financial statements. The Sec-tion applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. The CICA recommends that entities plan-ning business combinations in the fiscal year beginning on or after January 1, 2010 adopt these new standards early to avoid restatement on transition to IFRS in 2011. Early adoption of the new standard is permitted.

non-controlling Interests

In January 2009, the CICA approved Handbook Sec-tion 1602, “Non-controlling Interests”. It establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of International Financial Reporting Standard IAS 27 Consolidated and Separate Financial Statements (January 2008). The Section applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. The CICA recommends that entities planning busi-ness combinations in the fiscal year beginning on or after January 1, 2010 adopt these new standards early to avoid restatement on transition to IFRS in 2011. Early adoption of the new standard is permitted.

Credit Risk and the Fair Value of Financial Assets and Financial Liabilities

In January 2009, the CICA Emerging Issues Committee issued EIC-173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. It requires an entity to consider its own credit risk and the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments. This EIC is applicable retrospectively without restatements of prior periods to all financial assets and liabilities measured at fair value in interim and annual financial statements for periods ending on or after January 20, 2009. Retrospective application with restate-ment of prior periods is permitted but not required. The application of incorporating credit risk into the fair value may result in entities re-measuring the financial assets and financial liabilities as at the beginning of the period of adoption with any resulting difference recorded in retained earnings except when derivatives in a fair value hedging relationship are accounted for by the short cut method (the difference is adjusted to the hedged item) and for derivatives in a cash flow hedging relationship (the difference is recorded in accumulated other compre-hensive income).

3. Reorganization of Magnesium Operations

During 2008 the Company decided to further reorganize its Magnesium Group and on June 6, 2008 announced the closure of its Haley, Ontario manufacturing facility. The Haley facility manufactured cast magnesium billet used in Timminco’s magnesium extrusion operations in Aurora, Colorado and also produced specialty magnesium granules and turnings for third party customers. Cast magnesium billets will now be out-sourced from other manufacturers and specialty magnesium granules and turnings will be produced at Timminco’s Nuevo Laredo, Mexico facility.

The closure of the Haley facility resulted in reorganization costs in 2008 of $11,939 before income taxes. The charge includes severance costs of $2,629 (Note 11), pension curtailment costs of $4,274, accelerated mine closure costs, other site closure and remediation costs of $3,908 and asset write down costs of $1,128, including spare parts for $44.

In addition, a pension settlement charge relating to unamortized investment losses currently estimated at $7,621 as at December 31, 2008 will be expensed in the future when the pension obligation is actually settled in accordance with CICA Section 3461, “Employee Future Benefits”.

4. Short Term Investments

The Company has invested excess cash in Government of Canada treasury bills (“T-bills”) with maturities from 1 to 5 months, yielding 1.78% (December 31, 2007 – 3.75% to 4.24%). As at December 31, 2008, the Company had $116 invested in T-bills, of which $nil was classified as cash and cash equivalents (as at December 31, 2007, the Company had $29,342 invested in T-bills, of which $14,191 was classified as cash and cash equivalents).

5. Inventories

2008 2007

Raw materials $ 49,359 $ 13,071

Work in process 7,678 3,317

Finished goods 34,900 21,026

Stores inventory 3,983 2,668

$ 95,920 $ 40,082

Stores inventory includes minor spare parts and consum-ables for the Company’s plant and equipment.

Inventory is carried at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs necessary to make the sale.

Cost of raw materials includes costs in bringing each product to its present location and condition. Cost of


finished goods and work in process includes cost of direct materials, labour and a proportion of manufacturing overheads based on normal operating capacity.

6. Property, Plant & Equipment

2008 2007

Accumulated Accumulated Cost Amortization Net Cost Amortization Net

Land $ 3,077 $ – $ 3,077 $ 3,330 $ – $ 3,330

Buildings 54,212 19,315 34,897 21,249 18,911 2,338

Equipment 164,872 76,984 87,888 97,198 72,238 24,960

Deferred charges 7,653 3,217 4,436 5,941 2,060 3,881

Leased equipment 521 329 192 521 290 231

Construction in progress 357 – 357 8,851 – 8,851

$ 230,692 $ 99,845 $ 130,847 $ 137,090 $ 93,499 $ 43,591

During the year ended December 31, 2008, cost of goods sold included $198,718 of inventory and $5,822 of distribution costs (for the year ended December 31, 2007 – $154,555 of inventory and $5,095 of distribution costs).

During the year, the Company acquired property, plant and equipment of $95,160 (for the year ended December 31, 2007 – $29,189) of which $21,604 was in accounts payable at December 31, 2008 (December 31, 2007 – $6,578).

During the year, the Company had an inactive property of a former operation appraised by a third party. The fair value was assessed as less than the carrying value. Accordingly, the carrying value has been reduced to the assessed fair value resulting in an impairment charge

of $223 (for the year ended December 31, 2007 – $nil). Additionally, during the year ended December 31, 2008, the Company impaired the carrying value of the Haley facility buildings and equipment by $1,084 (for the year ended December 31, 2007 – $nil) (see Note 3). Also during the year, the Company sold inactive property resulting in a gain in excess of carrying value of $370 (for the year ended December 31, 2007 – $26).


7. Intangible Assets

2008 2007

Accumulated Accumulated Cost Amortization Net Cost Amortization Net

Customer relationships $ 1,500 $ 638 $ 862 $ 1,500 $ 488 $ 1,012

Deferred development costs 1,176 33 1,143 1,176 – 1,176

Technology 4,000 1,700 2,300 4,000 1300 2,700

$ 6,676 $ 2,371 $ 4,305 $ 6,676 $ 1,788 $ 4,888

8. Bank Indebtedness

2008 2007

Bank indebtedness $ 51,439 $ 21

The Credit Agreement currently includes a financial covenant requiring the Company to maintain a minimum EBITDA level on a rolling 12-month basis. The Company is currently in compliance with this covenant as of December 31, 2008. As a result, the Company presently is able to utilize the availability under the Credit Agree-ment. Availability is equal to (i) the lesser of the borrowing base and the revolving credit commitments under the Credit Agreement, which was US$49,983 as of December 31, 2008, minus (ii) the amount borrowed under the Revolver, which was US$41,833 as of December 31, 2008. The Company is required to maintain a minimum availability of at least US$2,000 at all times. Accordingly,

At December 31, 2008, total debt denominated in U.S. dollars amounted to US$41,833 (2007 – US$21).

The Company has a Credit Agreement dated April 15, 2005 (as amended, the “Credit Agreement”) with Bank of America, N.A. (the “Bank”). The Credit Agreement provides for maximum credit lines of US$50,000 (December 31, 2007 – US$32,800), limited by a borrowing base, in a revolving loan (the “Revolver”). The Revolver bears interest at the prime rate plus bank margin of 1.25% (December 31, 2007 – prime plus 1.25%) and does not require minimum repayments. The Credit Agreement expires on March 31, 2010. The Revolver is secured by the assets of the Company.

9. Due to Affiliated Companies

2008 2007

Convertible loans payable to ALD International LLC $ 7,392 $ 5,897

Due to ALD Vacuum Technologies GmbH (Note 16) 269 –

$ 7,661 $ 5,897

any remaining balance on the deposit is to be repaid to the customer within a specified time period. If the remaining amount is not repaid within the specified time period it becomes interest bearing at rates specified in the contract. The Company is currently negotiating a contract extension with one customer for periods beyond December 31, 2009. If this contract is not extended, up to $17,896 of the deposits will be repayable in the first quar-ter of 2010. The Company expects to fully utilize all other pre-payment amounts against future sales and deliveries of solar grade silicon. For the year ended December 31, 2008, $1,930 has been drawn down through shipments of finished products to customers.

The Company has convertible loans due to ALD Interna-tional LLC (“ALD International”) (see Note 12(b) and Note 16). The loans bear interest at U.S. prime plus 1% and are subordinate to bank debt.

10. Deposits

During the year ended December 31, 2008, the Company received deposits from customers of $45,534 under the terms of solar grade silicon supply contracts. The amounts are non-interest bearing pre-payments to be applied against future deliveries of solar grade silicon at pre-determined rates specified in the contracts. In the event of an early termination or completion of a supply contract without full utilization of the deposit amount,

11. Long Term Provisions

Long term provisions are comprised as follows:

2008 2007

Provision for reorganization $ 2,047 $ 1,339

Provision for environmental remediation 5,880 2,408

Other long term provisions 540 432

8,467 4,179

Less current portion 2,501 779

$ 5,966 $ 3,400

Provision for reorganization

2008 2007

Balance, beginning of the year $ 1,339 $ 4,630

Costs recognized 2,629 (363)

Costs transferred to environmental remediation accrual – (1,037)

Costs reclassified from accrued liabilities – 113

Amounts charged against provision (1,921) (2,004)

Balance, end of the year $ 2,047 $ 1,339


from June 30, 2008. Based on current projections, the Company expects to comply with its financial covenants throughout 2009. However, should there be any business developments that have a material adverse effect, this could enable the lender to declare an event of default under the terms and conditions of the Credit Agreement.

Interest expense in 2008 includes $nil of interest on long term debt ($293 in 2007).

the Company is able to borrow up to US$6,150 under the Revolver during the first quarter of 2009, assuming no change in the borrowing base during such quarter. The Credit Agreement previously included other financial covenants, including minimum fixed charge coverage ratios. These covenants have been revised or waived from time to time. The covenant relating to the Company’s fixed charge coverage ratio ceased to apply as of and

On June 6, 2008 the Company announced the closure of its Haley, Ontario manufacturing facility. The Haley facility manufactured cast magnesium billet used in Timminco’s magnesium extrusion operations in Aurora, Colorado and also produced specialty magnesium granules and turnings for third party customers. The closure resulted in the elimination of all positions. The Company accrued costs in respect of the closure to cover severance costs and post-employment obligations. The completion date of the Haley severance payments will be in 2010. Various post-employment benefits will continue until 2021 when the last of the covered employees attains the age of 65 years. Reorganization costs, including accretion, are disclosed separately in the consolidated statement of operations.

The provision for reorganization relates to the closure of the Haley facility in June 2008 (see Note 3), to amounts accrued related to the closure of certain Haley depart-ments in November 2006, certain accrued retirement obligations for Haley and a retention agreement with a former President and Chief Operating Officer. The future period costs of these obligations have been discounted at 9%. The costs transferred to environmental remediation during the year ended December 31, 2007 results in all environmental remediation costs being captured within one grouping.

Provision for environmental remediation

2008 2007

Balance, beginning of the year $ 2,408 $ 1,338

Costs recognized 3,699 (26)

Costs transferred from reorganization – 1,037

Accretion 209 104

Amounts charged against provision (436) (45)

Balance, end of the year $ 5,880 $ 2,408

Other long term provisions

Other long term provisions include an accrual for sales and use taxes as well as a long term deposit.

The costs recognized during the year ended December 31, 2008 relate to the closure of the Haley facility (see Note 3). Environmental remediation costs, including accretion, are disclosed separately in the consolidated statement of operations. The Company’s environmental liabilities are discounted using a rate of 9%.


Long term provision expenditures

Payments over the next five years and thereafter of long term provisions are as follows:

2009 $ 2,644

2010 2,148

2011 875

2012 557

2013 408

Thereafter 5,184

$ 11,816

common shares with respect to the payment of dividends and the return of capital.

Issued: none

(b) Authorized: unlimited number of common shares. Holders of common shares are entitled to one vote for each share.

12. Capital Stock

(a) Authorized: unlimited number of Class A and Class B preference shares, issuable in series and having such rights, privileges, restrictions and conditions as may be approved by the Board of Directors of the Company. The Company’s Class A and Class B preference shares rank in priority to the Company’s

Issued capital is:

2008 2007

Shares (000s) Amount Shares (000s) Amount

Balance, beginning of the period 103,993 $ 199,281 75,133 $ 84,191

Common share offering – – 21,650 111,256

Conversion of notes (Note 16) – – 6,515 2,810

Options exercised 421 407 695 1,024

Balance, end of the period 104,414 $ 199,688 103,993 $ 199,281

life of the loan coincides with the maturity date of the credit agreement with Bank of America, N.A. (namely March 31, 2010), to which the loan is subordinate.

On April 30, 2007, the Company completed a public offering of 10,000,000 common shares at a price of $2.60 per common share for gross proceeds of $26,000. The offering was sold on a bought deal basis. The underwriters also exercised their over-allotment option in full and purchased an additional 1,500,000 common shares at a price of $2.60 per common share for gross proceeds of $3,900. The total gross proceeds of the offering was $29,900.

On June 21, 2007, AMG entered into an option agree-ment with ALD International relating to common shares of the Company (the “AMG Call Option Agree-ment”) (see Note 16). Pursuant to this agreement, each time ALD International exercises in whole or in part its conversion right under the August 2006 Note or the March 2007 Note, AMG has the right, and must use its reasonable endeavours, to exercise its option requiring ALD International to instruct the Company to issue the common shares issuable on the conver-sion directly to AMG. On any exercise of this option AMG must pay to ALD International a sum of cash equal to the closing market price for the common shares of the Company over which it is exercising the option.

On July 23, 2007, the holder converted US$350 of the principal amount of the August 2006 Note into 913,500 common shares of the Company at a conversion rate of Cdn$0.40 per common share. The Canadian dollar equivalent of the United States dollars converted was $365. Such shares were issued directly to AMG pursuant to the AMG Call Option Agreement.

On September 27, 2007, the Company completed a public offering of 4,360,291 common shares at a price of $8.50 per common share for gross proceeds of $37,062. The public offering was sold on a bought deal basis. The underwriters also exercised their over-allotment option in full and purchased an additional 654,043 common shares at a price of $8.50 per common share for gross proceeds of $5,559. The total gross proceeds of the offering was $42,621. Concurrently with the public offering, the

On March 7, 2006, the Company borrowed US$2,000 from ALD International. On April 26, 2007, the entire principal amount outstanding under this loan was converted into 5,601,000 common shares of the Company. All such shares were issued directly to AMG, pursuant to ALD International’s directions. The Canadian dollar equivalent of the United States dollars comprised in the principal amount of the loan was $2,240.

On August 31, 2006, the Company issued a convertible promissory note in exchange for US$3,000, which is held by ALD International (the “August 2006 Note”) (see Note 16). The loan may be settled, at the lender’s option, in cash or shares at $0.40 per common share, or a combination of cash and shares. The lender’s option to settle the loan in shares has been fair valued separately from the loan using the Black-Scholes option pricing model. Accordingly, the transaction was recorded as $2.4 million as due to an affiliate in cur-rent liabilities and $0.9 million as equity component of convertible note in shareholders’ equity. The following assumptions were used to calculate the fair value of the equity component: expected dividend yield of 0%, expected stock volatility of 63%, risk-free rate of 4.0% and expected life of 3.6 years. The expected life of the loan coincides with the maturity date of the credit agreement with Bank of America, N.A. (namely March 31, 2010), to which the loan is subordinate.

On March 1, 2007, the Company borrowed $4,500 from ALD International (the “March 2007 Note”) (see Note 16). Under the terms of the loan, the lender has the option to convert the whole or any part of the outstanding principal amount at any time into com-mon shares of the Company at a conversion rate of $0.42 per common share. The lender’s option to settle the loan in shares has been fair valued separately from the loan using the Black-Scholes option pricing model. Accordingly, the transaction was recorded as $2.8 million as due to an affiliate in current liabilities and $1.7 million as an equity component of the convertible note in shareholders’ equity. The follow-ing assumptions were used to calculate the fair value of the equity component: expected dividend yield of 0%, expected stock volatility of 65%, risk-free rate of 3.96% and expected life of 3.2 years. The expected


Company completed a private placement to AMG of 5,136,140 common shares at a price of $8.50 per common share for gross proceeds of $43,657.

Subsequent to year end, the Company issued 7,042,000 common shares in a private placement (see Note 23).

(c) Options have been granted to certain key employees and directors to purchase common shares of the Company subject to various vesting requirements. During 2004, the Company established a Share Option Plan (the “2004 Plan”) which supersedes the prior share option plan for directors and key employ-ees. The 2004 Plan was last amended and restated as of April 28, 2008. Under the 2004 Plan, options are granted at the discretion of the Board of Directors or its compensation committee, at an exercise price no less than the closing price of the common shares on the Toronto Stock Exchange on the last trading day preceding the day of grant. The options vest equally over a four year period, with the initial 25% vesting after the first anniversary of the grant date, and expire seven years after the grant date.

During the year ended December 31, 2007, options to purchase 1,250,000 common shares of the Company were granted under the 2004 Plan. The fair values of the grants, determined using the Black-Scholes option-pricing model at the time of the respective grants, were $0.19 to $10.27 per common share subject to the option. The following assumptions were used to calculate the fair values: expected dividend yield of 0%, expected stock volatility of 76.6% to 328.9%, risk-free interest rate of 4.1% to 4.3% and expected option lives of seven years. The share option expense is being amortized, according to the vesting schedule, over a four year period from the date of the grants.

During the year ended December 31, 2008, options to purchase 940,000 common shares of the Company were granted under the 2004 Plan. The fair values of the grants, determined using the Black-Scholes option-pricing model at the time of the grants, were $10.05 to $13.27 per option. The following assump-tions were used to calculate the fair value: expected dividend yield of 0%, expected stock volatility of

105.4% to 114.6%, risk-free interest rate of 3.19% to 4.05% and expected option lives of seven years. The share option expense is being amortized, according to the vesting schedule, over a four year period from the date of the grants.

On November 11, 2008, the Company established a new share option plan (the “2008 Plan”) as part of certain long-term incentive compensation arrange-ments for key employees in the Silicon Group. The options are granted with an exercise price at the fair market value of the Company’s common shares, have a nine-year vesting schedule with 50% becoming exercisable after the fifth anniversary of the grant date, and the remaining 50% vest equally on the sixth through ninth anniversary dates. The options expire ten years after the grant date. The 2008 Plan will be submitted for approval by the Company’s share-holders at the next annual general meeting, and is also subject to Toronto Stock Exchange approval.

Options to purchase 7,000,000 common shares of the Company were granted under the 2008 Plan also on November 11, 2008. The fair values of the grants, determined using the Black-Scholes option-pricing model at the time of the respective grants, was $7.20 per common share subject to the option. The following assumptions were used to calculate the fair value: expected dividend yield of 0%, expected stock volatility of 114.6%, risk-free interest rate of 3.19% and expected option life of 10 years. The share option expense is being amortized on a straight-line basis over a nine year period. These options are subject to approval of the 2008 Plan by the Company’s share-holders and the Toronto Stock Exchange.

During the year ended December 31, 2008, the Company recorded stock-based compensation ex pense amounting to $1,978 (2007 – $469) which is included in selling and administrative expenses in the statement of operations.

A summary of the status of the options under both the 2004 Plan and the 2008 Plan as of December 31, 2008 and 2007, and changes during the years ending on those dates is presented below:


2008 2007

Shares Weighted Average Shares Weighted Average (000’s) Exercise Price (000’s) Exercise Price

Outstanding, beginning of year 4,130 $ 0.72 3,844 $ 0.71

Granted 7,940 $ 7.97 1,250 $ 0.79

Exercised (421) $ 0.61 (695) $ 0.87

Forfeited (300) $ 2.91 (269) $ 0.57

Outstanding, end of year 11,349 $ 5.74 4,130 $ 0.72

is 10,000,000, representing 16.6% of the issued and outstanding common shares of the Company.

As of December 31, 2008, the maximum number of common shares that may be reserved for options granted under the 2004 Plan is 7,332,175 and under the 2008 Plan

Contributed surplus

2008 2007

Balance, beginning of year $ 3,243 $ 3,192

Stock-based compensation 1,978 469

Exercise of options (152) (418)

Balance, end of year $ 5,069 $ 3,243

13. Investment in Fundo Wheels AS

2008 2007

Equity Balance, beginning of year $ 6,720 $ 9,173

Equity in loss for the year (3,075) (3,798)

Investment in equity – 1,823

Conversion of debt to equity in the year 5,084 –

Currency translation loss (17) (478)

Balance, end of year 8,712 6,720

Convertible note receivable

Balance, beginning of year 4,782 –

Investment during the year 3,850 4,745

Interest accrued during the year 268 52

Currency revaluation loss (99) (15)

Conversion of debt to equity in the year (5,084) –

Balance, end of year 3,718 4,782

Total investment in Fundo Wheels AS before impairment charge 12,430 11,502

Impairment charge during the year (12,430) –

Total Fundo Wheels AS investment, end of year $ – $ 11,502

Fundo Wheels AS (“Fundo”), a Norwegian company with operations located in Høyanger, Norway, is an original equipment manufacturer of cast aluminum wheels for high-end European car manufacturers. As at December 31, 2008, the Company owns approximately 45.3% of Fundo. The Company accounts for the Fundo investment under the equity method. The acquisition of the equity interest did not create any purchase discrepancy.

The downturn in the automotive industry has significantly decreased overall demand for standard wheels manufac-tured and sold by Fundo. Fundo is experiencing liquidity challenges and conditions could deteriorate to the point of giving rise to non-compliance with its bank covenants.

The Company has determined that it will no longer fund Fundo’s working capital deficits. Fundo’s remaining shareholders did not participate in the funding advances to Fundo on February 12 and July 11, 2008. Fundo’s management has engaged the services of financial advisors to secure additional capital and liquidity. There is no assurance that sufficient investment can be sourced to secure the long-term viability of Fundo. Accordingly, during the year ended December 31, 2008, the Company’s investment in Fundo, consisting of equity and loans, has been written down to $nil, which is management’s best estimate of its fair value.


At December 31, 2008, the number of common shares subject to options outstanding and exercisable was as follows:

Price Range Weighted Weighted Weighted Outstanding Average Average Exercisable Average Options Exercise Remaining Options Exercisable (000’s) Price Life (000’s) Price

$0.29 to $0.40 1,500 $ 0.39 4.96 475 $ 0.38

$0.41 to $0.96 1,909 $ 0.79 2.97 1,687 $ 0.82

$7.64 to $15.27 7,940 $ 7.94 9.48 12 $ 5.70

11,349 $ 5.74 7.79 2,174 $ 0.78

2008 2007

Loss before income taxes $ (16,911) $ (19,246)

Computed ‘expected’ tax expense (recovery) (5,326) (6,567)

Increase (reduction) in income taxes resulting from: Income taxed at different rates in other jurisdictions (353) 154

Adjustment to future tax assets and liabilities for changes in tax rates 304 3,662

Exchange rate effects (914) 550

Change in valuation allowance 10,689 (1,213)

Expired investment tax credits and loss carry forwards 794 339

Permanent and other differences 504 1,865

Income taxes $ 5,698 $ (1,210)


Subsequent to year end on January 12, 2009, Fundo filed for bankruptcy protection. On February 13, 2009, the Norwegian courts instructed the receiver to liquidate Fundo’s assets. The Company does not anticipate a recovery of any of its investment.

During the year ended December 31, 2007, the Company and the Community of Høyanger, the controlling share-holder, acquired shares of Fundo from treasury. The acquisition of the interest did not create any purchase discrepancy.

During the years ended December 31, 2008 and 2007 the Company advanced cash to assist Fundo with its working capital requirements. The loans are due on prescribed dates in 2009 and 2010, bear interest at three month NIBOR plus 4% and in certain circumstances are repaid in quarterly instalments commencing in 2009. The loans are secured by a charge against Fundo’s land, buildings and equipment and are subordinate to Fundo’s bank debt. The loans are convertible into shares of Fundo at the Company’s option at Fundo’s book value on the date the loans were granted or on the date of conversion at the Company’s option. The conversion of the loans is restricted such that the Company cannot exceed owner-ship of 49.9% of Fundo through the conversion of this loan. During the year ended December 31, 2008, the Company

converted certain of the loan balances into equity in Fundo. The conversion of debt into equity did not create any purchase discrepancy.

The equity method of accounting requires recognition of an impairment loss where there has been an other-than-temporary impairment. The determination of an other-than-temporary impairment, if any, requires the Company to assess the fair value of its investment. Since a quoted market price is not available, fair value is determined using an appropriate valuation methodology after considering the history and nature of the business, its operating results and financial conditions, and the general economic, industry and market conditions. The process of valuing an investment for which no published market exists, and the assessment of an other-than-temporary impairment, if any, is subject to inherent uncertainties and requires the use of estimates and significant judgment. Actual impairment, if any, could differ from management’s estimate.

14. Income Taxes

(a) Income taxes (recovery) attributable to loss before tax differs from the amounts computed by applying the combined Canadian federal and provincial income tax rates of 31.5% (34.1% in 2007) to the pre-tax loss as a result of the following:

(b) The tax effects of temporary differences that give rise to significant portions of the future tax assets and future tax liabilities are presented below:

(000’s) 2008 2007

Future tax assets: Inventories $ 1,104 $ 373

Property, plant and equipment 9,203 9,213

Deferred financing costs 559 103

Share issue costs 798 1,101

Accruals and long term provisions 3,330 2,275

Employee future benefits 5,265 5,015

Tax loss carry forwards (Note 12(c)) 25,725 21,558

Investment tax credit carry forwards expiring between 2008 and 2016 853 1,489

Research and development expenditures 111 111

Impaired investments 3,033 –

Impaired land 63 –

Ontario/Federal tax harmonization credit 274 –

Foreign exchange losses 291 –

Foreign exchange contract losses 452 –

Alternative and corporate minimum tax carry forwards 140 112

51,201 41,350

Less valuation allowance 42,141 31,452

9,060 9,898

Future income tax liabilities: Property, plant and equipment 7,328 1,508

Employee future benefits 138 1,064

Investment tax credit carry forwards 608 514

Intangible assets 903 1,068

Deferred development charges 307 316

Foreign exchange contract gains – 40

9,284 4,510

Net future income tax asset (liability) $ (224) $ 5,388

Approximately $4,362 of the United States tax loss carry forwards above, are subject to restrictions that limit the amount that can be utilized in any one taxation year.

15. Employee Future Benefits

The Company provides pension or retirement benefits to substantially all of its employees in Canada and the United States through Group RRSPs, 401(K), a defined contribution plan and defined benefit plans, based on length of service and remuneration. Contributions to the defined contribution plan for the year end December 31, 2008 were $59 (for the year ended December 31, 2007 – $83).

The Company sponsors a contributory defined benefit pension plan and other retirement benefits for certain of its eligible employees. Pension benefits vest immediately and are based on years of service and average final earnings. Other retirement benefits consist of a group insurance plan covering plan members for life insurance, disability, hospital, medical and dental benefits. At retirement, employees maintain a reduced life insurance coverage and certain hospital and medical benefits. The

The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences and loss carry forwards become deduct-ible. During 2008 the future income tax asset was increased by operating and non-operating losses generated in entities not generating taxable income. Accordingly, the valuation allowance was increased by a corresponding amount as there is currently no expectation of generating sufficient taxable income in these legal entities. During 2007 the valuation allowance was increased by $1,329 for future income tax assets relating to share issue costs charged directly against equity. Also during 2007, a valuation allowance of $1,481 set up in the September 2004 acquisition of Bécancour Silicon Inc. was reversed and credited against goodwill.

(c) At December 31, 2008, the Company has the follow-ing gross tax loss carry forwards available to reduce future years’ income in:

Canada expiring between 2013 and 2028 $ 64,195

United States (Federal) expiring between 2009 and 2028 $ 15,700


other retirement coverage provided by the plan is not funded. The net cost of other retirement benefits includes the current service cost, the interest cost and the amortization of experience losses.

The most recent Report on the Actuarial Valuation for Funding Purposes for the Silicon Group Plan is dated as of December 31, 2007 and as of January 1, 2007 for the Magnesium Group Plan. The Company is scheduled to

have the next detailed actuarial valuation as at July 31, 2008 for the Magnesium Group and December 31, 2010 for the Silicon Group. The Magnesium Group valuation will be performed during 2009, while the Silicon Group valuation will be performed during 2011.

Information about the Company’s defined benefit plans, in aggregate, is as follows:

2008 2007 Other Post Other Post Pension Plans Retirement Plan Pension Plans Retirement Plan

Accrued benefit obligation: Balance, beginning of year $ 58,739 $ 15,017 $ 61,311 $ 13,722

Current service cost, net of plan expenses 1,130 1,076 1,328 346

Employee contribution 361 – 388 –

Plan curtailment 3,593 – – –

Interest cost 3,224 1,206 3,119 774

Net actuarial (gain) loss (7,640) 41 (2,758) 377

Benefits paid (3,585) (447) (4,649) (202)

Balance, end of year $ 55,822 $ 16,893 $ 58,739 $ 15,017

Plan assets: Fair value, beginning of year $ 45,906 $ – $ 46,633 $ –

Actual contributions by the Company 3,919 447 4,101 202

Actual contributions by employees 361 – 388 –

Actual return (loss) on plan assets (6,986) – (492) –

Expected plan expenses (135) – (75) –

Benefits paid (3,585) (447) (4,649) (202)

Fair value, end of year $ 39,480 $ – $ 45,906 $ –

Funded status – deficit $ (16,342) $ (16,893) $ (12,833) $ (15,017)

Unamortized transitional asset (252) – (289) –

Unamortized past service cost (267) 32 626 54

Unamortized net actuarial loss 12,281 2,871 10,149 3,224

Employee future benefits $ (4,580) $ (13,990) $ (2,347) $ (11,739)

The significant actuarial assumptions adopted in measuring the Company’s accrued obligations and benefit costs are as follows (weighted-average assumptions as of December 31, 2008 and December 31, 2007):


Accrued benefit obligation as of December 31: Discount rate 4.31-7.5% 7.5% 5.5-5.75% 5.5%

Rate of compensation increase 2.8-3.0% n/a 2.5% n/a

Benefit costs for years ended December 31:Discount rate 5.5-5.75% 5.5% 5-5.25% 5.25%

Expected long-term rate of return on plan assets 7.0% n/a 6.75-7.0% n/a

Rate of compensation increase 2.5% n/a 2.5% n/a


For the curtailed pension plan, the rate of compensation increase for the year ended December 31, 2008 is not applicable.

2008 2007

Assumed other post retirement benefit obligation trend rates as of December 31: Initial weighted average health care trend rate 8.30% 7.57%

Ultimate weighted average health care trend rate 4.70% 4.51%

Year ultimate rate reached 2014-15 2014-15

Assumed other post retirement benefit costs trend rates for years ended December 31: Initial weighted average health care trend rate 8.70% 5.89%

Ultimate weighted average health care trend rate 4.70% 4.30%

Year ultimate rate reached 2014-15 2010-11

The following table reflects the effect of a change in the assumed health care cost trend rates on the aggregate of the service and interest cost components of the benefit cost for the period, and on the accrued benefit obligation at the end of the period:

Aggregate of service cost and Accrued Benefit interest cost for Obligation as at the period ending December 31, 2008 December 31, 2008

Valuation trend + 1% $ 19,355 $ 2,830

Valuation trend - 1 % $ 14,896 $ 1,867

The Company’s net benefit plan expense is as follows:


Current service cost $ 1,265 $ 1,076 $ 1,403 $ 346

Past service cost arising from current period plan initiation / amendment – –

Interest cost on accrued benefit obligation 3,225 1,206 3,119 774

Actual return on plan assets 6,986 – 492 –

Curtailment loss 4,274 – 277 –

Actuarial (gain) loss during current period on accrued benefit obligation (7,640) 41 (2,758) 377

8,110 2,323 2,533 1,497

Adjustments to recognize long-term nature of future employee benefit costs: Difference between actual and expected return on plan assets (10,153) – (3,722) –

Difference between recognized and actual actuarial loss 7,760 338 2,770 (289)

Difference between amortization of past service costs and actual plan amendments 473 38 148 12

Amortization of transitional asset (36) – (36) –

Net benefits plan expense $ 6,154 $ 2,699 $ 1,693 $ 1,220

Plan assets by asset category

2008 2007

Pension plan Equity 45% 54%

Debt 55% 46%

100% 100%

With respect to other retirement benefits, there is no requirement to fund the deficit. As such, cash disbursements in a given year are limited to benefits paid to retirees in the year.


16. Related Party Transactions

In March 2007, Safeguard reorganized its indirect hold-ings in the Company by contributing 40,909,093 common shares of the Company to AMG and increasing its owner-ship interest in AMG to 89.7%. In June 2007, Safeguard’s ownership interest in AMG increased to 91.5%. In July 2007, Safeguard sold a portion of its shares of AMG and retained 40.2% of the outstanding share capital of AMG. In October 2007, Safeguard sold a further portion of its shares of AMG, such that Safeguard’s ownership interest in AMG reduced to 26.6%. In addition, AMG has entered into a call option agreement with ALD International (the “AMG Call Option Agreement”), pursuant to which AMG may, at its option, require ALD International to instruct the Company to issue to AMG any common shares issuable upon the conversion of certain convertible promissory notes issued by the Company, as described below under “Convertible Notes”. The Company was not a party to any of the foregoing transactions among AMG, Safeguard or ALD International. However, the Company did enter into the transactions described below with one or more of these parties.

On December 13, 2006, the Company borrowed Euro 700 from ALD International. The loan bore interest at 11%, was due December 31, 2007 and the proceeds were used to invest in shares of Fundo. On May 3, 2007, the Company repaid this loan and accrued interest.

On March 1, 2007, ALD International loaned $4,500 to the Company to expedite product development and to fund its further investment in Fundo. The loan, which is in the form of a convertible promissory note and is secured against certain assets of the Company, is repayable on demand, and bears interest at the U.S. prime rate plus 1%. The loan and related security are subordinate to the indebtedness and the security provided by the Company under the credit agreement with Bank of America, N.A. Under the terms of the loan, ALD International has the option to convert the whole or any part of the outstanding principal amount at any time into common shares of the Company at a conver-sion rate of $0.42 per common share.

On April 26, 2007, ALD International exercised its right to convert the entire principal amount outstanding under the US$2,000 convertible promissory note issued March 7, 2006 into 5,601,000 common shares of the Company at a conversion rate of Cdn$0.40 per common share. The Canadian dollar equivalent of the United States dollars comprised in the principal amount of the note was $2.24 million. All such shares were issued directly to AMG, pursuant to ALD International’s directions.

On July 23, 2007, the holder converted US$350 of the principal amount outstanding under the US$3,000 convertible promissory note issued August 31, 2006 into 913,500 common shares of the Company at a conversion

rate of Cdn$0.40 per common share. The Canadian dollar equivalent of the United States dollars converted was $0.37 million. Pursuant to the AMG Call Option Agree-ment, all of the issued shares were issued directly to AMG.

During 2008, Safeguard billed the Company for various expenses including travel expenses and for business development expenses. These expenses totalled $281 (2007 – $139). These payments were reimbursements of Safeguard’s actual expenses incurred.

The Chairman of the Board and another director of Timminco are members of the Management Board of AMG, and are also members of the executive committee of the general partner of Safeguard, which controls ALD International.

The Company and Allied Resources Corporation, whose Chairman is also the Chairman and CEO of the Company, share the cost of one of the officers of the Company. Dur-ing 2008, the Company contributed $429 (2007 – $310) to the cost of the remuneration of the officer of the Company.

For the year ended December 31, 2008, the Company purchased a furnace and equipment spare parts for $1,556 from ALD Vacuum Technologies GmbH, a wholly-owned subsidiary of AMG. This equipment, which facilitates the production of ingots from solar grade silicon, was purchased on arm’s length terms and is being used by Silicon for quality control purposes and for research and development activities.

During 2008, the Company purchased $1,700 in finished goods inventory (aluminum wheels) from Fundo. Under this inventory purchase arrangement, Fundo agreed to resell such inventory on behalf of the Company to Fundo’s existing OEM customers and to remit the proceeds from such sales immediately to the Company. AMG agreed with the Company to unconditionally pay any shortfall in the actual proceeds of sales, as compared to the expected proceeds of sales, for such inventory. Under the terms of the guarantee, AMG paid the Company the outstanding balance of $1,700 plus interest at 7%.

Subsequent to December 31, 2008, the Company issued 7,042,000 common shares in a private placement. AMG acquired 3,938,200 of the total common shares issued (see Note 23).

17. Financial InstrumentsCategories of financial assets and liabilities

Under CICA Handbook Section 3862, “Financial Instru-ments – Disclosures”, the Company is required to provide disclosures regarding its financial instruments. Financial instruments are either measured at amortized cost or fair value. Held-to-maturity investments, loans and receivables and other financial liabilities are measured at amortized cost. Held-for-trading financial assets and liabilities and available-for-sale financial assets are measured on the


December 30, 2008 December 31, 2007 Carrying Amount Fair Value Carrying Amount Fair Value

Financial Assets Held-for-trading Cash and cash equivalents $ 4,512 $ 4,512 $ 19,463 $ 19,463

Short term investments 116 116 15,151 15,151

Foreign exchange contracts – – 128 128

Loans and receivables Accounts receivable 37,243 37,243 19,086 19,086

Long term receivables 1,329 1,329 1,012 1,012

43,200 43,200 54,840 54,840

Financial Liabilities Held-for-trading Foreign exchange contracts 1,463 1,463 – –

Other financial liabilities Bank indebtedness 51,439 50,765 21 21

Accounts payable and accrued liabilities 59,624 59,624 31,750 31,750

Convertible debt and liabilities due to affiliate 7,661 7,944 5,897 5,897

Long term provisions 8,467 8,467 4,179 4,179

$ 128,654 $ 128,263 $ 41,847 $ 41,847

the corporate finance function, identify, evaluate and, where appropriate, mitigate financial risks. Material risks are monitored and are regularly discussed with the Audit Committee of the Board of Directors.

Foreign exchange risk

The Company operates in Canada, the United States, Mexico, Asia and Europe. The functional currency of Timminco is Canadian dollars as is the reporting cur-rency. The functional currency of the Company’s foreign subsidiaries is the Canadian dollar. Foreign exchange risk arises because the amount of the local currency receiv-able or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates (“transaction exposures”) and because the non-Canadian dollar denominated financial statements of the subsidiar-ies may vary on consolidation into Canadian dollars.

In addition, approximately 90% of the Company’s sales are transacted in U.S. dollars or Euros. As a result, the Company may experience transaction exposures because of volatility in the exchange rate between the Canadian and U.S. dollar and the Canadian dollar and the Euro. Based on the Company’s U.S. dollar denominated net inflows and outflows for the year ended December 31, 2008, a strengthening (weakening) of the U.S. dollar of 1% would, everything else being equal, have a positive (negative) effect on net income before taxes of $49, prior

The Company has determined the estimated fair values of its financial instruments based on appropriate valua-tion methodologies; however, considerable judgment is required to develop these estimates. The carrying value of current monetary assets and liabilities approximates their fair value due to their relatively short periods to maturity. The fair values of long term receivables, other long term liabilities and the debt component of the amounts due to an affiliated company approximate their carrying values as the terms and conditions are similar to current market conditions. Foreign exchange contracts are marked to market using quoted market prices.

Risks arising from financial instruments and risk management

The Company’s activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company uses derivative financial instruments to mitigate certain risk exposures. The Company does not purchase any derivative financial instruments for speculative purposes. Risk management is the responsibility of the corporate finance function. The Company’s domestic and foreign operations along with


balance sheet at fair value. Derivative non-financial instru-ments are classified as held-for-trading and are recorded on the balance sheet at fair value unless exempted as a non-financial derivative representing a normal purchase and sale arrangement. Changes in fair value of derivative

financial instruments are recorded in earnings unless the instruments are designated as cash flow hedges. The fol-lowing table provides the carrying value of each category of financial assets and liabilities and the related balance sheet item:

to hedging activities. Based on the Company’s Euro denominated net inflows and outflows for the year ended December 31, 2008, a strengthening (weakening) of the Euro of 1% would, everything else being equal, have a positive (negative) effect on net income before taxes of approximately $589, prior to hedging activities.

The objective of the Company’s foreign exchange risk management activities is to minimize transaction exposures and the resulting volatility of the Company’s earnings. The Company manages this risk by entering into foreign exchange forward contracts. The Company does not hedge its investments in Norway.

Foreign exchange forward contracts

The Company enters into foreign exchange forward contracts to mitigate foreign currency risk relating to certain cash flow exposures. The Company’s foreign exchange forward contracts reduce the Company’s risk from exchange movements because gains and losses on such contracts offset losses and gains on transactions being hedged. The counterparty to the contracts is a multinational commercial bank and therefore credit risk of counterparty non-performance is remote. Realized and unrealized gains or losses are included in net earnings (for the year ended December 31, 2008 – $3,863 loss; 2007 – $2,106 gain).

As at December 31, 2008, the Company held the following foreign exchange forward contracts:

Notional Canadian dollar equivalent Notional amount of Contract Unrealized currency sold amount (loss)/gain $ $

Euros 12,000 18,962 (1,498)

United States dollars 9,000 11,129 35

The unrealized loss on foreign exchange is recorded under accrued liabilities. The forward contracts mature between January and December 2009.

Interest rate risk

The Company is exposed to interest rate risk to the extent that cash and short term investments, bank indebted-ness, convertible notes receivable and amounts due to an affiliated company are at floating rates of interest. The Company’s maximum exposure to interest rate risk is based on the effective interest rate and the current carrying value of these assets and liabilities. The Com-pany monitors the interest rate markets to ensure that appropriate steps can be taken if interest rate volatility compromises the Company’s cash flows.

Credit risk

Accounts receivable, convertible notes and long term receivables are subject to credit risk exposure and the carrying values reflect Management’s assessment of the associated maximum exposure to such credit risk. Substantially all of the Company’s accounts receivable are due from customers in a variety of different industries and as such, are subject to normal credit risks in their respective industries. The Company regularly monitors customers for changes in credit risk. As a requirement

of the Company’s Credit Agreement, trade receivables from customers in Europe, Australia, Mexico and Japan are insured for events of non-payment through Export Development Canada.

The maximum exposure to credit risk is equal to the carrying value of the financial assets. The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors. Credit risk is mitigated by entering into sales contracts with only stable, creditworthy parties and through frequent reviews of exposures to individual entities. In addition, the Com-pany enters into foreign exchange forward contracts with a large multinational bank to mitigate associated credit risk. In cases where the credit quality of a customer does not meet the Company’s requirements, a cash deposit is received before any goods are shipped. The carrying amount of accounts receivable is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statements of operations within operating expenses. When a receivable balance is considered uncollectible, it is written off against the allowance for accounts receivable. Subsequent recover-ies of amounts previously written off are credited against operating expenses in the consolidated statements of


operations. The following table sets forth details of the age of receivables that are not overdue as well as an analysis of overdue amounts and related allowance for the doubtful accounts:

December 31, 2008 December 31, 2007

Total accounts receivable $ 37,291 $ 19,136

Less: Allowance for doubtful accounts (48) (50)

Total accounts receivable, net $ 37,243 $ 19,086

Of which: Not overdue $ 37,291 $ 19,136

Past due for more than three months but not more than six months – –

Past due for more than six months but not for more than one year – –

Past due for more than one year – –

Less: Allowance for doubtful accounts (48) (50)

Total accounts receivable, net $ 37,243 $ 19,086

from committed credit facilities. As at December 31, 2008, the Company was holding cash and cash equivalents of $4,512 and had undrawn lines of credit available to it of US$6,150 which the Company is able to borrow under the Revolver during the first quarter of 2009, assuming no decrease in the borrowing base during such quarter. See Notes 8 and 19 for a further discussion of the Company’s liquidity and bank covenants.

Liquidity risk

Liquidity risk arises through an excess of financial obliga-tions over available financial assets due at any point in time. The Company’s objective in managing liquidity risk is to maintain sufficient readily available sources of funding in order to meet its liquidity requirements at any point in time. The Company achieves this by maintaining cash positive operations and through the availability of funding

18. Accumulated Other Comprehensive Income (Loss)

The accumulated other comprehensive income (loss) balances are as follows:

For the twelve months ended December 31, 2008 December 31, 2007

Balance, beginning of year $ (851) $ (1,337)

Other comprehensive income (loss) $ (17) $ 486

Balance, end of year $ (868) $ (851)

The Company manages its capital structure in a manner to ensure that sufficient room is maintained under the Company’s revolving debt arrangement such that the Company can make its required interest payments. For the year ended December 31, 2008, the Company had sufficient availability under its revolving debt arrange-ment to make its required interest payments.

Global economic conditions have deteriorated rapidly over the last several months, and the severity, duration and impact of these developments are not yet fully understood. Many of the Company’s customers are experiencing financial constraints and have reduced or deferred their purchases. Such customers may continue to curtail or delay their purchases, which would reduce the Company’s revenues and impact its liquidity. If these circumstances persist or deteriorate further, the Com-pany’s ability to raise capital in the debt or equity markets could be limited. In response to the current environment, the Company has adopted a plan to reduce its operating costs and realize on certain assets to improve its liquidity and believes it will be in compliance with its bank cov-enants (Note 8) and other obligations throughout 2009.

At December 31, 2008, accumulated other comprehensive income (loss) includes the deferred unrealized foreign exchange loss on the Fundo investment of $698 (Decem ber 31, 2007 – $681 loss) and the deferred unrealized foreign exchange loss on the consolidation of foreign subsidiaries that were previously self sustaining $170 (December 31, 2007 – $170 loss).

19. Capital Management

The Company defines capital that it manages as the aggregate of its shareholders’ equity and interest bearing debt. The Company’s objectives when managing capital are to ensure that the Company will continue as a going concern, so that it can provide products and services to its customers and returns to its shareholders.

As at December 31, 2008, total managed capital was $161,036 (December 31, 2007 – $128,516), comprised of shareholders’ equity of $102,205 (December 31, 2007 – $122,598) and interest-bearing debt of $58,831 (Decem-ber 31, 2007 – $5,918). Included in interest bearing debt is the debt component of the convertible notes of $7,392 (December 31, 2007 – $5,897), where the associated accreted interest expense is a non-cash charge.


Guarantees

In the normal course of business, the Company has pro-vided indemnifications in various commercial agreements which may require payment by the Company for breach of contractual terms of the agreement. Counterparties to these agreements provide the Company with comparable indemnifications. The indemnification period generally covers, at maximum, the period of the applicable agree-ment plus the applicable limitations period under law. The maximum potential amount of future payments that the Company would be required to make under these indemnification agreements is not reasonably quantifiable as certain indemnifications are not subject to limitation. However, the Company enters into indemnification agreements only when an assessment of the business circum-stances would indicate that the risk of loss is remote.

The Company has agreed to indemnify its current and former directors and officers to the extent permitted by law against any and all charges, costs, expenses, amounts paid in settlement and damages incurred by the directors and officers as a result of any lawsuit or any other judicial administrative or investigative proceeding in which the directors and officers are sued as a result of their service. These indemnification claims will be subject to any statutory or other legal limitation period. The nature of such indemnification prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counter parties. The Company has $45,000 (2007 – $15,000) in directors’ and officers’ liability insurance coverage.

21. Segmented Information

The Company manages its business along two principal business segments, the production and sale of silicon metal and solar grade silicon, the Silicon Group (“Silicon”), and of specialty non-ferrous metals, the Magnesium Group (“Magnesium”). Amounts included under “Other” include corporate activities and amounts related to the Company’s investment in Fundo. Segmented information on sales and identifiable assets by geographic region is as follows:

20. Commitments, Contingencies and Guarantees

Commitments

Property, plant and equipment

As at December 31, 2008, the Company had capital com-mitments of $17,678 related to the expansion of the solar silicon production facilities (December 31, 2007– $1,300).

Operating leases

The Company leases equipment and office, manufacturing and warehouse space under operating leases with minimum aggregate rent payable at December 31, 2008:

2009 $ 683

2010 207

2011 184

2012 182

2013 and thereafter 1,254

$ 2,510

Environmental matters

In accordance with applicable law, the Company is required to file a Mine Closure Plan with the Ontario Ministry of Northern Development and Mines (the “Ministry”) with respect to the Haley, Ontario facility together with appropriate financial assurance covering its obligations pursuant to the plan. The Company is required to provide financial assurance of $1.7 million by way of cash deposits over a period of five years or sooner, depending on the financial results of the Company. To date, $1,329 has been deposited with the Ministry and the Company expects to deposit the balance in equal instal-ments over the next two years.

Contingent liabilities

Legal actions

The Company is involved in various legal matters arising in the ordinary course of business. The resolution of these matters is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

(a) Sales (based on the country/region to which the goods were shipped):

2008 2007 Magnesium Silicon Total Magnesium Silicon Total

Canada $ 6,392 $ 19,966 $ 26,358 $ 5,243 $ 14,858 $ 20,101

United States 40,170 65,253 105,423 41,936 52,281 94,217

Mexico 4,331 43 4,374 4,263 23 4,286

Europe 5,740 79,899 85,639 3,853 34,036 37,889

Australia 3,933 – 3,933 3,881 – 3,881

Pacific Rim 1,479 23,525 25,004 1,905 2,273 4,178

Other 1,066 766 1,832 1,327 277 1,604

$ 63,111 $ 189,452 $ 252,563 $ 62,408 $ 103,748 $ 166,156


(b) Net income (loss):

2008 Magnesium Silicon Other Total

Income (loss) before the undernoted: $ (1,999) $ 31,935 $ (10,651) $ 19,285

Amortization of PP&E and intangible assets (448) (6,802) (39) (7,289)

Interest – – (1,610) (1,610)

Gain on disposal of PP&E – 370 – 370

Environmental remediation costs (3,908) – – (3,908)

Reorganization costs (2,629) – – (2,629)

Defined benefit plan curtailment costs (4,274) – – (4,274)

Impaired of capital assets (1,351) – – (1,351)

Impairment of investment in Fundo Wheels AS – – (12,430) (12,430)

Income tax expense (59) (5,639) – (5,698)

Equity in the loss of Fundo – – (3,075) (3,075)

Net income (loss) $ (14,668) $ 19,864 $ (27,805) $ (22,609)

2007 Magnesium Silicon Other Total

Income (loss) before the undernoted: $ (2,989) $ (677) $ (5,791) (9,457)

Amortization of PP&E and intangible assets (597) (3,068) (31) (3,696)

Interest – – (2,684) (2,684)

Gain on disposal of PP&E 26 – – 26

Reorganization costs 392 (29) – 363

Income tax (expense) recovery (974) 2,184 – 1,210

Equity in the loss of Fundo – – (3,798) (3,798)

Net loss $ (4,142) $ (1,590) $ (12,304) $ (18,036)

(c) Identifiable assets:

Magnesium Silicon Other December 31, 2008

Canada $ 5,107 $ 271,286 $ – $ 276,393

United States and Other 26,629 – – 26,629

$ 31,736 $ 271,286 $ – $ 303,022

Magnesium Silicon Other December 31, 2007

Canada $ 45,400 $ 119,169 $ – $ 164,569

United States and Other 11,210 – 11,502 22,712

$ 56,610 $ 119,169 $ 11,502 $ 187,281

(e) Additions to Property, Plant and Equipment:

2008 2007

Magnesium $ 313 $ 611

Silicon 94,847 28,578

$ 95,160 $ 29,189

Economic dependence

In 2008, one Silicon Group customer accounted for 14% of total sales (2007 – three customers accounted for 39% of total sales).

Included in the assets related to the Silicon Group is goodwill of $16,827 which arose from the acquisition of the Silicon Group by the Company. During 2007, goodwill was reduced from $18,308 to $16,827 due to the recogni-tion of certain tax assets that arose from the acquisition.

(d) Property, Plant and Equipment:

2008 2007

Magnesium $ 1,991 $ 3,299 Silicon 128,856 40,292

$ 130,847 $ 43,591


combined business which will be known as Applied Magnesium International. The proposed merger is subject to a number of conditions, including financing and the negotiation and execution of definitive agreements, and is expected to be completed in the second quarter 2009. The Company also announced that it would wind down production operations at its existing magnesium extru-sion facility in Aurora, Colorado and close the facility later in 2009.

On March 17, 2009, the Company announced that it will temporarily curtail production of silicon metal starting in the second quarter 2009 in recognition of difficult market conditions including reduced demand for silicon metal in the chemical and aluminum industries. The decrease of the Company’s silicon metal production will result in a temporary workforce reduction. During this period, the Company will supply silicon metal to customers from existing finished goods inventory. The Company will continue to produce solar grade silicon, although at levels that bring production in line with customer orders. The Company will defer further capacity expansion of its solar grade silicon facility pending recovery of demand for solar grade silicon.

22. Comparative Figures

Certain of the 2007 comparative figures have been reclas-sified to conform to the financial statement presentation adopted in 2008.

23. Subsequent Events

On February 3, 2009, the Company issued 7,042,000 common shares in a private placement at $3.55 per share for approximate net proceeds of $24,239. The Company’s controlling shareholder, AMG Advanced Metallurgical Group N.V. (“AMG”) subscribed for 3,938,200 shares (55.9% of the private placement) and the remaining 3,103,800 shares were issued to public shareholders. After the private placement, AMG controlled 50.7% of the total issued and outstanding share capital.

On February 18, 2009, the Company announced a non-binding letter of intent with Winca Tech Limited (“Winca”), a leading Chinese-based producer of magnesium products, to merge the principal components of the Company’s magnesium and specialty metals business, including its manufacturing facility in Nuevo Laredo, Mexico, with all of Winca’s operations. The Company expects to retain a minority equity interest in the


Corporate and Shareholder Information

Directors and Officers

DirectorsDr.HeinzC.SchimmelbuschChairman of Management Board, AMG Advanced Metallurgical Group N.V.

ArthurR.SpectorDeputy Chair of Management Board, AMG Advanced Metallurgical Group N.V.

JohnC.Fox1,2,3Senior Managing Director, Perseus LLC

JayC.KellermanPartner, Stikeman Elliott LLP

JackL.Messman2,3Company Director

MichaelD.Winfield1,2Company Director

MickeyM.Yaksich1,3Partner, McMillan LLP

1 Member of the Audit Committee2 Member of the Human Resources, Compensation

and Pension Committee3 Member of the Corporate Governance and

Nominating Committee

OfficersDr.HeinzC.SchimmelbuschChief Executive Officer and Chairman of the Board

RobertJ.DietrichExecutive Vice President – Finance and Chief Financial Officer

RenéBoisvertPresident – Silicon (President and Chief Executive Officer, Bécancour Silicon Inc.)

JohnFengerPresident – Light Metals

PeterA.M.KalinsGeneral Counsel and Corporate Secretary

PeterD.RaynerCorporate Controller

© Timminco Limited 2009

Head OfficeTimminco Limited 150 King Street West, Suite 2401 Toronto, Ontario, Canada M5H 1J9 Telephone: (416) 364-5171 Fax: (416) 364-3451 www.timminco.com

Annual MeetingMay 15, 2009 at 10:00 a.m. The Fairmont Royal York Imperial Room 100 Front Street West Toronto, Ontario

AuditorsErnst & Young LLP, Toronto, Ontario, Canada

Investor RelationsRobertJ.DietrichExecutive Vice President – Finance and Chief Financial Officer Telephone: (416) 364-5171 Fax: (416) 364-3451

LawrenceChamberlainTelephone: (416) 815-0700 Fax: (416) 815-0080 Email: [email protected]

Stock Exchange ListingTSX: TIM

Transfer AgentEnglish:Computershare Investor Services Inc. 100 University Avenue, 9th Floor Toronto, Ontario, Canada M5J 2Y1

French:Services aux investisseurs Computershare 1500, rue Université, bureau 700 Montréal, Québec, Canada H3A 3S8

72 Corporate and Shareholder Information

DesignedbyEquicom,aTMXGroupcompany

Timminco Limited

Corporate Office 150 King Street West, Suite 2401

Toronto, Ontario, M5H 1J9 Canada

T: (416) 364-5171 F: (416) 364-3451

www.timminco.com