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.

The Solar Energy Opportunity Solar energy is emerging as the front runner in the race to establish renewable sources of energy. Why Renewable Energy?1 Why Solar? Increasing demand for clean, 800 Projected renewable energy alternatives 700 600 Rising prices for conventional, non-renewable energy sources Quadrillion Btu 500 growing 400 energy Proven, reliable technology 300 demand with cost and logistical 200 advantages over other 100 0 renewable energy alternatives 80 85 90 95 00 05 10 15 20 25 30 Global energy consumption is expected Government initiatives and subsidies to rise by 50% from 2005 to 2030. Declining cost structure – convergence with electricity grid prices absent subsidies 1 See page 18. 2 The Solar Energy Opportunity

The sun’s energy doesn’t produce carbon dioxide, won’t run out, and it’s free. 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. 48,000 km 91 square meters 4,020,000 km 0 1,000,000 2,000,000 3,000,000 4,000,000 91 square meters Annual Global In recent years, the world has become increasingly concerned about the sustainability, the environmental impact and the Solar PV Production2 rising cost of conventional energy sources such as fossil fuels. These concerns have spurred global demand for alternatives 4000 that are renewable, environmentally friendly and have the potential to be less expensive. Solar energy has emerged as 46% 3500 one of the most viable options based on its reliability, minimal 3000 impact on its surroundings and logistical advantages, as 2500 well as its broad geographical application compared to other Megawatts renewable energy sources. 2000 compound annual Over the long term, the solar PV energy industry is expected 1500 growth since 2001 to experience significant growth driven by continued growth 1000 in the demand for electricity worldwide, the increasing 500 preference for renewable energy sources and solar’s advantages over other “clean” alternatives. This growth is being 0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 supported by hundreds of billions of dollars of investment and governmental commitments to increasing the proportion Photovoltaic production has nearly of energy generated by alternative means. Moreover, as doubled every two years, increasing related technologies improve and output in the various at a compound annual growth rate segments of the value chain increases, solar PV energy is of 46 percent since 2001. becoming more economical. 2 See page 18. The Solar Energy Opportunity 3

At a Glance Timminco has assumed world leadership in the production of upgraded metallurgical silicon (UMSi) for the solar energy industry. Silicon Metal With 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. Raw Material Electric Arc Silicon Metal Furnace Process Si Quartz Silicon Metal Our quartz mining rights Quartz is processed into Some silicon metal is sold provide security of supply. silicon metal. for use in the chemical, electronics, aluminum and steel industries. 4 At a Glance

Canada Québec Bécancour 70-acre facility in Bécancour, Québec Solar Grade Silicon We 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). Proprietary Solar Grade Silicon Solar Panel Purification Production UMSi Ingot Brick Wafer Cell Patents-pending metallurgical Customers turn our process converts silicon metal raw solar grade silicon to UMSi. into solar panels. At a Glance 5

Financial and Operational Highlights In its first full year of operation, our solar grade silicon product line contributed $65 million in gross revenue. Consolidated Sales EBITDA3 $ in millions 252.6 $ in millions 166.2 21.3 52% (8.9) 2007 2008 2007 2008 Sales by Product Line Solar Grade 2007 Silicon 2008 2% Solar Grade Silicon Magnesium 24% Magnesium 25% 38% Silicon Metal 60% Silicon Metal 51% Solar Grade Silicon Silicon Metal Magnesium (net revenue) (net revenue) (net revenue) 61.8 127.7 63.1 $ in millions 127.7 99.9 61.8 62.4 63.1 3.9 2007 2008 2007 2008 2007 2008 3 See page 18. 6 Financial and Operational Highlights

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. 2008 UMSi shipments 424 total shipments quarterly shipment growth (Q1 to Q4) 300 1,045 324% 221 100 mt Q1 Q2 Q3 Q4 Achieved consolidated sales of $252.6M and EBITDA of $21.3M 3 Shipped 1,045 mt of UMSi Expanded solar grade silicon operations to six lines, adding a seventh subsequent to year end Increased maximum revolving bank credit line to US$ 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) 3 See page 18. Financial and Operational Highlights 7

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, significantly dampening the demand for both silicon 2008 was a transformational year for metal and UMSi. Timminco. It was the first year of commercial production of upgraded metallurgical silicon During my long tenure in the metals industry, (UMSi) for the solar industry. It also marked I have witnessed a number of market the disengagement of Timminco from non- downturns. Experience has taught me that core, i.e., non-silicon, related activities. Both minimizing risk through capital preservation, events have to be seen in context, as the focus cost reduction, and inventory management are of the Company is now solely on its silicon essential during such periods. Accordingly, related activities, resulting in a major sim- we have taken decisive action, implementing plification of the corporate structure and the a cost containment plan that eliminates management process. non-essential capital expenditures, reduces our working capital requirements and The ramp-up in 2008 in the production of UMSi reduces the overall cost structure of our was challenging and slower than originally silicon operations. Once the markets return, planned. Nevertheless, we expanded ship- as they eventually will, Timminco will ments from 100 metric tons (mt) in the first emerge as a more efficient competitor. quarter to 424 mt in the fourth quarter with total shipments for the year of 1,045 mt. That We have temporarily adjusted our output levels product line generated $65 million in gross of solar grade silicon to bring them in line revenue and contributed significantly to the with customer orders. We have also deferred 52% growth in overall sales to $253 million further expansion of our solar grade silicon with EBITDA3 of $21 million. 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. 3 See page 18. 8 Letter to Shareholders

2008 was a transformational year for Timminco. It was the first year of commercial production of UMSi for the solar industry. We will also temporarily curtail production of The solar energy industry is one with significant silicon metal while continuing to supply silicon long-term opportunity. The global demand for metal to customers from existing finished energy is steadily increasing and solar energy goods inventory. is expected to play a significant role in the portfolio of renewables. 2009, however, will As part of the transformation of Timminco, be a challenging year. It is difficult to predict during 2008 we also focused on positioning our when market conditions will improve. We have Magnesium Group for a return to profitability taken steps to minimize risk and to position the and strategic divestiture. We took a number of Company to weather this difficult environment. important steps forward in this regard, includ- Our ongoing efforts to continue to increase ing the closure of the Haley, Ontario facility, the value proposition of our material will as well as the continued implementation of support our long-term success as the solar cost management initiatives. Subsequent to industry rebounds. year end, we signed a letter of intent to merge the majority of our magnesium operations with Winca Tech Limited, a leading China- Yours truly, 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 Dr. Heinz C. Schimmelbusch also begun to wind down operations at Chairman of the Board and our magnesium extrusion facility in Aurora, Chief Executive Officer 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. Letter to Shareholders 9

Value Proposition Conventional Process Silicon Metal Conventional polysilicon process: chemical ultra-refinement Semiconductor Grade Polysilicon Reverse Refinement (doping) Solar Grade Silicon Timminco Process Silicon Metal Timminco proprietary metallurgical process Solar Grade Silicon (UMSi) 1N 2N 3N 4N 5N 6N 7N A SOLAR CELL MADE WITH TIMMInCO’S UMSi 10 Value Proposition

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. The Emergence of UMSi Manufacturer Product In 2008, four leading Q-Cells Q6LEP3 manufacturers launched Canadian Solar e-Module (CS6P, CS6A) Trina Solar MeSolar products based on UMSi: Photowatt PWI400 Proprietary technology Lower capital investments Access to stable, Lower production costs inexpensive hydroelectric power Stable pricing environment Ready access to raw Ability to add capacity quickly material supply For more than three decades, we have been silicon using this process requires extensive a leading producer of silicon metal. We have capital investment and enormous energy leveraged our extensive experience and requirements resulting in high per-unit costs. technical expertise to develop a revolutionary In contrast, the Timminco process involves metallurgical-based purification process purifying silicon metal to greater than for the production of solar grade silicon, the 99.999% purity with the appropriate levels primary input in the manufacture of cells for of the elements boron and phosphorus. the solar energy industry. Our material, known The simplicity of our method and relatively as upgraded metallurgical silicon, or UMSi, low energy requirements result in capital is an economic alternative to the industry investments that are as little as one-tenth and standard, polysilicon. production costs that, at large-scale capacity, At the core of our value proposition is our pro- could be as little as half of those required prietary, patents-pending process that uses to produce polysilicon. Moreover, the nature non-chemical production methods to purify of our process enables us to rapidly ramp up silicon metal into upgraded metallurgical capacity to meet demand. silicon. Our process requires significantly less While our product has been validated by the expenditure for equipment and facilities than marketplace, we have only just begun to realize the conventional process used to produce poly- the potential. Continued refinement of our puri- silicon and lower input costs. Polysilicon fication process, as well as the development of production is a complex chemical-based process new methodologies to optimize ingoting, will that involves refining silicon metal to a higher enable our customers to increase both produc- purity than is usable for solar cells (as high as tion yields and the cell efficiency levels they are 99.9999999% pure). Impurities are then added achieving with our material. The achievement of through a process called “doping” to enable the these objectives will further enhance the value solar cell to conduct electricity from the solar proposition of our product. energy it captures. Producing solar grade Value Proposition 11

Operational Review – Silicon Group $189.5m $31.9m Revenue increased 83% over 2007 EBITDA3 increased from $-0.7m to $31.9m Purity levels achieved 0.5 PPM boron Timminco Solar Grade Silicon 1.5 PPM phosphorus Solar Grade Silicon (UMSi) The successful build-out of our solar grade In 2008, our solar grade silicon operations silicon operations in 2008 contributed were focused on three interrelated objectives: $65 million in gross revenue and more than $30 million in gross profit 4 to the Company’s 1. Increasing production and shipments of financial results for the year. It represented UMSi to meet our customer commitments; in excess of 24% of our consolidated revenue. 2. Improving the purity of our material Since introducing our UMSi product in late to increase its value proposition for our 2007, we have signed long-term supply customers; and contracts with seven leading ingot, wafer 3. Expanding our production facility to and cell manufacturers. address market demand. As we gain experience with our production pro- We made strong progress in each of cess, we are continually applying new learning these areas. and refining our methodologies to improve both our product and our efficiency. During 2008, In our first full year of operation, we shipped we made strong progress in increasing the 1,045 metric tons (mt) of UMSi to our custom- purity of our material, achieving average boron ers, the majority of which was delivered and phosphorus levels of 0.8 and 3.0 parts per under long-term supply contracts. Shipment million (ppm), respectively, and achieving levels volume increased appreciably in each succes- as low as 0.5 ppm and 1.5 ppm. Material of this sive quarter, quadrupling from the first to the purity has enabled customers to manufacture fourth quarter, the result of both the scale-up cells exclusively using Timminco UMSi, as of our operations and improvements in the opposed to blending it with polysilicon. efficiency of our process throughout the course of the year. In support of customer commitments and growing market demand for solar grade silicon, early in 2008 we made the strategic decision 3 See page 18. 4 See page 18. 12 Operational Review – Silicon Group

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). to significantly expand our production capacity Key achievements from our initial three-line operation. By year end, we commissioned an additional three 1,045 lines and added one more in the first quarter shipments of solar of 2009. Our ability to rapidly and inexpensively mt grade silicon add new capacity is an advantage in the solar grade silicon industry. We have realized our existing capacity with an investment of approximately $100 million. 0.5/1.5 purity levels of boron To date, our priorities have been output levels and quality – scaling up production as rapidly ppm and phosphorus as possible and ensuring that our material achieved, respectively meets or exceeds our customers’ specifications. We are now increasingly focused on lowering the cost of producing our material. 7 Our proprietary purification process has solar cell manu– cost advantages stemming from low raw facturers under material costs and significantly lower require- multi-year contracts ments for electricity, the largest input. Our average cost of production for 2008 was $32 per kilogram, declining to $30 per cell efficiency being 16 kilogram in the fourth quarter, while absorb- ing start up costs relating to three additional achieved by certain lines. In December, during which we achieved % customers using our highest monthly production volume to our material date, we achieved a cost of $26 per kilogram. Operational Review – Silicon Group 13

Subject to production volumes, we expect to decline in orders for UMSi. With little visibility appreciably lower our per-unit costs in 2009 into the timing for the recovery of the solar mar- through growth in output and improvements in ket, we have adjusted our business accordingly, efficiency. We are confident that the low-cost lowering our UMSi production to levels that are structure of our process will provide us with an in-line with customer orders. Concurrently, we advantage in the solar grade silicon market. have deferred further expansion of our capacity until the market recovers. During this period, Another area of strategic focus is on driving we will continue to focus on increasing the value the value proposition of our UMSi for our proposition of our material to support our long- customers. A critical stage in the manufactur- term success as the solar industry recovers. ing of solar cells is the production of ingots from solar grade silicon. Since we first began Silicon Metal shipping our solar grade silicon, we have been working closely with our customers to With more than three decades of experience, support their knowledge and capabilities for Timminco has established itself as a leading the production of ingots using our material. producer of silicon metal and related products, To this end, we installed ingoting capabili- including ferrosilicon. Our facility in Bécancour, ties at our UMSi facility toward the end of Québec, is one of the largest single-site silicon 2008 for research and development, as well metal production facilities in North America, as quality control purposes. We have made and benefits from low electricity rates and strong progress to date in the optimization of close proximity to efficient transportation the ingot making process using our material. routes and raw material. Our continued efforts in this area will enable In 2008, we shipped more than 45,000 mt of our customers to improve the yields they are silicon metal to customers in a broad range achieving with our material, thereby lowering of industries. Our materials are key inputs in their overall cost of production, as well as the production of more than 4,000 consumer increase the efficiency levels of the solar cells and industrial products, such as sealants and they are manufacturing with our material. lubricants, as well as sophisticated electronics Some of our customers have achieved cell components, including computer chip wafers efficiency levels of more than 16%, comparable and semi-conductors. Our silicon metal is to those achieved with polysilicon. Working also used by customers for the production of with the Engineering Systems Division of AMG polysilicon, the most widely used form of solar Advanced Metallurgical Group, a leading manu- grade silicon for the manufacture of solar cells. facturer of the furnaces used for ingoting, we are continuing to develop new processes and In recent years, the price of silicon metal methodologies that increase the usefulness of has appreciated from the historical lows of our material for our customers. approximately US$0.50 per pound reached in 2003 to the US$1.70 to US$1.90 range The successful build-out of our solar grade throughout most of 2008 (prior to the impact silicon operations in 2008 has positioned of the general macroeconomic environment). Timminco to capitalize on the anticipated The significant price appreciation was the growth of the solar industry over the long term. result of the confluence of a number of market The industry, however, is currently being conditions, including higher energy costs, a challenged by weakness in the global economy number of independent factors that have con- and restrictive credit conditions, which have strained supply, and increased market demand, adversely impacted the demand for solar power especially from the solar energy industry, installations and caused a build up of inventory among others. Because our silicon metal throughout the supply chain. As a result, during operation concludes its annual contracts in the the first quarter of 2009, we experienced a year prior to that in which product is delivered, 14 Operational Review – Silicon Group

OnE OF THREE SUBMERGED ARC FURnACES PRODUCInG 99% SILICOn METAL. we benefited from higher prices in effect in the Our objective over the long term is to continue second half of 2007 compared to late 2006. As a to transition part of our operation to support result, our silicon metal product line generated our UMSi production, while at the same time revenue of $128 million, an increase of 28% optimizing our customer base to capitalize on over the previous year’s total. the evolving product mix resulting from the transition. Short-term demand, however, has The primary focus of our silicon metal been adversely impacted by the slowdown in product line in 2008 was meeting our volume the chemical and aluminum industries, as well commitments to our customers. Accordingly, as the solar industry. In response, we have the majority of our production was shipped implemented a cost containment plan under to customers under contract. Silicon metal, which we will temporarily suspend production of however, is the primary input used in the silicon metal until market conditions improve. production of our UMSi and we benefit from During this period, we will supply silicon metal the synergies of having the production of to customers from existing finished goods both materials at the same site. Accordingly, inventory. We will monitor the progress of the it is our objective to increasingly use our silicon metal market and will resume produc- silicon metal capabilities to supply our own tion as demand warrants. UMSi operations. Operational Review – Silicon Group 15

Commitment to Sustainable Development As a producer of materials for the solar PV Environment – Energy Usage industry, we view ourselves as an integral part GRI Indicators EN3, EN4 of global efforts to reduce dependencies on Energy efficiency is a key tool in achieving fossil fuel and other hydrocarbon-based energy reduced greenhouse gas (GHG) emissions at generation and minimize the environmental our manufacturing facilities. Production of impact of energy consumption. Moreover, our silicon metal using electric arc furnaces is a low-cost solar grade silicon produced from high electrical energy consuming process. metallurgical silicon consumes significantly The purification of silicon also consumes less energy than traditional purification energy through burning natural gas or other methods for producing solar grade silicon hydrocarbon-based fuels. Careful management from polysilicon. and further process development can control As a natural corollary to our strategic focus or even reduce the amount of energy required on the solar PV industry, we are committed to to produce and purify metallurgical silicon. achieving the highest standards of environmen- Whilst energy efficiency is an important tool tal excellence at our manufacturing facilities. to combat climate change, the carbon footprint The principles of sustainable development will of our manufacturing sites is significantly continue to be implemented throughout our affected by the local power suppliers. organization in future years. In Québec, where hydroelectric power is predominant, remarkably low carbon indirect This annual report sets out the principles by emissions are associated with operations. which we intend to measure our performance Future energy consumption data will segregate towards these objectives in future years. direct energy versus indirect energy and energy Specifically, for future sustainable develop- from renewable and non renewable sources. ment reports, we are committed to reporting Indirect energy almost exclusively encom- environmental and safety performance passes the purchase of electricity, while direct according to the Global Reporting Initiative’s energy includes, among others, the onsite (GRI’s) G3 guidelines for sustainability combustion of natural gas, gasoline and other reporting. The initial indicators that we have oils for heating and transportation purposes. identified for data collection and their relationship to GRI are outlined below. Environment – Water Management Environment – Raw Material Usage GRI Indicator EN8 GRI Indicators EN1, EN2 We recognize that prudent use of water reserves is an important sustainable business We recognize that efficient use of primary practice. Even in water abundant areas, materials and recycled materials is an impor- careful management of raw water usage can tant sustainable business practice. We will save energy associated with pumping and collect data on our primary and recycled effluent treatment costs, and can help raw material usage as a means to identify minimize effects on water quality through opportunities to increase efficiencies in the the control of discharges. We will collect data use of these materials. on water usage and use this data to identify opportunities for water recycling and water usage reduction projects. 16 Commitment to Sustainable Development

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 – Climate Change Environment – Emissions to Water GRI Indicators EN16, EN17 GRI Indicator EN21 We recognize that a worldwide response at Emissions to water generally result from the every level of society, personal, commercial discharges of process water. Strategies to re- and governmental, is urgently required to duce emissions include on-site water recycling, address climate change while promoting utilizing less input water and using water only progress and growth. Reduction of GHG emis- in non-contact processes. We will collect data sions is an important sustainability objective. on the volume of water discharged from our We will collect data on our GHG emissions and facilities and the levels and types of impurities use this data to identify opportunities to reduce in that water. such emissions relative to the volume of silicon metal and solar grade silicon that we produce. Environment – Waste Production Over 95% of GHG emissions at our metal- GRI Indicator EN22 lurgical silicon manufacturing site occur as a We recognize that most waste materials have result of the production of carbon dioxide as a an intrinsic value resulting either from chemical by-product of the process for making silicon composition or physical properties. We will metal. Specifically, carbon-based process continue to seek out either recycling method- materials, such as coal, coke, charcoal and ologies or beneficially reuse opportunities wood chips (C), are combined with quartz for all materials currently disposed as waste. (SiO2) in a pyrometallurgical process to create We will collect data on our waste production silicon (Si) and carbon dioxide (CO2). Although and set goals for the reduction of wastes. the production of solar grade silicon produces GHG emissions, studies have shown that the Safety – Accident Rates lifetime energy created from a solar PV system GRI Indicator LA7 significantly exceeds the energy used in its The continued health and safety of all employees production. is a core value of ours. Safety data will be collected to cover all accidents involving our Environment – Emissions to Air employees at any of our facilities. Lost time GRI Indicators EN19, EN20 accident rates and accident severity rates will Particulates from furnaces are controlled by be the primary indicators used to assess our baghouses, which are the best and most performance. reliable technology for particulate emission control. We will collect data on our air emissions and use that data to identify opportunities to reduce emissions of both particulate and other air pollutants. Commitment to Sustainable Development 17

Cautionary note on Forward-Looking Information This Annual Report contains “forward-looking information”, completion of related proposed transactions; cost and including “financial outlooks”, as such terms are defined availability of magnesium metal; dependence upon in applicable Canadian securities legislation, concerning key customers of magnesium extruded and fabricated Timminco’s future financial or operating performance and products; credit risk exposure; customer concentration; other statements that express management’s expectations equipment failures; labour disputes; foreign currency ex- or estimates of future developments, circumstances change; dependence upon key executives and employees; or results. Generally, forward-looking information can completion and integration of potential acquisitions, part- be identified by the use of forward-looking terminology nerships or joint ventures; risks with foreign operations such as “expects”, “targets”, “believes”, “anticipates”, and suppliers; environmental, health and safety laws “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, and liabilities; transportation disruptions; conflicts of “plans” and variations of such words and phrases, or by interest; interest rates; intellectual property infringement statements that certain actions, events or results “may”, claims; new regulatory requirements; changes in tax “will”, “could”, “would” or “might”, “be taken”, “occur” laws; and climate change. These factors are discussed or “be achieved”. Forward-looking information is based in greater detail in Timminco’s Annual Information Form on a number of assumptions and estimates that, while for the year ended December 31, 2008 and in Timminco’s considered reasonable by management based on the most recent Management’s Discussion and Analysis, business and markets in which Timminco operates, are each of which is available via the SEDAR website at inherently subject to significant operational, economic www.sedar.com. Timminco provides financial outlooks for and competitive uncertainties and contingencies. the purpose of assisting investors understand manage- Timminco cautions that forward-looking information ment’s views on Timminco’s potential future financial involves known and unknown risks, uncertainties and or operating performance, and readers are cautioned other factors that may cause Timminco’s actual results, that such information may not be appropriate for other performance or achievements to be materially different purposes. Although Timminco has attempted to identify from those expressed or implied by such information, in- important factors that could cause actual results, per- cluding, but not limited to: deteriorating global economic formance or achievements to differ materially from those conditions; future growth plans and strategic objectives; contained in forward-looking information, there can be liquidity risks; limitations under existing credit facilities; other factors that cause results, performance or achieve- long-term contracts for supplying solar grade silicon; ments not to be as anticipated, estimated or intended. solar grade silicon production cost targets; selling prices There can be no assurance that such information will of solar grade silicon and silicon metal; achieving and prove to be accurate or that management’s expectations maintaining the purity of solar grade silicon; production or estimates of future developments, circumstances or capacity expansion at the Bécancour facilities; pricing results will materialize. Accordingly, readers should not and availability of raw materials for the silicon business; place undue reliance on forward-looking information. customer capabilities in producing ingots; limited history The forward-looking information in this Annual Report is with the solar grade silicon business; dependence upon made as of the date of the Management’s Discussion and power supply for silicon metal production; protection of Analysis included in this Annual Report and Timminco intellectual property rights; government and economic disclaims any intention or obligation to update or revise incentives; closure of the magnesium facilities and the such information, except as required by applicable law. Endnotes 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 distribution 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. 18 Cautionary Note on Forward-Looking Information | Endnotes

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. Overview • The Company, through its wholly owned subsidiary Bécancour Silicon Inc. (“BSI”), shipped 424 metric The Company is divided into two segments: the Silicon tons of solar grade silicon in the fourth quarter 2008 Group, which includes the production and sale of silicon generating $27.7 million of gross revenue from this metal and solar grade silicon products, and the Mag- product line in the quarter (1,045 metric tons and nesium Group, which includes the sale of magnesium $64.6 million of gross revenue for fiscal 2008). extruded and fabricated products and specialty non- ferrous metals. • During the fourth quarter 2008, the Company received $4.4 million in deposits from customers in accordance The fourth quarter 2008 saw continued progress towards with the terms of solar grade silicon supply contracts. the Company’s goal of achieving profitable operations These amounts, which are non-interest bearing through increasing production and sales of solar grade pre-payments to be credited against future deliveries silicon and further expansion of the Company’s solar of solar grade silicon, will be used to fund the grade silicon manufacturing facility. The Company’s capacity expansion. operations were profitable in fourth quarter 2008 and fiscal 2008 (before charges for reorganization costs, equity in • During the fourth quarter 2008, the Company amended the loss of Fundo Wheels and the impairment of invest- its Credit Agreement with Bank of America, N.A. ment in Fundo Wheels). The reported loss before income to increase the maximum revolving credit line to taxes in fiscal 2008 includes a reorganization charge US$50.0 million from US$32.8 million. The availability relating to the closure of the Company’s Haley, Ontario of the revolving credit facility is subject to the borrow- magnesium manufacturing facility and an asset impair- ing base net of a minimum availability requirement ment charge relating to the write-down of the Company’s of US$2.0 million. The Company intends to use the investment in Fundo Wheels AS (“Fundo”). increased credit line to finance potential increases in working capital in support of the ramp-up of its solar • Sales for the fourth quarter 2008 were $72.7 million grade silicon production. compared to $36.4 million in the fourth quarter 2007, an increase of 100%. The increase is attributable • During the third quarter 2008 management determined primarily to increased sales of the Company’s Silicon that there was a permanent impairment in the carrying Group reflecting volume growth of solar grade value of the Company’s equity and loan investment silicon and pricing strength in silicon metal products. in Fundo. The investment was written down to $nil For the fourth quarter 2008, the Company’s EBITDA which is management’s best estimate of its fair value. was $6.4 million, compared to an EBITDA loss of On January 12, 2009, Fundo commenced bankruptcy $7.3 million in the fourth quarter 2007. For the fourth proceedings in Norway. The Company’s investment in quarter 2008, the net loss was $1.3 million or $0.01 per Fundo is in the form of common equity and convertible share, compared to a loss of $8.8 million or $0.08 per loans that are subordinated to other secured parties. share in the fourth quarter 2007. As a result of the commencement of these proceedings, management does not anticipate recovery of any • During fiscal 2008 sales increased by 52% from proceeds from the Company’s investment in Fundo. $166.2 million in fiscal 2007 to $252.6 million reflecting the strong growth in sales of solar grade silicon. Global economic conditions have deteriorated rapidly EBITDA for fiscal 2008 was $21.3 million compared to over the last several months as a result of the financial an EBITDA loss of $8.9 million in fiscal 2007. Net loss crisis and recession that negatively impacted markets for fiscal 2008 was $22.6 million or $0.22 per share in North America, Europe and Asia during 2008. These compared to a loss of $18.0 million or $0.20 per share for fiscal 2007. Management’s Discussion & Analysis 19

developments are having and will likely continue to have this period, the Company will supply silicon metal to a broad-reaching impact on the Company’s businesses customers from existing finished goods inventory. and the industries in which they operate. The severity, The Company will continue to produce solar grade duration and impact of these developments are not yet silicon, although at levels that bring production in line fully understood. Many of the Company’s customers are with customer orders. The Company will defer further experiencing financial constraints and have reduced or capacity expansion of its solar grade silicon facility deferred their purchases. In response to this environ- pending recovery of demand for solar grade silicon. ment, the Company has subsequent to the year end announced certain initiatives in both its Silicon and Strategy Magnesium Groups to reduce expenditures and acceler- Timminco is focused on creating a profitable, high growth ate reduction of working capital. business from the development of its solar grade silicon • On February 3, 2009, the Company issued 7,042,000 product line. Building upon its metallurgical silicon common shares in an equity offering by way of private operations, the Company purifies metallurgical silicon placement at $3.55 per share for net proceeds of using a proprietary process to supply solar cell manufac- $24.2 million. The Company’s controlling shareholder, turers with solar grade silicon, also known as upgraded AMG Advanced Metallurgical Group N.V. (“AMG”), metallurgical silicon (“UMSi”), which is a lower cost subscribed for 3,938,200 shares (55.9% of the offering) alternative to polysilicon. The Company’s strategy has and the remaining 3,103,800 shares were issued to the following key elements: other investors. AMG currently holds 50.7% of the total • Low cost production based upon a proprietary issued and outstanding share capital of the Company. metallurgical process that consumes significantly less The Company completed this financing as a prudent energy than traditional silicon purification methods contingency measure in light of the impact that the current global economic conditions are having on the solar • Internal supply of silicon feedstock for purification industry. The additional capital from this financing will process to secure supply and control quality and cost strengthen the Company’s financial position by provid- • Lower capital investment for equivalent capacity ing the Company with additional liquidity to finance • Expansion of productive capacity to meet committed working capital having regards to potentially lower customer demand operating cash flows from possible reduced short-term • Development of a customer base focused on the use demand from solar grade silicon customers and delays of UMSi to lower the total cost per watt of solar cells in receipt of outstanding customer deposits. delivered into the market • On February 18, 2009, the Company announced a • Ongoing collaboration with customers and the non-binding letter of intent with Winca Tech Limited Company’s controlling shareholder, AMG, to develop (“Winca”), a leading Chinese-based producer of mag- state-of-the-art techniques for transforming UMSi nesium products, to merge the principal components into high quality ingots for processing into silicon of the Company’s magnesium and specialty metals wafers, and allowing customers to lower their total business, including its manufacturing facility in Nuevo cost per watt by implementing such know-how Laredo, Mexico, with all of Winca’s operations. The Company expects to retain a minority equity interest in During 2008 the Company made progress on all of the key the combined business, which will be known as Applied elements of its strategy. Production ramped up sequen- Magnesium International. The proposed merger is tially throughout 2008 and the average cost of production subject to a number of conditions, including financing dropped sequentially despite one-time costs incurred in and execution of definitive agreements, and is expected bringing on new production capacity. Acquisition of new to be completed in the second quarter 2009. long term customers for UMSi in the first half of the year supported the business case for proceeding with an ex- • Also on February 18, 2009, the Company announced pansion of production capacity. By year end, the Company that it would wind down production operations at had installed one third of the incremental planned capac- its existing magnesium extrusion facility in Aurora, ity. Work progressed on securing new sources of high Colorado and close that facility later in 2009. quality raw materials for silicon feedstock production and • On March 17, 2009, the Company announced that it will the Company installed an ingoting furnace that enabled temporarily curtail production of silicon metal starting commencement of research and development activities in the second quarter 2009 in recognition of difficult on this downstream activity in the fourth quarter. market conditions including reduced demand for silicon Key factors for the Company in further executing its metal in the chemical and aluminum industries. The strategy include: continued reduction of unit costs of decrease of the Company’s silicon metal production production, improved quality of UMSi (in terms of parts will result in a temporary workforce reduction. During 20 Management’s Discussion & Analysis

per million of impurities) and development of a “recipe” Aurora, Colorado facility, were successfully moved to for the production of high quality ingots from its UMSi the Company’s manufacturing facility in Nuevo Laredo, that can be shared with its customers. This last factor will Mexico supported by the Chinese supply chain. These be driven by research and development activities by the moves have provided the Magnesium Group with a Company at its Bécancour site and in collaboration with competitive core to be leveraged by a strategic purchaser. its key equipment suppliers. Subsequent to year end, the Company announced the The Company has decided to reduce its investment in closure of its Aurora facility and the signing of a letter its magnesium business, and has been pursuing a of intent with Winca, its primary China-based supplier, divestiture and other strategic alternatives during to transfer the Company’s magnesium business to a 2008. Given the low manufacturing cost environment in new merged business that would include all of Winca’s China, the Company successfully commenced sourcing magnesium operations and would be majority owned by magnesium from China prior to the mid-2008 closure of Winca. Upon closing of this proposed transaction, the the Haley, Ontario magnesium manufacturing facilities. Company will have significantly reduced its exposure to In addition, high labour content activities related to water the magnesium market, holding only a minority interest heater anodes, formerly undertaken in the Company’s in the merged business. 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”. Results for the fourth quarter and fiscal 2008 were Company’s investment in Fundo Wheels AS during fiscal reduced by a reorganization charge of $1.3 million and 2008. In the absence of these charges the Company would $11.9 million, respectively, relating to the closing of the have reported a profit for both the fourth quarter and Company’s Haley, Ontario magnesium manufacturing fiscal 2008. facility and $12.4 million relating to the impairment of the Management’s Discussion & Analysis 21

Silicon Group Gross margin for the solar grade silicon product for the Sales of the Silicon Group were $58.5 million in the fourth fourth quarter 2008 was 54% and for fiscal 2008 was 48%. quarter 2008, up 140% from $24.3 million in the fourth The gross margin percent increased in the fourth quarter quarter 2007. For fiscal 2008, Silicon Group sales were 2008 compared to the gross margin of 42% in the third $189.5 million compared to $103.7 million in fiscal 2007, quarter of 2008 due to the higher average selling prices an increase of 83%. The increase in sales for the fourth realized. The average cost of sale per metric ton of solar quarter 2008 compared to the same period of 2007 is due grade silicon continues to decline and was lower in the to increased sales volume of silicon metal and solar grade fourth quarter 2008 than previous quarters. Management silicon and higher average selling prices for silicon metal expects the costs of production per metric ton of solar sales. During fiscal 2008 and the fourth quarter 2008, grade silicon to decrease as the expansion of the BSI solar grade silicon gross revenues were $64.6 million and facility progresses and additional production capacity is $27.7 million, respectively. Net revenue for solar grade brought on stream. silicon, including a deduction for anticipated returns of EBITDA of $11.6 million for the fourth quarter 2008 scrap, for these periods was $61.8 million and $25.9 million, increased significantly compared to the fourth quarter respectively. The Company shipped 424 metric tons 2007 negative EBITDA of $2.1 million. Similarly, EBITDA of of solar grade silicon material in the fourth quarter 2008, $31.9 million for fiscal 2008 was substantially higher than compared to 33 metric tons in the fourth quarter 2007 the negative $0.7 million for fiscal 2007. The increases and 300 metric tons in the third quarter 2008. The average reflect the shift in sales mix from metallurgical silicon to selling price for solar grade silicon sales in the fourth quar- solar grade silicon, favourable conversion of the U.S. dol- ter was $65 per kilogram and $62 per kilogram for fiscal lar and Euro to Canadian dollars and the stronger margins 2008, compared to $44 per kilogram during fiscal 2007. of the solar grade silicon. For fiscal 2008 and the fourth quarter 2008, respectively, Net income for the fourth quarter 2008 and fiscal 2008 the weakness of the Canadian dollar against the U.S. ($7.5 million and $19.9 million, respectively) were higher dollar and the Euro had a $6.5 million favourable and than the net losses for the comparable periods of 2007 an $8.8 million favourable impact on sales, respectively, ($3.1 million and $1.6 million, respectively). The increase as the majority of the Silicon Group’s sales are denomi- is due to higher profits from the solar grade silicon offset nated in these currencies. Production of silicon metal by increased amortization costs of the property, plant and was negatively impacted throughout fiscal 2008 due to equipment and income taxes. the reduced efficiency of one of the electric arc furnaces pending receipt of a repaired transformer in the fourth Magnesium Group quarter. The Company has made a claim under its insurance For the fourth quarter 2008, sales of the Magnesium policy to recover the income lost during this interruption, Group were $14.2 million, up 17% from $12.1 million in the $1.0 million of which has been included as a recovery fourth quarter 2007. For fiscal 2008, sales were $63.1 mil- in cost of sales in the fourth quarter 2008. The trans- lion compared to $62.4 million in fiscal 2007, an increase former was fully operational by December 2008. Sales of 1%. Sales in the fourth quarter 2008 were unfavourably of regular silicon products for the fourth quarter 2008 impacted by the weakening United States economy. were $32.6 million (fourth quarter 2007 – $22.8 million) However, a stronger gross profit percentage resulted from and for fiscal 2008 were $127.7 million (fiscal 2007 – price increases across most of the Group’s product lines, $99.9 million). The increase in regular silicon product initiated to recover large unfavourable magnesium metal sales in 2008 relates to both volume and increased cost increases. Sales volume in metric tons was down average selling prices. 37% compared to the fourth quarter 2007 and 28% for Gross profit for the fourth quarter 2008 was $15.4 million fiscal 2008 compared to fiscal 2007. The volume decrease or 26.3% of sales, compared to a negative gross margin relates primarily to a decline in North American new of $2.7 million or negative 11.1% of sales in the fourth housing construction as the Magnesium Group’s principal quarter 2007. Cost of sales of the solar grade silicon product lines are new water heater anodes and construc- product are comprised of raw materials, utilities, labour tion tools. Sales softness in the Magnesium Group’s and an allocation of manufacturing overhead expenses, traditional markets of water heater anodes and construc- including depreciation. Utilities and labour represent a tion tools were offset by increased volume in specialty majority of the cost inputs, as the Company owns mining metals markets. The change in exchange rates of the rights in respect of a quartz quarry, the primary raw Canadian dollar against the U.S. dollar had an unfavour- material input. Total solar grade silicon product cost of able impact on sales of $1.6 million in fiscal 2008 and a sales for the fourth quarter 2008 and fiscal 2008 were $2.5 million favourable impact in the fourth quarter 2008. $12.6 million and $33.0 million, respectively. The main Gross profit for the fourth quarter 2008 was $1.2 million contributor to the increase in margin of the Silicon Group or 8.4% of sales, compared to $0.1 million or 0.9% of sales was the increase in sales volume of solar grade silicon. in the fourth quarter 2007. Gross profit for fiscal 2008 was 22 Management’s Discussion & Analysis

$8.0 million or 12.6% of sales, compared to $5.6 million $8.7 million for the fourth quarter 2008 and fiscal 2008, or 8.9% of sales in the fourth quarter 2007. Gross profit respectively, compared to $1.4 million and $5.3 million, was positively impacted by price increases realized in respectively, for comparative periods in 2007. The largest the quarter and higher utilization of production facilities, portion of the increase was related to higher professional offset by higher magnesium input prices. fees and travel related to various strategic initiatives, in Negative EBITDA of $2.3 million for the fourth quarter addition to smaller increases in various other expense 2008 compared to negative EBITDA of $3.9 million in categories. the fourth quarter 2007. For fiscal 2008, EBITDA was negative $2.0 million, compared to a negative EBITDA of Closure of Haley Facility $2.9 million for fiscal 2007. The decreased losses resulted On June 6, 2008, the Company announced the closure from a rationalization of the Magnesium Group’s opera- of its Haley, Ontario manufacturing facility. This facility tions in order to lower raw materials and production costs. supplied the cast magnesium billet used in the Company’s For the fourth quarters 2008 and 2007 the net losses magnesium extrusion operations in Aurora, Colorado. All were $3.9 million and $2.7 million, respectively. For of these supplies are now being provided by outsource the fiscal years 2008 and 2007 the net losses were partners. This facility also produced specialty magnesium $14.7 million and $4.1 million, respectively. The net granules and turnings which are now produced in the results of 2008 are impacted by reorganization costs Company’s Nuevo Laredo, Mexico facility. resulting from the closure of the Haley facility. Due to The closure of the Haley facility has resulted in a charge historical asset impairment charges, depreciation is to earnings of approximately $11.9 million before taxes in nominal in all of the reported periods. fiscal 2008. The charge is lower than the range of costs of $15 to $17 million anticipated when the closure announce- Corporate and Other ment was made, although the total cost of the closure Corporate and Other EBITDA primarily represents over time will be in the expected range as indicated in the selling and administration expenses of $2.8 million and 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 expenditures Cost 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 and remediation costs and increased the provision to the Haley facility, more than half relates to the settle- by $0.8 million and $1.3 million, respectively. The Com- ment of the liability to the pensioners upon wind-up of the pany also expended $1.3 million in the fourth quarter plan, when the pension obligation is actually settled, and, 2008 ($2.5 million during fiscal 2008) with respect to accordingly, is not recognized as an expense at the time of this reorganization charge, primarily for employee closure of the facility. termination costs. The balance of the reorganization charge amounting to $7.7 million comprises severance, site closure and Aluminium Wheels Investment remediation costs, asset relocation costs and asset Fundo Wheels AS (“Fundo”), a Norwegian company with write downs to estimated fair market value. The assets operations located in Høyanger, Norway, is an original located at the Haley facility were deemed to be impaired equipment manufacturer of cast aluminum wheels as of December 31, 2006 and were written down to for high end European automobile original equipment $1.25 million at that time. At December 31, 2008, the manufacturers. As at December 31, 2008, the Company Company updated its assessment of the fair market value held a 45.3% equity interest in Fundo. The remaining of the Haley land and buildings and deemed they had been 54.7% equity interest in Fundo is held by the community impaired by a further $0.8 million. of Høyanger, the Høyangerfondet Foundation and Sogn og During the third and fourth quarters 2008, the Company Fjordane Fylkeskommune. updated the estimated costs relating to the site closure Management’s Discussion & Analysis 23

The Company has from time to time provided subordinated the Company determined that it would no longer fund debt financing to Fundo. On February 12 and July 11, Fundo’s working capital deficits. Fundo’s management 2008 the Company advanced funds to Fundo to address attempted to secure additional capital and liquidity; short term working capital deficits while Fundo pursued however, it was ultimately unsuccessful. In the third potential new sales opportunities in the automotive quarter 2008, the Company’s investment in Fundo, industry and continued the development of its hybrid consisting of equity and loans, was written down to $nil, wheel technology. Throughout the summer of 2008 the which was management’s best estimate of its fair value. automotive industry experienced a significant decrease On January 12, 2009, Fundo commenced bankruptcy in overall demand for the standard wheels manufactured proceedings in Norway. and sold by Fundo. By the end of the third quarter 2008, Liquidity and Capital Resources Summary 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. Cash Flows Before Financing Activities The consumption of cash during fiscal 2008 is largely The Company’s operations consumed cash flows of attributable to the growth of the Company’s solar grade $1.6 million in the fourth quarter 2008 compared to con- silicon product line. Accounts receivable have increased suming cash flows of $15.0 million in the same quarter in $17.6 million due to the higher average selling price the prior year. For fiscal 2008 the Company’s operations of solar grade silicon and the increased sales volumes. consumed $44.2 million compared to consumption of For fiscal 2008, Magnesium Group accounts receivable $20.1 million in fiscal 2007. In both the fourth quarter increased $0.7 million as increased magnesium costs 2008 and fiscal 2008 the Company generated positive were passed on to customers. The inventories increase cash from operations before changes in non-cash work- of $55.9 million was driven by both the Silicon Group ing capital of $5.9 million and $19.5 million, respectively. ($46.3 million) and the Magnesium Group ($9.6 million). 24 Management’s Discussion & Analysis

For fiscal 2008, the Silicon Group has been building were $1.1 million lower due to lower sales than the third inventories in support of the growth of the solar grade quarter 2008. Throughout the fourth quarter, receivables silicon product line as additional production lines were generally collected within credit terms and bad are commissioned and anticipated to be put into service debts were minimal. Inventories increased $14.8 mil- in future periods. Inventory increases reflect silicon lion from the third quarter 2008. Substantially all of the metal required to support the ramp-up of the solar grade increase is attributable to the Silicon Group with a silicon facilities while concurrently supplying silicon metal $0.6 million decrease in the Magnesium Group. Silicon customers, plus accumulation of intermediate products metal purchases have increased in anticipation of the that will either be consumed in the manufacture of silicon commissioning of new solar grade silicon production once additional production capacity has been brought on- lines in the fourth quarter 2008 and the seasonal pur- line or will be sold subsequent to the quarter end. A portion chase of raw materials before the closure of shipping of the increase is also the result of seasonal purchases of lanes. In the Magnesium Group, the price for magnesium raw materials prior to the closure of shipping lanes in metal decreased relative to the third quarter 2008 and the winter. Inventories for the Magnesium Group increased the quantity of magnesium in inventories was decreased. during fiscal 2008 due to the increased unit cost of mag- This was offset by the conversion of the United States nesium and an increase in raw materials inventory in dollar carrying value due to the weakening Canadian dollar transit as the supply chain was changed in anticipation of exchange rate. Accounts payable and accrued liabilities the closure of the Haley facility. The increase in accounts increased $10.2 million compared to the third quarter payable and accrued liabilities of $13.0 million for fiscal 2008: $8.9 million for the Silicon Group and $1.3 million 2008 reflects the increased inventory purchases of the for the Magnesium Group. The Silicon Group increase Silicon Group and the timing of payments related to the relates to the plant expansion and the timing of payments plant expansion ($10.7 million) and the timing of inventory for inventory purchases related to the expanded purchases for the Magnesium Group ($2.3 million). plant capacity. In the fourth quarter 2008, accounts receivable increased Results of operations in both the fourth quarter 2008 and by $1.7 million. Sales to Silicon Group customers were fiscal 2008 reflect the growth in revenue from solar grade higher in the fourth quarter 2008 resulting in accounts silicon that has generated cash flow from operations receivable increasing $2.8 million compared to the third before changes in working capital. 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, $17.9 million of the deposits will be repayable early in the including $4.4 million received during the fourth quarter first quarter 2010. As of December 31, 2008, $1.9 million 2008, from its customers under the terms of solar has been drawn down against deposits through ship- grade silicon supply contracts. These amounts, which ments of finished product to customers. are non-interest bearing pre-payments to be credited The global economic downturn has negatively impacted against future deliveries of solar grade silicon under such the solar industry in general and has resulted in weak- contracts, are being used to fund the capacity expansion. ened liquidity of certain market participants. Under the In the event of an early termination or completion of a terms of existing supply contracts the Company has supply contract, any remaining balance on the deposits contractual commitments from certain customers to pay would be returned to the customer within a specified time additional deposits. There is significant uncertainty as to period. If the remaining amount is not repaid within the whether these deposits will be received. The Company is specified time period it becomes interest bearing at rates in discussions with its customers regarding alternatives specified in the contract. One such supply contract will to these contractual commitments in the context of facili- be completed at the end of 2009, and unless the Company tating requests that may serve to maintain and enhance concludes a contract extension with this customer, up to long-term customer relationships. The outcome of these Management’s Discussion & Analysis 25

discussions may include a renegotiation of certain terms in liquid form as a “first pass”; the reconfiguration of and conditions that preserves the economic return to the equipment at the existing three line purification facility Company while adjusting deposits, advances and timing and the installation of new purification equipment in such of delivery to better reflect the current environment. facility and in another new purification facility all of which will produce “second pass” and “third pass” material; Capital Expenditures and the construction of new buildings for packaging and The Company operates in a capital-intensive manufactur- shipping, maintenance and employee services, all of ing industry. Capital expenditures are incurred to expand which will be located at the Company’s Bécancour site. To capacity for new product lines, maintain capacity, comply date, the Company has installed and commissioned seven with safety and environmental regulations, support cost of a planned total of 12 purification lines. Construction of reductions and foster growth. the new and expanded buildings and the commissioning of the new and reconfigured equipment for this expansion During the fourth quarter 2008, the Company invested were originally expected to be completed by mid 2009. $28.5 million in capital assets, of which approximately However, the Company announced on March 17, 2009 that $20.0 million was in respect of the expansion of its it will defer further capacity expansion of its solar grade solar grade silicon production capacity. For fiscal 2008, silicon facility until orders for solar grade silicon in excess the Company acquired $80.1 million of capital assets, of current capacity are confirmed by its customers. of which approximately $67.0 million related to the construction of its solar grade silicon facilities in The Company believes it has sufficient liquidity to Bécancour, Québec. finance the expected capital expenditures for its current expansion plans for its solar grade silicon production in In the first quarter 2008, the Company announced plans Bécancour. Sources of financing include proceeds from to expand its nominal production capacity for solar grade the private placement of common equity of $24.2 million silicon to 14,400 metric tons per year. This expansion, which closed on February 3, 2009, the Company’s credit the construction of which commenced in the second facilities, further solar grade silicon customer deposits, quarter 2008, includes: the installation of additional lines if any, cash flow from operations and cash on hand. See of purification equipment in the existing silicon metal “Credit Facilities” and “Customer Deposits” below. production facility to enable processing of silicon metal 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 The Company uses its credit facility to finance working The Company’s controlling shareholder, AMG Advanced capital requirements. As it develops a steady history Metallurgical Group N.V. (“AMG”), has consistently owned of operating earnings and as credit markets stabilize more than 50% of the total common shares outstanding in the future, the Company will evaluate seeking term and has participated in financings to maintain its majority debt financing to fund its capital assets. Since 2004, the control. Although AMG has expressed its intent to main- Company has funded its expansion from the issuance tain a majority controlling position in the Company, there of convertible debentures and share capital to its major- can be no assurance that AMG will always participate in ity controlling shareholder and public shareholders. future equity financings. 26 Management’s Discussion & Analysis

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, Equity Financings 2005 (as amended, the “Credit Agreement”) with Bank On April 30, 2007, the Company completed a public offer- of America, N.A. (the “Bank”). The Credit Agreement ing of 11,500,000 common shares at a price of $2.60 per principally includes a revolving line of credit (the share, resulting in gross proceeds of $29.9 million. Net “Revolver”) for US$50.0 million as of December 31, 2008. proceeds of the offering, which were $27.8 million, were The Revolver currently bears interest at the U.S. prime used primarily for the construction of the new solar grade rate plus bank margin of 1.25% (6.25% as at December 31, silicon production facility in Bécancour, Québec, and for 2008) and does not require minimum repayments. general corporate purposes. The Credit Agreement expires on March 31, 2010. On September 27, 2007, the Company completed a public The Revolver is secured by the assets of the Company. offering of 5,014,334 common shares at a price of $8.50 The Credit Agreement currently includes a financial per share, resulting in gross proceeds of $42.6 million. covenant requiring the Company to maintain a minimum Concurrently with the public offering, the Company EBITDA level on a rolling 12-month basis. The Company completed a private placement of 5,136,140 common is currently in compliance with this covenant as of shares to AMG, the Company’s controlling shareholder, December 31, 2008. As a result, the Company presently resulting in gross proceeds of $43.7 million. Net proceeds is able to utilize the total availability under the Credit of the public offering and private placement, which were Agreement. Total availability is equal to (i) the lesser $83.6 million, were used primarily for additional produc- of the borrowing base and the revolving credit commit- tion capacity expansion for solar grade silicon at the ment under the Revolver, minus (ii) the amount Bécancour facility and to further the Company’s objective borrowed under the Revolver, which was US$41.8 million to increase the purity of its solar grade silicon production as of December 31, 2008. The Company is also beyond the 99.999% material presently produced. The required to maintain a minimum availability of at least balance of the net proceeds was used for repayment of US$2.0 million at all times. The Credit Agreement bank debt and for general corporate purposes. previously included other financial covenants, including On February 3, 2009, the Company completed an equity minimum fixed charge coverage ratios. These covenants offering by way of private placement of 7,042,000 common have been revised or waived from time to time. The shares at a price of $3.55 per share, resulting in gross covenant relating to the Company’s fixed charge coverage proceeds of $25.0 million. AMG acquired 3,938,200 com- ratio ceased to apply as of and from June 30, 2008. 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. Management’s Discussion & Analysis 27

Convertible Notes (“Safeguard”). Such borrowings were made pursuant to The Company currently owes the following amounts to the terms and conditions of certain convertible promis- ALD International LLC (“ALD International”), which is a sory notes, as are described below under “Related Party controlled subsidiary of Safeguard International Fund, LP Transactions – Convertible Notes”. 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 Defined Benefit Pension Plan Obligations losses of approximately $9.8 million incurred in 2008. The Company directly and through its wholly-owned Such losses are due to a combination of: (i) an investment subsidiaries sponsors five defined benefit pension plans. loss of approximately 20% of the market values of the However, only two such plans have active members. plans’ assets due to negative investment returns during These are contributory defined benefit pension plans 2008 – as of December 31, 2008, such market values for employees in the Company’s Silicon Group (“Silicon totalled $30.6 million; and (ii) a solvency liability loss of plans”). The remaining three defined benefit pension approximately 6% in the plans’ liabilities during 2008, due plans, which have no active members, are for former to changes in prescribed actuarial assumptions. However, employees of former operations of the Company and are this increase in estimated annual funding contributions in the process of being wound up (“inactive plans”). starting in 2011, which is based on December 31, 2008 The notes to the Company’s audited financial state- market data, does not take into account any potential gains ments for the year ended December 31, 2008 reflect an or losses that may arise in 2009 and 2010. The Company’s aggregate unfunded deficit of $16.3 million (for the year pension expenses associated with the Silicon plans for ended December 31, 2007 – $12.8 million) in respect of its 2009 are expected to be approximately $2.4 million. defined benefit pension plans. With respect to the inactive plans, two plans are in the With respect to the Silicon plans, the most recent final stages of settlement and wind up (“inactive wind-up actuarial valuations were performed as of December 31, plans”) and one is in the early stages of settlement 2007, and the next actuarial valuations will be performed (“Haley plan”). The inactive wind-up plans have assets of no later than December 31, 2010. Based on the actuarial less than $0.5 million and are anticipated to require cumu- valuations updated as at December 31, 2008, the plans lative payments of less than $0.4 million to settle the plans. have an aggregate unfunded deficit of $9.2 million on a These plans have been terminated as of December 31, solvency basis (December 31, 2007 – $10.9 million). The 2008 and further actuarial valuations are not required for Company expects that funding contributions will be made the purposes of funding if they are terminated as sched- to these plans in the amount of approximately $2.6 million uled. An actuarial valuation of the Haley plan was last in both 2009 and 2010, which are comparable to the fund- performed as of January 1, 2007. The Haley plan ceased ing contributions made in 2008. The Company’s actuaries having active members as of August 1, 2008, and a estimate that annual funding contributions to these plans wind-up valuation is currently being performed as of that could increase to as much as $4.6 million for each of the date. Based on a January 1, 2008 update to the prior years 2011 to 2013, based on the actuarial valuations as of actuarial valuation, the Company made funding contribu- December 31, 2007 and taking into consideration actuarial tions to this plan throughout 2008 both in respect of accruals for service up to August 1, 2008, and special 28 Management’s Discussion & Analysis

payments to address the funding deficit. Until the wind-up All of these risks may materially change the Company’s valuation report is completed and approved by the future contribution requirements and the pension Financial Services Commission of Ontario, the Company expense it will recognize in future period statements will continue to contribute special payments to the Haley of operations. plan in accordance with the January 1, 2008 update. These payments are expected to be $1.5 million in 2009. Foreign Exchange and Foreign Currency Contracts The Company will be required to make contributions to On an annualized basis, approximately 90% of the Com- fully fund the deficit within five years after approval of the pany’s sales are denominated in U.S. dollars or Euros. wind-up report, whose approval is not expected until the For reporting purposes all foreign currency sales and latter half of 2009. For the year ended December 31, 2008, expenses are converted to the Canadian dollar equivalent the Company recognized an estimated pension curtail- at the exchange rate applicable at the time of the transac- ment expense of $4.3 million and will record a pension tion. While the Company has historically been exposed to settlement expense in a future fiscal period which swings in foreign exchange rates, and will continue to be currently is estimated to be $7.6 million. This expense will exposed to some extent, it is increasingly endeavouring to be recognized upon final settlement of the pension reduce these risks through foreign exchange contracts. liabilities and determination of the actual deficit in the As at December 31, 2008, the Company had outstanding Haley plan upon completion of the wind-up process. Until exchange contracts to sell 112.0 million over the 12 month the final settlement of the pension liabilities, this expendi- period to December 2009 at a weighted average rate ture will change based on gains or losses that may arise of 1.5801 and US$9.0 million over the same period at an prior to completion of the wind-up process, based on average rate of $1.2365. The counterparty to the contracts fluctuations in market values of assets and investment is a multinational commercial bank. returns and changes in actuarial assumptions and data experience in respect of the Haley plan. Related Party Transactions There are various risks to the Company related to its In March 2007, Safeguard reorganized its indirect obligations to the defined benefit plans: holdings in the Company, by contributing 40,909,093 i. There is no assurance that the plans will be able common shares of the Company to AMG and increasing to earn the assumed rates of return. The Company its ownership interest in AMG to 89.7%. In June 2007, assumed the Haley plan will be settled in approxi- Safeguard’s ownership interest in AMG increased to mately five years; accordingly, the actuarial valuation 91.5%. In July 2007, Safeguard sold a portion of its shares assumed five year bond yields. The Silicon plans are of AMG and retained 40.2% of the outstanding share active ongoing defined benefit plans. Therefore, long capital of AMG. In October 2007, Safeguard sold a further term bond yields and equity returns were assumed in portion of its shares of AMG, such that Safeguard’s the latest actuarial valuation. ownership interest in AMG reduced to 26.6%. In addition, AMG has entered into a call option agreement with ii. Market driven changes may result in changes in the ALD International (the “AMG Call Option Agreement”), discount rates and other variables which would result pursuant to which AMG may, at its option, require ALD in the Company being required to make contributions International to instruct the Company to issue to AMG any in the future that differ significantly from the current common shares issuable upon the conversion of certain estimates. The Company is currently remitting annual convertible promissory notes issued by BSI, as described special payments of $1.5 million to address the funding below under “Convertible Notes”. The Company was not deficit in the Haley plan. If equity markets decline a party to any of the foregoing transactions among AMG, below current levels, the Company may be required to Safeguard or ALD International. However, the Company remit material payments to this plan prior to settle- did enter into the transactions described below with one ment. Currently, it is anticipated that contributions to or more of these parties. the Silicon plans will increase from current annual remittances of $2.6 million to $4.6 million in 2011. If As at December 31, 2008, AMG directly held 52,559,733 equity market values change significantly in the interim common shares of the Company, representing 50.4% of period, then the required annual contributions may the total issued and outstanding shares. Subsequent to increase or decrease significantly. the Company’s equity offering that was completed on February 3, 2009, AMG directly held 56,497,933 common iii. There is measurement uncertainty incorporated into shares of the Company, representing 50.7% of the total the actual valuation process. The Company and its issued and outstanding shares. actuarial advisors believe they have applied conserva- tive valuation parameters in the derivation of the plans’ Fundo Wheels obligations. If those assumptions are incorrect, then future calculations of the plans’ obligations could be In the fourth quarter 2008, the Company purchased materially different. $1.7 million in finished goods inventory (aluminum Management’s Discussion & Analysis 29

wheels) from Fundo under an arrangement whereby repayable on demand, bear interest at the U.S. prime Fundo agreed to resell such inventory on behalf of the rate plus 1%, are secured against the assets of BSI, and Company to Fundo’s existing customers and remit the are subordinated to the indebtedness due to the Bank proceeds from such sales to the Company. In connection under the Credit Agreement. Each note may be settled, with this arrangement, AMG unconditionally agreed to at the lender’s option, in cash or common shares of the pay the Company an amount equal to any shortfall in the Company (or a combination thereof); the conversion actual proceeds from the sales of such inventory. Fundo price of the August 2006 Note is $0.40 per share and the defaulted on its obligations to the Company and, pursuant conversion price of the March 2007 Note is $0.42 per to the Company’s demand under the guarantee, AMG paid share. See “Liquidity and Capital Resources – Convertible the Company $1.7 million plus interest at 7%. Notes” above for a summary of the outstanding amounts under these notes, and see “Capital Structure” below ALD Vacuum Technologies for a summary of the common shares issuable upon the In fiscal 2008, BSI purchased a furnace and equipment conversion of these notes. spare parts from ALD Vacuum Technologies GmbH, a On July 23, 2007, US$0.35 million of the principal amount wholly-owned subsidiary of AMG, for $1.6 million. This of the August 2006 Note was converted into common equipment, which facilitates the production of ingots from shares of the Company. As a result, AMG increased its solar grade silicon, was purchased on arm’s length terms ownership position in the Company to 50.6% by exercising and is being used by BSI for quality control purposes and its option under the AMG Call Option Agreement to for research and development activities. acquire the 913,500 common shares that were issued upon such conversion. Private Placements The Company issued common shares to AMG in private Executive Management placement transactions that were concluded concurrently Both Dr. Schimmelbusch and Mr. Spector are members with equity offerings on September 27, 2007 and of the Management Board of AMG, and are also members February 3, 2009. See above under “Liquidity and Capital of the executive committee of the general partner of Resources – Equity Financings”. Safeguard, which controls ALD International. Convertible Notes The Company and Allied Resources Corporation (“Allied”) share the cost of John Fenger, President – Light Metals of On August 31, 2006, the Company issued a convertible the Company. During fiscal 2008, the Company contrib- promissory note in exchange for US$3.0 million, which uted $0.4 million to the cost of the remuneration of is held by ALD International (the “August 2006 Note”). Mr. Fenger (for the year ended December 31, 2007 – On March 1, 2007, BSI borrowed $4.5 million from ALD $0.5 million). Dr. Schimmelbusch is both the Chairman International (the “March 2007 Note”). The notes are and CEO of the Company and the Chairman of Allied. Capital Structure As 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 representing approximately 7.0% of the Company’s issued shares were subject to outstanding options granted under and outstanding shares as at December 31, 2008. the Company’s Share Option Plan established in 2004 (the Measured at the December 31, 2008 noon exchange rate, “2004 Option Plan”), with exercise prices ranging from as quoted by the Bank of Canada, of $1.2246 CAD$/US$, $0.29 – $15.45. If exercised, 11,349,000 common shares the balance of the August 2006 Note is convertible into of the Company would be issued. As of December 31, 8,112,975 common shares of the Company (based on 2008, 2,174,000 options had met the vesting criteria the March 25, 2009 Bank of Canada noon exchange rate of which 2,161,500 are in-the-money based on the Decem- of $1.2245 CAD$/US$ – 8,112,313 common shares). The ber 31, 2008 TSX closing price of $3.53 per common March 2007 Note is convertible into 10,714,286 shares share. The maximum number of common shares avail- of the Company. See “Related Party Transactions – able for options under the 2004 Option Plan is 7,332,175, Convertible Notes” above. 30 Management’s Discussion & Analysis

On November 11, 2008, the Board of Directors approved severe financial difficulties, which could significantly a new share option plan (the “2008 Option Plan”) as increase the Company’s credit risk or reduce the Com- part of certain incentive compensation arrangements. pany’s liquidity. Moreover, the pace of deterioration of Options granted under the 2008 Option Plan have an economic conditions has continued to accelerate since exercise price at no less than the fair market value of the the end of fiscal 2008, particularly impacting the stock Company’s common shares at the time of the grants, and markets, which have experienced unprecedented volatil- have a nine-year vesting schedule with 50% becoming ity. If these circumstances persist or deteriorate further, exercisable only after the fifth anniversary of the grant the Company’s ability to raise capital in the debt or date, and the remaining 50% vesting equally on the sixth equity markets could be significantly limited, which could through ninth anniversary dates. The options will expire restrict the Company’s ability to pursue its strategies or ten years after the grant date. The maximum number financial objectives. Any one of these developments could of common shares available for options under the 2008 have a material adverse effect on the Company’s financial Option Plan is 10 million, representing approximately 9.6% position, results of operations and liquidity. of the Company’s issued and outstanding shares as at December 31, 2008. This new share option plan is subject Risks Relating to the Silicon Group to approval by the Company’s shareholders at the 2009 Customer Commitments for Solar Grade Silicon annual general and special meeting, and is also subject The Company has several long-term commercial to Toronto Stock Exchange approval. Options to purchase contracts with customers for the supply of solar grade 7 million common shares of the Company were granted silicon. These contracts provide for certain volume under the 2008 Option Plan. As of March 25, 2009, there purchase and delivery commitments by the customers has been no material change in the number of common and the Company, respectively, during specified periods shares issuable upon the exercise of options pursuant to over the term of each contract. Based on its current either the 2004 Option Plan or the 2008 Option Plan. production capacity and expansion plans, and experience On February 3, 2009, the Company issued 7,042,000 to date in fulfillment by customers of their volume pur- common shares at a price of $3.55 per share, resulting chase commitments, the Company expects to be able to in gross proceeds of $25.0 million. Net proceeds of the satisfy all of its volume delivery commitments regarding private placement, which were $24.2 million, were used solar grade silicon. However, actual customer fulfill- for general corporate purposes including repayment of ment of volume purchase commitments in the future is funds drawn on the Company’s revolving credit facility. uncertain, as many customers under long-term contracts for solar grade silicon have recently reduced their orders Risks and Uncertainties due to the current market downturn. A shortfall in the volumes of solar grade silicon actually purchased by The Company’s businesses are subject to significant risks these customers relative to the Company’s expectations, and uncertainties. These risks and uncertainties, together or changes in the timeframes within which these with certain assumptions, also underlie the forward- customers take delivery, or an inability by the Company looking statements made in this MD&A and may cause to satisfy the volume requirements under these contracts the Company’s actual results to differ materially from or other purchase orders with its customers could have its expectations. Described below are some of the more a material adverse effect on the Company’s financial significant risks that could affect the Company’s results. position, results of operations and liquidity. Global Economic Uncertainty The Company’s contracts with customers also provide for Global economic conditions have deteriorated rapidly over specifications for the solar grade silicon to be delivered, the last several months as a result of the financial crisis and various quality control and testing methodologies that erupted in North America, Europe and Asia during to verify compliance with such specifications. Such 2008. These developments, which include the collapse specifications, quality controls and testing methodologies of certain financial institutions, significant tightening of are changing and are expected to evolve as the Company credit, loss of consumer and investor confidence and and its customers continue to build experience in using recession, are having and will likely continue to have a the Company’s solar grade silicon for solar photovoltaic broad-reaching impact on the Company’s businesses applications. and the industries in which they operate. The severity, Certain contracts also provide for the customer to make duration and extent of such impact are not yet fully advance payments, or deposits, to the Company. The understood. Many of the Company’s customers are Company has received $45.5 million in such deposits experiencing financial constraints and have reduced or during fiscal 2008, and existing contractual commitments deferred their purchases. Such customers may continue provide for additional deposits to be made by certain to curtail or delay their purchases, which would reduce customers, in some cases conditional upon certain events the Company’s revenues, or may experience even more or circumstances arising under the terms of the contract. Management’s Discussion & Analysis 31

In the event of an early termination or completion of a • Quality of silicon metal feedstock – Lower impurity supply contract, any remaining balance on the deposits levels in the silicon metal that the Company uses as would be returned to the customer within a specified time a feedstock for the purification process will provide period. If the remaining amount is not repaid within the higher yields of solar grade silicon per volume input specified time period it becomes interest bearing at rates into the process. specified in the contract. In addition, the global economic • In-house production of molten silicon metal feedstock – downturn has negatively impacted the solar industry in Cost reductions should be achieved once the current general and has resulted in weakened liquidity of certain expansion project is complete and the Company is able market participants, which has created significant to utilize molten silicon metal produced at its own uncertainty as to whether the remaining deposits will facility as feedstock for the purification process as this be received. The Company is in discussions with its is expected to enable the Company to eliminate one customers regarding alternatives to these contractual cycle of re-melting and purification. commitments in the context of facilitating requests that • Scale – The Company expects to realize cost savings may serve to maintain and enhance long-term customer per kilogram when the current level of production relationships, including a renegotiation of certain terms of solar grade silicon is expanded to a planned level and conditions. However, there is no assurance that the of 14,400 metric tons per year, based upon spreading Company will be able to preserve the economic return to overhead costs across a larger volume, and production the Company while adjusting deposits, advances and tim- efficiencies related to a more flexible plant configuration. ing of delivery to better reflect the current environment. • Continuous process improvement – The Company Any inability of the Company to address customer issues, expects to realize numerous small process improve- whether regarding delivery volumes, quality or deposits, ments over time to enable it to lower production costs. may delay or reduce deliveries of solar grade silicon, or result in termination of one or more of the long-term • Customer Requirements – The specific purity levels commercial contracts, including a repayment of deposits, required by the Company’s current and future customers any of which could also have a material adverse effect on of solar grade silicon will impact the amount and the Company’s financial position, results of operations nature of the processing that the Company would have and liquidity, including in the case of termination of a to perform. long-term commercial contract, possible repayment on There is no assurance of the timing and extent to which account of the remaining deposit. the Company will be able to achieve its solar grade silicon The Company’s revenue recognition policy provides that production cost targets. revenue from long-term solar silicon contracts will be recorded net of an adjustment for estimated returns Expansion of Solar Grade Silicon Production Capacity of scrap material. This estimate will fluctuate, with appro- The Company has plans to eventually expand its produc- priate adjustments to the return provision, depending on tion facilities in Bécancour to a nominal production changes in the Company’s experience with the return rate capacity for solar grade silicon of 14,400 metric tons and other assumptions, including the prevailing market per year. This expansion will involve risks, including price for scrap material relative to the value of the credit potential delays in construction of the new facilities and customers would receive from the Company for returned commissioning of equipment, and unanticipated costs material. A significant change in the return rate or other and changes in design that may cause the Company’s assumptions underlying the Company’s estimates could capital budget for the project to be exceeded. There may have a material adverse effect on the Company’s results also be delays in achieving the full production capacity of operations. while the Company is in the ramp-up stage in the new facilities. Failure to complete this expansion or to achieve Solar Grade Silicon Production Costs the anticipated production capacity within the expected The Company anticipates that its variable cost of timeframe and on budget could have a material adverse production for solar grade silicon will fluctuate in the effect on the Company’s financial position, results of short-term, as it continues to refine and optimize produc- operations and liquidity. tion processes at its new manufacturing facilities. The Company has established production cost targets for Protection of Intellectual Property Rights the purification of solar grade silicon based on long term The success of the Company’s solar grade silicon produc- production levels which it has not yet achieved principally tion and sales depends to a large degree on the protection because it is still in the production ramp-up stage. and development of its intellectual property rights, The key factors that will influence the Company’s achieve- including proprietary technology, information, processes ment of its target include: and know-how. Such protection is based on trade secrets and patents, including two patents pending in respect of 32 Management’s Discussion & Analysis

the Company’s manufacturing process for the production The Company’s revenues, earnings and cash flows of solar grade silicon. The Company has received favour- from the sale of silicon metal are sensitive to changes able preliminary reports from the international patent in market prices. In order to manage some of the price examiners in respect of two of its key patent applications. volatility related to these products, the Company enters As well, the Company attempts to protect its trade into contractual arrangements to fix the selling prices for secrets through physical security measures, as well as certain periods, generally a calendar year, where possible. confidentiality agreements with customers, suppliers and However, the Company may not be able to reduce its key employees. The Company also enters into licensing exposure to such metal price risks. arrangements in respect of third parties’ intellectual property rights, and collaborates with key equipment sup- Pricing and Availability of Raw Materials pliers in the development of technologies that enhance Coal is a significant raw material in the production of the Company’s product offering. The Company could also silicon metal, and the market price of coal is an important be liable to third parties in respect of any infringements of factor influencing the Company’s cash flows and earn- their patents or other intellectual property rights. There is ings. The price of coal has risen in the last few years, no assurance that the Company has adequately protected and more significantly since the beginning of this year, or will be able to adequately protect its valuable intel- principally due to supply shortages. The Company has lectual property rights, or will at all times have access its own internal supply of quartz which is the source of to all intellectual property rights that are required to the silicon. The Company has determined that alternate conduct its business or pursue its strategies, or that the suppliers of quartz have superior quality for the produc- Company will be able to adequately protect itself against tion of solar grade silicon feedstock and accordingly has any intellectual property infringement claims. begun to procure more quartz from third party suppliers. The Company also buys silicon metal in the spot (or open) Purity of Solar Grade Silicon market to balance its production and thus is subject to The Company is currently able to produce solar grade fluctuations in market price, which has increased due to silicon at a purity level of 99.999%, or “five nines”, with supply and demand forces. An increase in the pricing for, levels of phosphorus and boron that are contemplated or limitations on the availability of, these raw materials under existing contracts. The Company has achieved could have a material adverse effect of the Company’s a boron level of 0.5 parts per million and a phosphorus financial position, results of operations and liquidity. level of 1.5 parts per million, and is striving to consistently maintain these levels. Achieving and maintaining these Importance of Customer Capabilities in Producing Ingots levels could allow customers to increasingly utilize The next step in the solar value chain downstream from unblended versions of the Company’s solar grade silicon the Company is the transformation of solar grade silicon in their manufacturing activities, which could enhance the into ingots which are cut into “bricks”. The Company has Company’s competitive advantage and may allow for discovered that there is a significant range of experience increased selling prices and margins. However, achieving in its customer base with respect to this vital transforma- and maintaining these levels may also increase the tion. The quality of the resulting solar wafers can be Company’s production costs for solar grade silicon. The quite different depending upon the process adopted for Company intends to invest certain resources to achieve ingot making. To that end, the Company is collaborating improvements in purity levels of its solar grade silicon. with third parties and its affiliates to develop processes However, there is no assurance that the Company will to optimize the quality of ingots and bricks made from consistently achieve these or any higher purity levels for its solar grade silicon. There is no assurance that such its solar grade silicon. development efforts will be successful or that customers will adopt appropriate processes, and therefore there Solar Grade Silicon and Silicon Metal Selling Prices remains a risk that certain customers will not achieve the Some of the long-term commercial contracts for solar results they expected from solar grade silicon. grade silicon provide for renegotiations on pricing in certain circumstances. These pricing negotiations will be Limited History with Solar Grade Silicon significantly influenced by the prevailing market price of Although the Company has experience in producing sili- solar grade silicon, and there is a risk that such prevailing con metal, it has relatively limited history and experience market price will decline, whether as a result of any addi- in producing solar grade silicon. As such, the Company’s tional UMSi or polysilicon production capacity becoming historical financial results do not provide a meaningful available or due to declining demand. Such a price decline basis for evaluating its future financial performance. on incremental volumes could have a material adverse effect on the Company’s financial position, results of operations and liquidity. Management’s Discussion & Analysis 33

Power Supply Pricing and Availability of Magnesium Metal The production of silicon metal is energy intensive and The market price of magnesium metal has a significant the Company is dependent upon the continuous supply impact on the Company’s cash flows and earnings. of electricity from third parties for its smelting and other In the past few years, the price of magnesium metal has operations in Bécancour. During the first quarter of significantly increased. The Company purchases the 2007, the Company suffered an interruption in electricity majority of its magnesium metal and is subject to pricing service, and has since taken measures to mitigate the cycles dictated by overall supply and demand for this raw likelihood of such interruptions in the future. However, material. Suppliers have demanded increased selling there is no assurance that the Company will not be subject prices for magnesium metal, despite existing supply to power interruptions in the future. contracts, and, as a result, there is no assurance that such contracts will fully protect the Company against Risks Relating to the Magnesium Group magnesium price risks. The Company also purchases Closure of Facilities and Completion of Proposed magnesium in U.S. dollars, but is subject to pricing Transactions with Winca adjustments based on the exchange rate between the The Company intends to wind down production operations U.S. dollar and the Chinese Renminbi for a portion of its at its existing magnesium extrusion facility in Aurora, magnesium purchases. The Company attempts to pass Colorado and close that facility later in 2009. The Company on increased magnesium metal costs to its customers. also intends to pursue the transactions contemplated by However, existing customer contracts may limit the the non-binding letter of intent with Winca announced timing or amount of any adjustments and price increases on February 18, 2009 that would involve the transition reduce the competitiveness of the Company’s products. of certain aspects of the Company’s magnesium and The Company is currently dependent on the supply of specialty metals business and assets to a new merged magnesium metal from a number of third party suppliers business, to be known as Applied Magnesium Interna- in Russia and China, and has outsourced certain magne- tional (“AMI”). The closure of the Aurora magnesium sium production functions to such suppliers as part of its extrusion operations will result in severance payments ongoing manufacturing cost reduction initiatives. and other cash closure costs of approximately $3 million, Financial difficulties or operational constraints affect- which will be incurred in 2009, and the Company expects ing any such supplier may adversely affect its ability to to record charges in the first half of 2009 relating to continue to produce and supply a sufficient quantity of these costs. The majority of the production assets of the magnesium metal or to perform outsourced production Aurora facility were deemed to be impaired during 2006 functions. There is no assurance that any efforts the and written down to fair market value at that time. To the Company may take in response to or in anticipation of extent that estimated proceeds of disposition, if any, are supply constraints will effectively mitigate the Company’s less than the carrying value of such assets, a charge will exposure to supply chain risk for its magnesium business. be taken in the first half of 2009. The Company expects to recover a significant portion of its investment in working Other Risks capital as the Magnesium Group’s operations are wound Financing for Capital Expenditures down and the remaining business is transitioned to AMI. The Company’s growth plans will require capital The Company expects to generate net cash proceeds expenditures. The Company is expanding its solar from these announced plans during 2009. However, the grade silicon production facilities in Bécancour, and actual closure costs may exceed the Company’s expecta- may also require capital expenditures for acquisitions, tions, and the actual proceeds from disposition of working mergers, business combinations, joint ventures, or capital items may not meet the Company’s expectations. strategic business alliances or partnerships in respect Moreover, the proposed transactions with Winca are of its businesses or investments. The Company expects subject to a number of conditions, including financing to fund its requirements for capital expenditures from and execution of definitive agreements, and are expected common equity, term debt, credit facilities, operating to be completed in the second quarter 2009. A failure to cash flows and cash balances. However, these sources complete such transactions on the expected timetables, of financing may not be available to the Company when if at all, could further increase the Company’s severance required in the amounts needed or on acceptable terms. payments and other cash closure costs relating to the The Company’s existing credit agreement also limits Magnesium Group, or further reduce the proceeds from the Company’s financial flexibility in a number of ways, disposition of working capital items. Any of these events including restrictions on the Company’s ability to incur could have a material adverse effect of the Company’s additional indebtedness, to sell assets, to create liens or financial position, results of operations and liquidity. other encumbrances, to incur guarantee obligations, to 34 Management’s Discussion & Analysis

make certain payments, investments, loans or advances, Interest Rate Risk and to make acquisitions or capital expenditures beyond The Company is exposed to interest rate risk to the extent certain levels. that cash and short term investments, bank indebtedness, convertible notes receivable and amounts due to Foreign Exchange an affiliated company are at floating rates of interest. The majority of the Company’s products are priced in The Company’s maximum exposure to interest rate risk U.S. dollars and Euros. The Company reports its results is based on the effective interest rate and the current in Canadian dollars, and a substantial portion of the oper- carrying value of these assets and liabilities. The ating costs of the silicon business is in Canadian dollars. Company monitors the interest rate markets to ensure Consequently, the Company’s earnings and cash flows that appropriate steps can be taken if interest rate volatil- are sensitive to changes in exchange rates. The Company ity compromises the Company’s cash flows. However, the enters into foreign exchange contracts from time to time Company may not be able to reduce its exposure to all to mitigate its foreign currency risk relating to certain such interest rate risks. cash flow exposures. However, there is no assurance that such foreign exchange contracts will fully protect the Credit Risk Company against foreign exchange risks. Accounts receivable, convertible notes and long term receivables are subject to credit risk exposure and the Customer Concentration carrying values reflect management’s assessment of The Company has traditionally had several large custom- the associated maximum exposure to such credit risk. ers, the loss of any of which could have a material adverse Substantially all of the Company’s accounts receivable effect on the financial position, results of operations and are due from customers in a variety of different industries liquidity of the Company. At December 31, 2008, one cus- and, as such, are subject to normal credit risks in their tomer accounted for 14% of total sales (for the year ended respective industries. The Company regularly monitors December 31, 2007 three customers accounted for 39% customers for changes in credit risk. Where available, of total sales). Not all of the Company’s key customers the Company has insured its accounts receivable under are subject to long-term contracts. Some of the existing credit insurance policies to offset the increased credit long-term customer contracts for the Magnesium Group risk environment. However, since all customers may not are currently under renegotiation, and the Company is qualify for credit insurance the Company may not be able experiencing significant pricing pressure as a result of to reduce its exposure to all such credit risks. increased competition. Liquidity Risk Environmental Liabilities Liquidity risk arises through excess financial obligations The Company is, and historically has been, involved over available financial assets due at any point in time. in businesses that may be deemed to be hazardous to The Company’s objective in managing liquidity risk is to the environment and subject to extensive and changing maintain sufficient readily available sources of funding laws and regulations governing, among other things, in order to meet its liquidity requirements at any point in emissions to air, discharges and releases to land and time. The Company attempts to achieve this by maintain- water, the generation, handling, storage, transportation, ing cash positive operations and through the availability treatment and disposal of wastes and other materials, and of funding from committed credit facilities. As at the remediation of contamination caused by discharges December 31, 2008, the Company was holding cash and of waste and other material. The Company has accrued cash equivalents of $4.5 million and had undrawn lines $5.8 million as at December 31, 2008 for future costs of credit available of US$6.2 million. On October 21, 2008, relating to site restoration and closure of certain of its the Credit Agreement was amended to increase the total former facilities and operations. The actual cost for such maximum credit lines to US$50.0 million. Subsequent site restoration and closure in the future could be higher to the year end the Company raised $24.2 million in a than the amounts estimated. The Company’s estimate common equity private placement to further strengthen for this future liability is also subject to change based on its overall liquidity. If sufficient sources of funding are amendments to applicable laws, the nature of ongoing not available in the future, the Company may not be able operations, the timing of future closures and technological to fully implement its growth plans or strategic objec- innovations. In addition, a violation of environmental or tives, which could have a material adverse effect on the health and safety laws could lead to, among other things, Company’s business or investments. a temporary shutdown of the Company’s facilities or the imposition of fines, penalties or additional costly compliance or remediation procedures. Management’s Discussion & Analysis 35

Critical Accounting Estimates Fair Market Value of Assets at Haley, Ontario The preparation of the Company’s financial statements in The Company is in the process of closing its Haley, accordance with Canadian generally accepted account- Ontario manufacturing facility and anticipates disposing ing principles requires management to make estimates of all the assets related to that operation including land, and assumptions which affect the reported amounts of buildings and manufacturing equipment. As at the date assets and liabilities, the disclosure of contingent assets of the closure, management has made estimates of the and liabilities at the date of the financial statements, and expected net proceeds from the future disposal of these the reported amounts of revenue and expenses for the assets. These estimates are based upon management’s reporting year. Due to the inherent uncertainty involved experience with the disposal of other physical assets with making such estimates, actual results reported in at this site in 2007. As the closure process proceeds future periods could differ from those estimates. management will employ the services of an appraisal firm Significant estimates include the following: to establish an orderly liquidation process. Management currently estimates the fair market value of the land, Pension Return and Discount Rates equipment and buildings at Haley to be approximately The estimated return and discount rate affect the pension $0.7 million. During fiscal 2008, the carrying value of expense and liabilities. These estimates are made with the buildings at Haley was reduced by $0.8 million to the assistance of the Company’s actuaries to ensure that their estimated scrap value. The value of the property the estimates are reasonable and consistent with those is impaired by the ongoing environmental remediation of other Companies in our industry. The estimated return underway at the site. on plan assets is subject to change on an annual basis based on the anticipated returns of the plan assets, the Accounting Changes return of equities and fixed income securities held by the Effective January 1, 2008, the Company has adopted plan and the performance of public securities markets. the new recommendations of the CICA Handbook The discount rate is subject to change based on the age Section 3031, “Inventories”, Section 1535, “Capital and changes in composition of the plan members and Disclosures”, Section 3862, “Financial Instruments – long term bond rates. A one percent change in either rate Disclosures”, Section 3863, “Financial Instruments – would have a material impact on the pension liabilities. Presentation” and Section 1400, “General Standards on The significant ongoing volatility in the global financial Financial Statement Presentation”. The impact that the markets, particularly since the end of fiscal 2008, could adoption of these sections has had on the Company’s significantly increase the Company’s pension liabilities. financial statements is outlined below. This could have a material adverse effect in the Company’s liquidity and results of operations. Inventories CICA Section 3031, “Inventories”, was issued in June 2007 Revenue Recognition and replaces existing Section 3030 of the same title. The terms of the Company’s solar silicon contracts It provides guidance with respect to the determination of provide certain customers with limited rights of return. cost and requires inventories to be measured at the lower Revenue from such contracts is recorded net of an of cost and net realizable value. Reversal of previous adjustment for estimated returns. The Company’s write-downs to net realizable value when there is a estimate of returns requires assumptions to be made subsequent increase in the value of inventories is now regarding the market price for solar silicon scrap in required. The cost of the inventories should be based on concert with actual experience of returns received. a first-in, first-out or a weighted average cost formula. Should this estimate and these experiences change, the Techniques used for the measurement of cost of inven- return provision will be adjusted in the period. tories, such as the standard cost method, may be used for convenience if the results approximate cost. The new Asset Retirement Obligations standard also requires additional disclosures including The Company’s asset retirement obligations involve the accounting policies used in measuring inventories, the various estimates of the cost of a variety of activities carrying amount of the inventories, amounts recognized often many years in the future. The Company engages as an expense during the period, write-downs and the independent consultants to assist in the estimation of amount of any reversal of any write-downs recognized closure and remediation costs. Furthermore, the asset as a reduction in expenses. The adoption of this section retirement obligation is a discounted balance. Currently had no material impact on the Company’s consolidated the Company discounts the estimated cash flows at 9%. A financial statements. The Silicon Group uses a weighted 1% change in the discount rate will change the obligation average cost methodology and the Magnesium Group by approximately $0.3 million. 36 Management’s Discussion & Analysis

applies a standard cost methodology on a FIFO basis as defined in National Instrument 52-109 – Certification that approximates actual cost. See Notes 2 and 5 to the of Disclosure in Issuers’ Annual and Interim Filings Company’s consolidated financial statements. (NI 52-109). Disclosure controls and procedures are designed to provide reasonable assurance that informa- Capital Disclosures tion required to be disclosed in filings under securities CICA Handbook Section 1535, “Capital Disclosures”, legislation is accumulated and communicated to requires disclosure of an entity’s objectives, policies and management, including the CEO and CFO as appropriate, processes for managing capital, quantitative data about to allow timely decisions regarding public disclosure. what the entity regards as capital and whether the entity They are also designed to provide reasonable assurance has complied with any capital requirements and, if it has that all information required to be disclosed in these not complied, the consequences of such non-compliance. filings is recorded, processed, summarized and reported See Note 19 to the Company’s consolidated financial within the time periods specified in securities legislation. statements regarding these disclosures. The Company regularly reviews its disclosure controls and procedures; however, they cannot provide an absolute Financial Instruments Disclosures level of assurance because of the inherent limitations in CICA Handbook Section 3862, “Financial Instruments – control systems to prevent or detect all misstatements Disclosures”, increases the disclosures currently due to error or fraud. required that will enable users to evaluate the signifi- The Company’s management, including the CEO and cance of financial instruments for an entity’s financial CFO, conducted an evaluation of the effectiveness of our position and performance, including disclosures about disclosure controls and procedures as of December 31, fair value. In addition, disclosure is required of qualitative 2008. Based on this evaluation, the CEO and CFO have and quantitative information about exposure to risks concluded that our disclosure controls and procedures arising from financial instruments, including specified were effective as of December 31, 2008. minimum disclosures about liquidity risk and market risk. The quantitative disclosures must also include a sensitiv- Internal Control over Financial Reporting ity analysis for each type of market risk to which an entity Management is responsible for establishing and main- is exposed, showing how net income and other compre- taining adequate internal control over financial reporting, hensive income would have been affected by reasonably as defined in NI 52-109. Internal control over financial possible changes in the relevant risk variable. reporting means a process designed by or under the See Note 17 to the consolidated financial statements. supervision of the CEO and CFO, and effected by the Financial Instruments Presentation Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability CICA Handbook Section 3863, “Financial Instruments – of financial reporting and the preparation of financial Presentation”, replaces the existing requirements on statements for external purposes in accordance with presentation of financial instruments which have been GAAP, and includes those policies and procedures that: carried forward unchanged to this new section. See Note 17 (1) pertain to the maintenance of records that in reason- to the Company’s consolidated financial statements. able detail accurately and fairly reflect the transactions General Standards on Financial Statement Presentation and dispositions of the assets of the Company; (2) are designed to provide reasonable assurance that transac- CICA Handbook Section 1400, “General Standards on tions are recorded as necessary to permit preparation Financial Statement Presentation”, has been amended to of financial statements in accordance with GAAP, and include requirements to assess and disclose an entity’s that receipts and expenditures of the Company are being ability to continue as a going concern. This section made only in accordance with authorizations of manage- had no impact on the Company’s consolidated financial ment and directors of the Company; and (3) are designed statements. to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or Transitional Adjustment disposition of the Company’s assets that could have a Adoption of these standards was on a prospective basis material effect on the financial statements. without retroactive restatement of prior periods. All internal control systems have inherent limitations and therefore internal control over financial reporting can Disclosure Controls and Procedures only provide reasonable assurance and may not prevent The Chief Executive Officer (CEO) and Chief Financial or detect misstatements due to error or fraud. Officer (CFO) are responsible for establishing and maintaining adequate disclosure controls and procedures, Management’s Discussion & Analysis 37

The Company’s management, including the CEO and CFO, Business Combinations conducted an evaluation of the effectiveness of internal In January 2009, the CICA approved Handbook control over financial reporting as of December 31, 2008 Section 1582 “Business Combinations”, replacing existing using the Committee of Sponsoring Organizations of the Section 1581 by the same name. It establishes standards Treadway Commission (COSO) framework. Based on this for the accounting for a business combination. It provides evaluation, the CEO and CFO have concluded that the the Canadian generally accepted accounting principles Company’s internal control over financial reporting was equivalent to International Financial Reporting Standard effective as of December 31, 2008. IFRS 3 Business Combinations (January 2008). The Section applies prospectively to business combinations Changes in Internal Control over Financial Reporting for which the acquisition date is on or after the beginning During 2008, the Company implemented a number of of the first annual reporting period beginning on or after initiatives that served to strengthen its system of internal January 1, 2011. The CICA recommends that entities plan- control over financial reporting (“ICFR”) including imple- ning business combinations in the fiscal year beginning mentation of a formal testing program of key controls on or after January 1, 2010 adopt these new standards in conjunction with the Company’s 52-109 certification early to avoid restatement on transition to IFRS in 2011. program, increased staffing in key financial roles that Early adoption of the new standard is permitted. served to improve the level of financial expertise in the Company and strengthen segregation of duties, updating Consolidated Financial Statements policies related to disclosure and insider trading and In January 2009, the CICA approved Handbook developing a policy on costing of inventory for new inven- Section 1601, “Consolidated Financial Statements” and tory items arising from the Company’s solar grade silicon Handbook Section 1602, “Non-controlling Interests” product line. Additionally, a change in the scope of ICFR replacing existing Section 1600, “Consolidated Financial occurred with the closing of the Company’s manufactur- Statements”. This Section establishes standards for ing site in Haley, Ontario which had been an accounting the preparation of consolidated financial statements. centre. The evaluation of the effectiveness of ICFR was The Section applies to interim and annual consolidated conducted following a reassessment of key internal financial statements relating to fiscal years beginning controls incorporating these changes. There have been on or after January 1, 2011. The CICA recommends that no other changes in the Company’s ICFR during the entities planning business combinations in the fiscal year year ended December 31, 2008, that have materially beginning on or after January 1, 2010 adopt these new affected, or are reasonably likely to materially affect, standards early to avoid restatement on transition to IFRS the Company’s ICFR. in 2011. Early adoption of the new standard is permitted. Recent Accounting Pronouncements Issued Non-controlling Interests But Not Yet Adopted In January 2009, the CICA approved Handbook Section 1602, “Non-controlling Interests”. It establishes Goodwill and Intangible Assets standards for accounting for a non-controlling interest In February 2008, the CICA approved Handbook in a subsidiary in consolidated financial statements Section 3064, “Goodwill and Intangible Assets”, replacing subsequent to a business combination. It is equivalent previous guidance. The new section establishes stan- to the corresponding provisions of International dards for the recognition, measurement, presentation and Financial Reporting Standard IAS 27, “Consolidated and disclosure of goodwill and intangible assets subsequent Separate Financial Statements (January 2008)”. The to initial recognition. Standards concerning goodwill are Section applies to interim and annual consolidated unchanged. This new standard is applicable to fiscal financial statements relating to fiscal years beginning years beginning on or after October 1, 2008. The Company on or after January 1, 2011. The CICA recommends that is reviewing this standard, and has not yet determined the entities planning business combinations in the fiscal year impact, if any, on the consolidated financial statements. beginning on or after January 1, 2010 adopt these new In conjunction with this new standard, Handbook Section standards early to avoid restatement on transition to IFRS 1000, “Financial Statement Concepts”, has been amended in 2011. Early adoption of the new standard is permitted. to eliminate references that might be interpreted by some as permitting the recognition of assets that would not Credit Risk and the Fair Value of Financial Assets and otherwise meet the definition of an asset or the recogni- Financial Liabilities tion criteria. 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 38 Management’s Discussion & Analysis

financial assets and financial liabilities, including deriva- implementation of IFRS is not anticipated to result in tive instruments. This EIC is applicable retrospectively material differences in the calculation of bank covenants without restatements of prior periods to all financial as they are currently defined in the credit agreement. assets and liabilities measured at fair value in interim and The Company intends to formalize its IFRS conversion annual financial statements for periods ending on or after plan during fiscal 2009. January 20, 2009. Retrospective application with restatement of prior periods is permitted but not required. The Outlook application of incorporating credit risk into the fair value may result in entities re-measuring the financial assets Timminco’s strategy in 2009 is to organically grow its and financial liabilities as at the beginning of the period solar grade silicon product line through increased of adoption with any resulting difference recorded in production from the completion of the expansion of its retained earnings except when derivatives in a fair value Bécancour, Québec production facilities. hedging relationship are accounted for by the short cut The long term growth of the Company’s solar grade method (the difference is adjusted to the hedged item) silicon product line is dependent upon the quality of the and for derivatives in a cash flow hedging relationship product and the manufactured cost of the product relative (the difference is recorded in accumulated other compre- to competing materials. The Company has ongoing hensive income). initiatives to improve its performance in both of these key metrics. With respect to product quality, improvements International Financial Reporting Standards (“IFRS”) are a function of (i) the impurity level of raw materials In February 2008, the Accounting Standards Board used to produce silicon metal feedstock, (ii) suppliers’ “AcSB” confirmed that Canadian GAAP for publicly traded ability to provide consistent quality of these raw materials enterprises will be converted to IFRS effective in calendar over time, and (iii) the knowledge and experience of and year 2011. IFRS uses a conceptual framework similar to recipe used by the Company’s customers in producing Canadian GAAP but there are significant differences on ingots. The Company has procured raw materials for recognition, measurement and disclosures. In the period its silicon metal production that meet the quality require- leading up to the changeover, the AcSB will continue ments for UMSi feedstock, and it is working with its to issue accounting standards that are converged with suppliers to ensure consistent quality in each delivery. IFRS such as IAS 2, “Inventories” and IAS 38, “Intangible Additionally, the Company is undertaking research Assets”, thus mitigating the impact of adopting IFRS at and development efforts in the area of ingot making the changeover date. processes, which the Company believes will assist its customers in achieving optimal outcomes in using UMSi. The Company currently converts its internal financial With respect to manufactured cost of the product, the statements to IFRS in order to report to its parent company Company achieved an average cost for the fourth quarter and therefore has identified the significant differences 2008 of $30 per kilogram. The Company expects further between Canadian GAAP and IFRS in its accounts. In improvement in cost beyond the level achieved in the terms of the IFRS conversion process, the Company has fourth quarter 2008 primarily from the elimination of one therefore substantially completed the diagnostic stage. re-melt step from the current three step re-melt process. A formal review and documentation of IFRS accounting The primary impact of one less re-melt is a reduction in policy choices was performed on the parent company’s the amount of silicon required per unit of final production adoption of IFRS effective with its fiscal 2005 results. (an increase in yield). Costs will also improve further The Company will review and update these documents through minor adjustments to the process (industrial during fiscal 2009 to prepare for its formal adoption learning) that is expected to further improve yield and of IFRS. It is anticipated that the Company will adopt the through spreading of fixed overhead across larger same IFRS accounting policies that are used to report volumes (labour and capital efficiency). to its parent company on a retroactive basis. The Company shipped 424 mt of solar grade silicon in Since the Company reports IFRS compliant financial the fourth quarter 2008, an increase of 41% over levels results to its parent company, management has determined achieved in the third quarter 2008. The Company will that the current information technology infrastructure will continue to ramp-up production of solar grade silicon in be sufficient for IFRS conversion and ongoing reporting 2009 as new productive capacity is installed in keeping requirements. Additionally, the Canadian accounting with customer orders. The Company exited 2008 with functions are sufficiently aware of IFRS reporting require- six production lines in operation and commissioned ments in preparation for a formal implementation on a seventh line in the last week of January 2009. When January 1, 2011. It is not anticipated that the implementation the expansion is completed, the Bécancour plant will of IFRS will have a significant effect on the Company’s comprise 12 production lines in total with a cumulative control environment, internal controls over financial nominal capacity of 14,400 metric tons per year. reporting or disclosure controls and procedures. The Management’s Discussion & Analysis 39

The global economic downturn that began in 2008 has silicon product line will enable the Company to maintain negatively impacted demand for and installations of this operational profitability in 2009 as a whole. solar power systems. Demand for solar power systems, whether large scale industrial power plants or small Cautionary Note on Forward-Looking scale residential systems, is dependent upon financial Information incentives and project financing. The liquidity crunch in This MD&A contains “forward-looking information”, in- international banking and financial markets has con- cluding “financial outlooks”, as such terms are defined in strained available financing for new solar projects which applicable Canadian securities legislation, concerning the in turn has created a surplus of inventory throughout Company’s future financial or operating performance and the solar value chain. In this environment it is difficult other statements that express management’s expecta- to judge short term shipment volume for the Company’s tions or estimates of future developments, circumstances solar grade silicon product as the Company’s customers or results. Generally, forward-looking information can manage inventory and demand levels downstream from be identified by the use of forward-looking terminology the Company. During 2008 the Company shipped 1,045 such as “expects”, “targets”, “believes”, “anticipates”, metric tons of solar grade silicon generating revenue of “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, $65 million. Given the current industry environment the “plans” and variations of such words, or by statements Company is working closely with its customers to monitor that certain actions, events or results “may”, “will”, the progress of their business development plans so that “could”, “would” or “might”, “be taken”, “occur” or “be the Company and its customers can ramp up volumes achieved”. Forward-looking information is based on shipped into the market in a cost effective manner. As a a number of assumptions and estimates that, while result of this environment, the Company has deferred the considered reasonable by management based on the completion of its expansion project beyond the targeted business and markets in which Timminco operates, are timeframe of mid-2009. There is also the potential that inherently subject to significant operational, economic and customer contracts may be amended to reduce volumes competitive uncertainties and contingencies. Timminco committed during 2009 and 2010 and/or adjust the timing cautions that forward-looking information involves known and amount of customer deposits owing to the Company. and unknown risks, uncertainties and other factors that While the Company is focused on the high-value may cause Timminco’s actual results, performance opportunity presented by the solar grade silicon market, or achievements to be materially different from those the Company is reducing its investment in the Magnesium expressed or implied by such information, including, but Group. The closure of the Haley, Ontario facility in July not limited to: deteriorating global economic conditions; 2008 was a milestone event in reducing such investment. future growth plans and strategic objectives; liquidity Morever, the impact of the recession in the United States risks; limitations under existing credit facilities; long- throughout 2008 as reflected in lower volumes shipped term contracts for supplying solar grade silicon; solar in each successive quarter led the Company to conclude grade silicon production cost targets; selling prices that the extruded products manufactured in the Aurora, of solar grade silicon and silicon metal; achieving and Colorado facility were not providing sufficient margin to maintaining the purity of solar grade silicon; production cover the overhead costs associated with that facility. capacity expansion at the Bécancour facilities; pricing Accordingly the Company has subsequent to the year and availability of raw materials for the silicon business; end announced its intention to close the Aurora facility. customer capabilities in producing ingots; limited history Additionally the Company concurrently announced with the solar grade silicon business; dependence upon the signing of a letter of intent with Winca, its primary power supply for silicon metal production; protection China-based supplier, to transfer its magnesium business of intellectual property rights; government and economic to a new merged business in which the Company would incentives; closure of the magnesium facilities and the hold only a minority interest, representing a significant completion of related proposed transactions; cost and reduction in the Company’s investment in and exposure to availability of magnesium metal; dependence upon key the magnesium market. The Company will wind down its customers of magnesium extruded and fabricated Aurora operations over the first half of 2009 in conjunction products; credit risk exposure; customer concentration; with an integrated plan with Winca to support extruded equipment failures; labour disputes; foreign currency products customers from alternative low-cost locations. exchange; dependence upon key executives and employees; For 2008 as a whole the Company achieved operational completion and integration of potential acquisitions, part- profitability (net income before charges for reorganization nerships or joint ventures; risks with foreign operations costs, the equity in the loss of Fundo Wheels and the and suppliers; environmental, health and safety laws and impairment of investment in Fundo Wheels). Provided that liabilities; transportation disruptions; conflicts of interest; economic conditions stabilize in the course of 2009, the interest rates; intellectual property infringement claims; Company expects that the revenue from its solar grade new regulatory requirements; changes in tax laws; and 40 Management’s Discussion & Analysis

climate change. These factors are discussed in greater tions or estimates of future developments, circumstances detail in Timminco’s Annual Information Form for the year or results will materialize. Accordingly, readers should ended December 31, 2008, which is available on SEDAR not place undue reliance on forward-looking information. via www.sedar.com. Although Timminco has attempted to The forward-looking information in this MD&A is made identify important factors that could cause actual results, as of the date of this MD&A and Timminco disclaims any performance or achievements to differ materially from intention or obligation to update or revise such informa- those contained in forward-looking information, there tion, except as required by applicable law. can be other factors that cause results, performance or In addition, the Company has withdrawn certain previ- achievements not to be as anticipated, estimated or in- ously disclosed material forward-looking information as tended. There can be no assurance that such information disclosed in its news release dated November 11, 2008, will prove to be accurate or that management’s expecta- which is available on SEDAR via www.sedar.com. Quarterly Financial Information (CAD$ 000’s except 2008 2008 2008 2008 2007 2007 2007 2007 per 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 Other Information Additional 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. Management’s Discussion & Analysis 41

Non-GAAP Accounting Definitions be cautioned, however, that EBITDA should not be EBITDA construed as an alternative to net income determined in accordance with GAAP as an indicator of the Company’s EBITDA (“Earnings Before Interest, Taxes, Depreciation profitability. Also, EBITDA should not be construed as an and Amortization”) is not a recognized measure under alternative to cash flows from operating, investing and GAAP. Management believes that, in addition to net income financing activities as a measure of liquidity and cash (loss), EBITDA is a useful supplemental measure as it flows. The Company’s method of calculating EBITDA may provides investors with an indication of cash available differ from other companies and, accordingly, EBITDA for distribution prior to debt service, past pension may not be comparable to measures used by other service obligations, capital expenditures, income taxes companies. EBITDA is calculated as follows: and restructuring cash payments. Investors should 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 cautioned, however, that gross profit should not be Gross profit is not a recognized measure under GAAP. construed as an alternative to net income determined in Management believes that, in addition to net income accordance with GAAP as an indicator of the Company’s (loss), gross profit is a useful supplemental measure profitability. The Company’s method of calculating gross as it provides investors with an indication of the profit may differ from other companies and accordingly, profits generated on products sold to customers before gross profit may not be comparable to measures used by corporate overhead expenses. Investors should be other companies. Gross profit is calculated as follows: 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 42 Management’s Discussion & Analysis

Management’s Responsibility for Financial Statements The financial statements of Timminco Limited are The financial statements are examined by the external prepared by management which is responsible for their auditors in accordance with Canadian generally accepted fairness, integrity and objectivity. The financial state- auditing standards. These standards provide for the ments have been prepared in accordance with Canadian review of internal accounting control systems and the generally accepted accounting principles. Preparation of testing of transactions to the extent the auditors deem the financial statements necessarily requires some esti- appropriate. The external auditors have full and free mates, and these reflect management’s best judgment. access to the Audit Committee of the Board. Management Management has established systems of internal control recognizes its responsibility for conducting the Com- which are designed to provide reasonable assurance pany’s affairs in compliance with established financial that assets are safeguarded from loss or unauthorized standards and applicable laws and the maintenance use and to produce reliable accounting records for the of proper standards of conduct in its activities. preparation of financial information. The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial (signed) reporting and internal control. The Audit Committee Dr. Heinz C. Schimmelbusch of the Board of Directors, currently composed of three Chairman of the Board and Chief Executive Officer independent directors, meets with management and March 25, 2009 representatives of the external auditors to satisfy itself that responsibilities are properly discharged and to review the financial statements. The Audit Committee (signed) is also responsible for, after completing its review, Robert J. Dietrich recommending the financial statements to the Board of Executive Vice President – Finance Directors for approval and recommending the appoint- and Chief Financial Officer ment of external auditors. March 25, 2009 Management’s Responsibility for Financial Statements 43

Auditors’ Report To the Shareholders of In our opinion, these consolidated financial statements Timminco Limited present fairly, in all material respects, the financial posi- We have audited the consolidated balance sheets of tion of the Company as at December 31, 2008 and 2007 Timminco Limited (the “Company”) as at December 31, and the results of its operations and its cash flows for the 2008 and 2007, and the consolidated statements of years then ended in accordance with Canadian generally operations, comprehensive loss, deficit and cash flows accepted accounting principles. 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 Ernst & Young LLP require that we plan and perform an audit to obtain rea- Chartered Accountants sonable assurance whether the financial statements are Licensed Public Accountants free of material misstatement. An audit includes examin- Toronto, Canada, ing, on a test basis, evidence supporting the amounts March 10, 2009 and disclosures in the financial statements. An audit also (except as to Note 23, which is as of March 17, 2009) includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 44 Auditors’ Report

Consolidated Balance Sheets As at December 31 2008 2007 (in thousands of Canadian dollars) ASSETS Current Assets Cash 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 LIABILITIES Current 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’ EQUITY Capital 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. Yaksich Director Director Consolidated Balance Sheets 45

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 Years ended December 31 2008 2007 (in thousands of Canadian dollars) Deficit, beginning of year $ (81,596) $ (63,560) Net loss (22,609) (18,036) Deficit, end of year $ (104,205) $ (81,596) The accompanying notes are an integral part of these consolidated financial statements. 46 Consolidated Statements of Operations and Comprehensive Loss/Consolidated Statements of Deficit

Consolidated Statements of Cash Flows Years ended December 31 2008 2007 (in thousands of Canadian dollars) 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 The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Cash Flows 47

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 Foreign currency translation Timminco Limited (the “Company” or “Timminco”) is The Company’s functional currency is the Canadian a global supplier of silicon metal for the electronics, dollar. Foreign currency transactions are translated chemical and aluminum industries and solar grade into Canadian dollars at rates in effect at the date of the silicon for the solar industry. Other businesses include transaction. Assets and liabilities denominated in foreign the production and marketing of magnesium extruded currencies are translated at the exchange rate in effect and fabricated products and magnesium, calcium and at each year end. Exchange gains or losses are included strontium alloys. Timminco’s products are used in a in net earnings (for the year ended December 31, 2008 – broad range of specialized industrial applications and $1,384 loss; 2007 – $508 loss). industries. The Company manages its business along The assets and liabilities of the Company’s integrated two principal business segments: the production and foreign operations are translated using the temporal sale of silicon metal and solar grade silicon products (the method. Under this method, monetary assets and “Silicon Group”) and the sale of magnesium extruded and liabilities are translated at year end rates of exchange, fabricated products and specialty non-ferrous metals non-monetary assets and liabilities are translated at (the “Magnesium Group”). AMG Advanced Metallurgical historic rates of exchange and income statement items Group N.V. (“AMG”) is the controlling shareholder of the are translated at average rates prevailing during the year. Company (see Note 16). Exchange gains and losses are of a current nature and See note 19 for a discussion of the Company’s liquidity are included in income (for the year ended December 31, and capital management strategy. 2008 – $256 gain; 2007 – $926 loss). The assets and liabilities of the Company’s self-sustaining 2. Summary of Significant Accounting Policies and foreign operations are translated using the exchange Change in Accounting Policy rate in effect at the period end and revenues and expenses Basis of consolidation are translated at the average rate during the period. Exchange gains and losses on translation of the Company’s The consolidated financial statements are prepared in net equity investment in these operations are deferred accordance with Canadian generally accepted accounting as a separate component of comprehensive income. principles and include the accounts of Timminco and all of its subsidiaries. Intercompany transactions are Financial instruments eliminated on consolidation. All financial instruments are classified into one of the fol- Investments in companies which the Company is able to lowing five categories: held-for-trading, held-to-maturity significantly influence are accounted for using the equity investments, loans and receivables, available-for-sale method. Under the equity method, the original cost of financial assets or other financial liabilities. All financial the shares is adjusted for the Company’s share of post- instruments, including derivatives, are included in the acquisition earnings or losses less dividends. consolidated balance sheets and are measured at fair value with the exception of loans and receivables, invest- Use of estimates ments held-to-maturity and other financial liabilities, The preparation of the Company’s financial statements in which are measured at amortized cost. Subsequent accordance with Canadian generally accepted accounting measurement and recognition of changes in fair value of principles requires management to make estimates and financial instruments depend on their initial classification. assumptions which affect the reported amounts of assets Held-for-trading investments are measured at fair value and liabilities, the disclosure of contingent assets and and all gains and losses are included in net income in the liabilities at the date of the consolidated financial state- period in which they arise. Available-for-sale financial ments, and the reported amounts of revenue and expenses assets are measured at fair value with revaluation gains for the reporting period. Due to the inherent uncertainty and losses included in other comprehensive income until involved with making such estimates, actual results re- the asset is derecognized or impaired. The Company has ported in future periods could differ from those estimates. classified its cash and cash equivalents, which includes Significant estimates include provisions for environmental highly liquid marketable securities with less than 90 days remediation, goodwill impairment, long-lived asset to maturity at the time of purchase, as held-for-trading. impairment, economic lives of mining assets and mine Short term investments, which includes marketable secu- closure and site remediation costs, valuation allowance of rities with maturities of three months or more at the time future income tax assets, valuation of inventories, pension of purchase, are classified as held-for-trading. Receivables asset returns and employee future benefit discount rates. are classified as loans and receivables. Foreign forward In arriving at these estimates, management consults with exchange contracts, included in prepaid expenses and outside experts as it deems necessary. deposits, and convertible notes receivable are classified as held-for-trading. The Company’s investment in Fundo 48 Notes to Consolidated Financial Statements

Wheels AS is accounted for under the equity method. host contracts when the currency that is commonly used Unrealized gains and losses from the translation into in contracts to purchase or sell non-financial items in Canadian dollars of this equity investment are presented the economic environment is that currency in which the as a separate component of other comprehensive income transaction takes place. As at December 31, 2008 and (loss). Accumulated other comprehensive income (loss) 2007 the Company does not have any outstanding is presented as a separate component of shareholders’ contracts or financial instruments with embedded deriva- equity in the Consolidated Balance Sheets. Accounts pay- tives that require bifurcation. able and accruals and short-term debt, including interest payable, are classified as other financial liabilities. Determination of fair value Financial instruments such as bonds and debentures The fair value of a financial instrument is the amount convertible at the holder’s option into common shares of of consideration that would be agreed upon in an arm’s the Company take the form of a debt security but include length transaction between knowledgeable, willing both liability and equity components. On initial recognition parties who are under no compulsion to act. The fair of this type of financial instrument, the carrying amount value of a financial instrument on initial recognition is the ascribed to the holder’s right of conversion is presented transaction price, which is the fair value of the consider- as a separate component of equity on the balance sheet. ation given or received. Subsequent to initial recognition, This equity component is fair valued using the Black- the fair values of financial instruments that are quoted Scholes option pricing model. The fair value of the liability in active markets are based on bid prices for financial component is determined based on discounted cash assets held and offer prices for financial liabilities. When flows. The initial accounting values for the liability and independent prices are not available, fair values are equity components are determined by pro rating the pro- determined by using valuation techniques which refer to ceeds based on the relative fair value of the components. observable market data. These include comparisons with Interest expense on the liability component is determined similar instruments where market observable prices using the effective interest rate method. exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used Derivatives by market participants. Derivative financial instruments are mainly used to Hedges manage the Company’s exposure to foreign exchange market risks. They consist of forward foreign exchange Designation as a hedge is only allowed if, both at the contracts. Derivative financial instruments are measured inception of the hedge and throughout the hedge period, at fair value, including those derivatives that are embed- the changes in the fair value of the derivative financial ded in financial or non-financial contracts that are not instruments are expected to substantially offset the closely related to host contracts. changes in the fair value of the hedged item attributable to the underlying risk exposure. Derivatives are carried at fair value and are reported as assets where they have a positive fair value and as liabili- The Company formally documents all relationships ties where they have a negative fair value. Non-financial between the hedging instruments and hedged items, as derivatives are carried at fair value unless exempted well as its risk management objectives and strategy for from derivative treatment as a normal purchase and sale. undertaking various hedge transactions. This process The Company has reviewed all significant contractual includes linking all derivatives to forecasted foreign arrangements and determined there are no material non- currency cash flows or to a specific asset or liability. financial derivatives that need to be carried at fair value. The Company also formally documents and assesses, both at the hedge’s inception and on an ongoing basis, Embedded derivatives whether the derivative financial instruments that are used Derivatives embedded in other financial instruments in hedging transactions are highly effective in offsetting or contracts are separated from their host contracts the changes in the fair value or cash flows of the hedged and accounted for as derivatives when their economic items. There are three permitted hedging strategies: characteristics and risks are not closely related to those • Fair value hedges – The Company has designated cer- of the host contract; the terms of the embedded derivative tain interest-rate swap and forward foreign exchange are the same as those of a free standing derivative; and contracts as fair value hedges. In a fair value hedge the combined instrument or contract is not measured at relationship, gains or losses from the measurement fair value, with changes in fair value recognized in interest of derivative hedging instruments at fair value are re- and other expenses, net. These embedded derivatives are corded in net income, while gains or losses on hedged measured at fair value. The Company does not account for items attributable to the hedged risks are accounted embedded foreign currency derivatives in host contracts for as an adjustment to the carrying amount of hedged that are not financial instruments separately from the items and are recorded in net income. Notes to Consolidated Financial Statements 49

• Cash flow hedges – The Company has designated attributable manufacturing overhead costs and property, forward foreign exchange contracts and interest-rate plant and equipment amortization. swap agreements as cash flow hedges. In a cash flow For the Magnesium Group, raw materials, work in hedge relationship, the portion of gains or losses on process and finished goods inventories are valued at the the hedging item that is determined to be an effective lower of cost and net realizable value, with cost being hedge is recognized in other comprehensive income, determined applying a standard cost methodology that while the ineffective portion is recorded in net income. approximates actual cost on a first-in first-out basis. The amounts recognized in other comprehensive For work in process and finished goods, costs include all income are reclassified in net income when the hedged direct costs incurred in production including direct labour item affects net income. However, when an anticipated and materials, freight, directly attributable manufactur- transaction is subsequently recorded as a non-financial ing overhead costs and property, plant and equipment asset, the amounts recognized in other comprehensive amortization. income are reclassified in the initial carrying amount of Inventory is written down to net realizable value at the the related asset. time its carrying value exceeds net realizable value. • Hedge of net investments in self-sustaining foreign Reversals of previous write-downs to net realizable value operations – The Company has designated certain are recognized when there is a subsequent increase in cross-currency interest-rate swap agreements, the value of the inventories. long-term debt and intercompany loans as hedges of its net investments in self-sustaining foreign operations. Property, plant and equipment The portion of gains or losses on the hedging item that Property, plant and equipment (“PP&E”) is stated at cost is determined to be an effective hedge is recognized in less accumulated amortization. Amortization is provided other comprehensive income, while the ineffective por- on a straight-line basis over the estimated useful life of tion is recorded in net income. The amounts recognized the assets as follows: in other comprehensive income are reclassified to net Buildings 20 to 25 years income when corresponding exchange gains or losses Roads and sidings 33 years arising from the translation of the self-sustaining Plant equipment 2 to 10 years foreign operations are recorded in net income. Office equipment 3 to 7 years The portion of gains or losses on the hedging item that Computer software 5 years is determined to be an effective hedge is recorded as an Mobile equipment 3 years adjustment of the cost or revenue of the related hedged Leasehold improvements Over the lease period item. Other gains and losses on derivative financial Machinery and equipment instruments are recorded in other expense (income), or under capital leases 10 years in financing income or financing expense for the interest No amortization is taken on construction in progress until component of the derivatives or when the derivatives placed into service. were entered into for interest rate management purposes. Hedge accounting is discontinued prospectively Deferred charges representing direct costs incurred for when it is determined that the hedging instrument is no major overhauls of furnaces are amortized over periods longer effective as a hedge, the hedging instrument is from 12 to 122 months depending on the estimated useful terminated or sold, or upon the sale or early termination life of the overhaul. of the hedged item. Intangible assets As at December 31, 2008 and 2007, the Company has not Purchased intangible assets, which consist of technology designated any hedge transactions. and customer relationships, are recorded at cost less Cash and cash equivalents accumulated amortization. Expenditures incurred to develop a new raw material feedstock for solar grade Cash and cash equivalents consist of cash on hand and silicon production that meet the criteria for deferral are short term deposits with maturities of less than 90 days. recorded at cost as deferred development costs. Inventories Intangible assets are amortized on a straight-line basis For the Silicon Group, raw materials, work in process, over the estimated useful lives of the related assets as finished goods and stores inventories are valued at the follows: lower of cost and net realizable value, using a weighted • Technology – 10 years average cost. For work in process and finished goods, • Deferred development costs – 3 years costs include all direct costs incurred in production • Customer relationships – 10 years including direct labour and materials, freight, directly 50 Notes to Consolidated Financial Statements

No amortization is taken on the deferred development amortization. During 2008, the Company recorded a net costs until the corresponding property, plant and equip- research and development expense of $296 (2007 – net ment was commercially functional. recovery of $1,189) through the Governments of Canada and Québec research and development credit programs. Goodwill The net amount has been recorded in cost of goods sold. Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum Employee future benefits of the amounts allocated to the assets acquired, less The Company accrues its obligations under employee liabilities assumed, based on their fair values. benefit plans and the related costs, net of plan assets, Goodwill is not amortized and is tested for impairment as services are rendered. The costs of the Company’s annually, or more frequently, if events or changes in defined benefit plans are determined periodically by circumstances indicate that the asset might be impaired. independent actuaries. The benefit plan costs charged to The impairment test is carried out in two steps. In the earnings for the year include the cost of benefits provided first step, the carrying amount of the reporting unit is for services rendered during the year, using actuarial compared with its fair value. When the fair value of a cost methods as permitted by regulatory bodies and reporting unit exceeds its carrying amount, goodwill of management’s best estimates of expected plan invest- the reporting unit is considered not to be impaired and ment performance, salary escalation and retirement the second step of the impairment test is unnecessary. ages of employees. For the purpose of calculating the actual return on plan assets, those assets are valued at The second step is carried out when the carrying amount fair value. For the purpose of calculating the expected of a reporting unit exceeds its fair value, in which case, return on plan assets, a market-related value of assets the implied fair value of the reporting unit’s goodwill is used. The Company’s policy is to amortize past service is compared with its carrying amount to measure the costs and the net actuarial gain or loss in excess of 10% amount of the impairment loss, if any. The implied fair of the greater of the accrued benefit obligations and the value of goodwill is determined in the same manner market-related value of assets over the expected average as the value of goodwill is determined in a business remaining service life of the employees. combination, using the fair value of the reporting unit as if it was the purchase price. When the carrying amount Deposits of reporting unit goodwill exceeds the implied fair value Certain customers advance cash deposits to the Company of the goodwill, an impairment loss is recognized in an under the terms of supply agreements to secure future amount equal to the excess. delivery of finished solar grade silicon. The total cash Impairment of long-lived assets advance is reflected in the consolidated balance sheet as deposits. The amounts are non-interest bearing Long-lived assets, including PP&E subject to amortiza- pre-payments to be applied against accounts receivable tion and intangible assets, are reviewed for impairment resulting from the delivery of solar grade silicon under whenever events or changes in circumstances indicate such contracts. Deposits are recorded on receipt of cash that the carrying amount of an asset may not be recover- and are drawn down as finished goods are shipped to able. Recoverability of assets to be held and used is customers. The liability is extinguished after all product measured by a comparison of the carrying amount of has been delivered or on termination of the contract. an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying Income taxes amount of an asset exceeds its estimated future cash The Company accounts for income taxes using the asset flows, an impairment charge is recognized by the amount and liability method of accounting for income taxes. Under by which the carrying amount of the asset exceeds the the asset and liability method, future income tax assets fair value of the asset. Assets to be disposed of would be and liabilities are recognized for the future tax conse- separately presented in the balance sheet and reported at quences of temporary differences (differences between the lower of the carrying amount or fair value less costs the accounting basis and the tax basis of the assets and to sell, and are no longer depreciated. The asset and liabilities) and are measured using the currently enacted, liabilities of a disposed group classified as held for sale or substantively enacted, tax rates expected to apply when would be presented separately in the appropriate asset the differences reverse. A valuation allowance is recorded and liability sections of the balance sheet. against any future income tax asset if it is more likely Research and development expenditures than not that the asset will not be realized. Income tax expense or benefit is the sum of the Company’s provision Research costs, other than capital expenditures, are for current income taxes and the difference between the expensed as incurred. Development costs are expensed opening and ending balances of the future income tax as incurred unless they meet the criteria for deferral and assets and liabilities. Notes to Consolidated Financial Statements 51

Asset retirement obligations Deferred share unit plan – The Company has a deferred The Company records the fair value of a liability for an share unit plan (“DSU Plan”) for members of the Board of asset retirement obligation in the year in which it is Directors. Under the DSU Plan, each director is required incurred and when a reasonable estimate of fair value can to receive a minimum of 40% of his or her annual com- be made. Changes in the obligation due to the passage of pensation in the form of notional common shares of the time are recognized in income as an operating expense Company called deferred share units (“DSUs”). The issue using the interest method. Changes in the obligation due price of each DSU is equal to the market value of a com- to changes in estimated cash flows are recognized as an mon share which, for the purposes of the DSU Plan, is adjustment of the carrying amount of the related long- based on the weighted average share price at which com- lived asset that is depreciated over the remaining life of mon shares of the Company trade on the Toronto Stock the asset. Exchange during the five trading days prior to the last day of the quarter in which the DSUs are issued. A Director Comprehensive income may elect to have up to 100% of his or her compensation The Company’s comprehensive income/loss is composed in the form of DSUs, provided that such election is made of net income/loss and other comprehensive income/ no later than November 30 preceding the calendar year in loss (“OCI/L”). OCI/L includes the deferred loss on the respect of which such election is to apply. foreign exchange forward contracts (see discussion The DSU account of each Director includes the value under “Hedges” above) and their reclassification in the of dividends, if any, as if reinvested in additional DSUs. statements of operations during the period, as well as the DSUs are only redeemable in cash, upon each director’s foreign currency gain/loss on the Company’s investment retirement or resignation from the Board of Directors. in Fundo Wheels AS. The value of the DSUs, when redeemed in cash, will be equivalent to the market value of the common shares Equity at the time of redemption. The value of the outstanding Accumulated other comprehensive income (“AOCI”) is DSUs as at December 31, 2008, was $271 representing included on the consolidated balance sheet as a separate the equivalent of 76,699 common shares of the Company component of shareholders’ equity. (2007 – $nil). Compensation cost and changes in the value of earned DSUs is recognized as selling, general and Revenue recognition administrative expense as the DSUs are earned (for the The Company recognizes revenue when products are year ended December 31, 2008 – $271; 2007 – $nil). shipped and the customer takes ownership and assumes risk of loss, collection of the related receivable is prob- Income (loss) per common share able, persuasive evidence of an arrangement exists and Basic income (loss) per share is computed by dividing net the sales price is fixed or determinable. loss by the weighted average shares outstanding during The terms of the Company’s new solar silicon contracts the year. Diluted income (loss) per share is computed provide certain customers with specified rights of return. similarly to basic income (loss) per share except that the Revenue from such contracts is recorded net of an weighted average shares outstanding are increased to adjustment for estimated returns of scrap material. The include additional shares from the assumed exercise of Company’s estimate of returns requires assumptions stock options, warrants and convertible notes, if dilutive. to be made regarding the market price for solar silicon The number of additional shares is calculated by assuming scrap in concert with actual experience of returns that outstanding stock options, warrants and convertible received. Should this estimate and these experiences notes were exercised and that the proceeds from such change, the return provision will be adjusted in the period. exercises were used to acquire shares of common stock at the average market price during the year. Stock-based compensation and The conversion of outstanding stock options, warrants other stock-based payments and convertible notes has not been included in the Share option plans – The Company has share option determination of loss per share as to do so would have plans for key employees and directors. All awards are been anti-dilutive. accounted for under the fair value method. Under the fair value method, compensation cost is measured at ACCOUnTInG CHAnGES fair value at the grant date using a Black-Scholes option Effective January 1, 2008, the Company has adopted pricing model. Compensation cost is recognized as the new recommendations of the Canadian Institute of selling, general and administrative expense on a straight- Chartered Accountants (“CICA”) Handbook Section 3031, line basis over the vesting period with a corresponding “Inventories”, Section 1535, “Capital Disclosures”, increase to contributed surplus. Consideration paid by Section 3862, “Financial Instruments – Disclosures”, employees on the exercise of stock options is recorded Section 3863, “Financial Instruments – Presentation” and as share capital. 52 Notes to Consolidated Financial Statements

Section 1400, “General Standards on Financial Statement Financial Instruments – Presentation Presentation”. The impact that the adoption of these CICA Handbook Section 3863, “Financial Instruments – sections has had on the Company’s consolidated financial Presentation”, replaces the existing requirements on statements is outlined below. presentation of financial instruments which have been carried forward. Inventories CICA Handbook Section 3031, “Inventories”, was issued in General Standards on Financial Statement Presentation June 2007 and replaces existing Section 3030 of the same CICA Handbook Section 1400, “General Standards on title. It provides guidance with respect to the determina- Financial Statement Presentation”, has been amended to tion of cost and requires inventories to be measured at include requirements to assess and disclose an entity’s the lower of cost and net realizable value. Reversal of ability to continue as a going concern. This section had no previous write-downs to net realizable value when there impact on the Company’s consolidated financial statements. is a subsequent increase in the value of inventories is now required. The cost of the inventories should be based on Transitional Adjustment a first-in, first-out or a weighted average cost formula. Adoption of these standards was on a prospective basis Techniques used for the measurement of cost of inven- without retroactive restatement of prior periods. tories, such as the standard cost method, may be used for convenience if the results approximate cost. The new RECEnT ACCOUnTInG PROUnOUnCEMEnTS standard also requires additional disclosures including Recent accounting pronouncements issued and not yet the accounting policies used in measuring inventories, the effective: carrying amount of the inventories, amounts recognized as an expense during the period, write-downs and the Goodwill and Intangible Assets amount of any reversal of any write-downs recognized In February 2008, the CICA approved Handbook as a reduction in expenses. The adoption of this section Section 3064, “Goodwill and Intangible Assets”, replacing had no material impact on the Company’s consolidated previous guidance. The new section establishes standards financial statements. The Silicon Group uses a weighted for the recognition, measurement, presentation and average cost methodology and the Magnesium Group disclosure of goodwill and intangible assets subsequent applies a standard cost methodology on a FIFO basis that to initial recognition. Standards concerning goodwill approximates actual cost. are unchanged. This standard is effective for interim and annual financial statements beginning on or after Capital Disclosures October 1, 2008. The Company does not expect the CICA Handbook Section 1535, “Capital Disclosures”, adoption of this standard to have a material impact on requires disclosure of an entity’s objectives, policies and its consolidated financial statements. In conjunction with processes for managing capital, quantitative data about this new standard, Handbook Section 1000, “Financial what the entity regards as capital and whether the entity Statement Concepts”, has been amended to eliminate has complied with any capital requirements and, if it has references that might be interpreted by some as permit- not complied, the consequences of such non-compliance. ting the recognition of assets that would not otherwise Note 19 has been added to the Company’s consolidated meet the definition of an asset or the recognition criteria. financial statements regarding these disclosures. Business Combinations Financial Instruments – Disclosures In January 2009, the CICA approved Handbook Section 1582, CICA Handbook Section 3862, “Financial Instruments – “Business Combinations”, replacing existing Section 1581, Disclosures”, increases the disclosures currently re- by the same name. It establishes standards for the quired that will enable users to evaluate the significance accounting for a business combination. It provides the of financial instruments for an entity’s financial position Canadian generally accepted accounting principles and performance, including disclosures about fair value. equivalent to International Financial Reporting Standard In addition, disclosure is required of qualitative and IFRS 3 Business Combinations (January 2008). The quantitative information about exposure to risks arising Section applies prospectively to business combinations from financial instruments, including specified minimum for which the acquisition date is on or after the beginning disclosures about liquidity risk and market risk. The of the first annual reporting period beginning on or after quantitative disclosures must also include a sensitivity January 1, 2011. The CICA recommends that entities plan- analysis for each type of market risk to which an entity ning business combinations in the fiscal year beginning is exposed, showing how net income and other compre- on or after January 1, 2010 adopt these new standards hensive income would have been affected by reasonably early to avoid restatement on transition to IFRS in 2011. possible changes in the relevant risk variables which have Early adoption of the new standard is permitted. been disclosed in Note 17. Notes to Consolidated Financial Statements 53

Consolidated Financial Statements 3. Reorganization of Magnesium Operations In January 2009, the CICA approved Handbook During 2008 the Company decided to further reorganize Section 1601, “Consolidated Financial Statements” and its Magnesium Group and on June 6, 2008 announced the Handbook Section 1602, “Non-controlling Interests” closure of its Haley, Ontario manufacturing facility. The replacing existing Section 1600, “Consolidated Financial Haley facility manufactured cast magnesium billet used Statements”. This Section establishes standards for the in Timminco’s magnesium extrusion operations in Aurora, preparation of consolidated financial statements. The Sec- Colorado and also produced specialty magnesium tion applies to interim and annual consolidated financial granules and turnings for third party customers. Cast statements relating to fiscal years beginning on or after magnesium billets will now be out-sourced from other January 1, 2011. The CICA recommends that entities plan- manufacturers and specialty magnesium granules and ning business combinations in the fiscal year beginning turnings will be produced at Timminco’s Nuevo Laredo, on or after January 1, 2010 adopt these new standards Mexico facility. early to avoid restatement on transition to IFRS in 2011. The closure of the Haley facility resulted in reorganization Early adoption of the new standard is permitted. costs in 2008 of $11,939 before income taxes. The charge non-controlling Interests includes severance costs of $2,629 (Note 11), pension curtailment costs of $4,274, accelerated mine closure In January 2009, the CICA approved Handbook Sec- tion 1602, “Non-controlling Interests”. It establishes costs, other site closure and remediation costs of $3,908 standards for accounting for a non-controlling interest and asset write down costs of $1,128, including spare in a subsidiary in consolidated financial statements parts for $44. subsequent to a business combination. It is equivalent to In addition, a pension settlement charge relating to the corresponding provisions of International Financial unamortized investment losses currently estimated at Reporting Standard IAS 27 Consolidated and Separate $7,621 as at December 31, 2008 will be expensed in the Financial Statements (January 2008). The Section applies future when the pension obligation is actually settled in to interim and annual consolidated financial statements accordance with CICA Section 3461, “Employee Future relating to fiscal years beginning on or after January 1, Benefits”. 2011. The CICA recommends that entities planning business combinations in the fiscal year beginning on or after 4. Short Term Investments January 1, 2010 adopt these new standards early to avoid The Company has invested excess cash in Government of restatement on transition to IFRS in 2011. Early adoption of Canada treasury bills (“T-bills”) with maturities from the new standard is permitted. 1 to 5 months, yielding 1.78% (December 31, 2007 – 3.75% to 4.24%). As at December 31, 2008, the Company had Credit Risk and the Fair Value of Financial Assets and $116 invested in T-bills, of which $nil was classified as Financial Liabilities cash and cash equivalents (as at December 31, 2007, the In January 2009, the CICA Emerging Issues Committee Company had $29,342 invested in T-bills, of which $14,191 issued EIC-173 Credit Risk and the Fair Value of Financial was classified as cash and cash equivalents). Assets and Financial Liabilities. It requires an entity to consider its own credit risk and the credit risk of the 5. Inventories counterparty in determining the fair value of financial 2008 2007 assets and financial liabilities, including derivative instruments. This EIC is applicable retrospectively Raw materials $ 49,359 $ 13,071 without restatements of prior periods to all financial Work in process 7,678 3,317 assets and liabilities measured at fair value in interim and Finished goods 34,900 21,026 annual financial statements for periods ending on or after Stores inventory 3,983 2,668 January 20, 2009. Retrospective application with restate- $ 95,920 $ 40,082 ment of prior periods is permitted but not required. The Stores inventory includes minor spare parts and consum- application of incorporating credit risk into the fair value ables for the Company’s plant and equipment. may result in entities re-measuring the financial assets and financial liabilities as at the beginning of the period Inventory is carried at the lower of cost and net realizable of adoption with any resulting difference recorded in value. Net realizable value is the estimated selling price retained earnings except when derivatives in a fair value in the ordinary course of business, less estimated costs hedging relationship are accounted for by the short cut of completion and estimated costs necessary to make method (the difference is adjusted to the hedged item) the sale. and for derivatives in a cash flow hedging relationship Cost of raw materials includes costs in bringing each (the difference is recorded in accumulated other compre- product to its present location and condition. Cost of hensive income). 54 Notes to Consolidated Financial Statements

finished goods and work in process includes cost of direct During the year ended December 31, 2008, cost of materials, labour and a proportion of manufacturing goods sold included $198,718 of inventory and $5,822 of overheads based on normal operating capacity. distribution costs (for the year ended December 31, 2007 – $154,555 of inventory and $5,095 of distribution costs). 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, the Company acquired property, plant of $223 (for the year ended December 31, 2007 – $nil). and equipment of $95,160 (for the year ended December 31, Additionally, during the year ended December 31, 2008, 2007 – $29,189) of which $21,604 was in accounts payable the Company impaired the carrying value of the Haley at December 31, 2008 (December 31, 2007 – $6,578). facility buildings and equipment by $1,084 (for the year During the year, the Company had an inactive property ended December 31, 2007 – $nil) (see Note 3). Also during of a former operation appraised by a third party. The the year, the Company sold inactive property resulting fair value was assessed as less than the carrying value. in a gain in excess of carrying value of $370 (for the year Accordingly, the carrying value has been reduced to the ended December 31, 2007 – $26). assessed fair value resulting in an impairment charge 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 At December 31, 2008, total debt denominated in The Credit Agreement currently includes a financial U.S. dollars amounted to US$41,833 (2007 – US$21). covenant requiring the Company to maintain a minimum The Company has a Credit Agreement dated April 15, EBITDA level on a rolling 12-month basis. The Company 2005 (as amended, the “Credit Agreement”) with Bank is currently in compliance with this covenant as of of America, N.A. (the “Bank”). The Credit Agreement December 31, 2008. As a result, the Company presently provides for maximum credit lines of US$50,000 is able to utilize the availability under the Credit Agree- (December 31, 2007 – US$32,800), limited by a borrowing ment. Availability is equal to (i) the lesser of the borrowing base, in a revolving loan (the “Revolver”). The Revolver base and the revolving credit commitments under the bears interest at the prime rate plus bank margin of Credit Agreement, which was US$49,983 as of December 1.25% (December 31, 2007 – prime plus 1.25%) and does 31, 2008, minus (ii) the amount borrowed under the not require minimum repayments. The Credit Agreement Revolver, which was US$41,833 as of December 31, expires on March 31, 2010. The Revolver is secured by the 2008. The Company is required to maintain a minimum assets of the Company. availability of at least US$2,000 at all times. Accordingly, Notes to Consolidated Financial Statements 55

the Company is able to borrow up to US$6,150 under the from June 30, 2008. Based on current projections, the Revolver during the first quarter of 2009, assuming no Company expects to comply with its financial covenants change in the borrowing base during such quarter. The throughout 2009. However, should there be any business Credit Agreement previously included other financial developments that have a material adverse effect, this covenants, including minimum fixed charge coverage could enable the lender to declare an event of default ratios. These covenants have been revised or waived from under the terms and conditions of the Credit Agreement. time to time. The covenant relating to the Company’s Interest expense in 2008 includes $nil of interest on long fixed charge coverage ratio ceased to apply as of and term debt ($293 in 2007). 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 The Company has convertible loans due to ALD Interna- any remaining balance on the deposit is to be repaid tional LLC (“ALD International”) (see Note 12(b) and to the customer within a specified time period. If the Note 16). The loans bear interest at U.S. prime plus 1% remaining amount is not repaid within the specified time and are subordinate to bank debt. period it becomes interest bearing at rates specified in the contract. The Company is currently negotiating a 10. Deposits contract extension with one customer for periods beyond During the year ended December 31, 2008, the Company December 31, 2009. If this contract is not extended, up to received deposits from customers of $45,534 under $17,896 of the deposits will be repayable in the first quar- the terms of solar grade silicon supply contracts. The ter of 2010. The Company expects to fully utilize all other amounts are non-interest bearing pre-payments to be pre-payment amounts against future sales and deliveries applied against future deliveries of solar grade silicon at of solar grade silicon. For the year ended December 31, pre-determined rates specified in the contracts. In the 2008, $1,930 has been drawn down through shipments of event of an early termination or completion of a supply finished products to customers. 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 56 Notes to Consolidated Financial Statements

The provision for reorganization relates to the closure of On June 6, 2008 the Company announced the closure of the Haley facility in June 2008 (see Note 3), to amounts its Haley, Ontario manufacturing facility. The Haley facility accrued related to the closure of certain Haley depart- manufactured cast magnesium billet used in Timminco’s ments in November 2006, certain accrued retirement magnesium extrusion operations in Aurora, Colorado obligations for Haley and a retention agreement with a and also produced specialty magnesium granules and former President and Chief Operating Officer. The future turnings for third party customers. The closure resulted period costs of these obligations have been discounted at in the elimination of all positions. The Company accrued 9%. The costs transferred to environmental remediation costs in respect of the closure to cover severance costs during the year ended December 31, 2007 results in all and post-employment obligations. The completion date environmental remediation costs being captured within of the Haley severance payments will be in 2010. Various one grouping. 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. 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 The costs recognized during the year ended December 31, Other long term provisions 2008 relate to the closure of the Haley facility (see Note 3). Other long term provisions include an accrual for sales Environmental remediation costs, including accretion, and use taxes as well as a long term deposit. 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 12. Capital Stock common shares with respect to the payment of (a) Authorized: unlimited number of Class A and Class dividends and the return of capital. B preference shares, issuable in series and having Issued: none such rights, privileges, restrictions and conditions (b) Authorized: unlimited number of common shares. as may be approved by the Board of Directors of Holders of common shares are entitled to one vote the Company. The Company’s Class A and Class B for each share. preference shares rank in priority to the Company’s Notes to Consolidated Financial Statements 57

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 On March 7, 2006, the Company borrowed US$2,000 life of the loan coincides with the maturity date of the from ALD International. On April 26, 2007, the entire credit agreement with Bank of America, N.A. (namely principal amount outstanding under this loan was March 31, 2010), to which the loan is subordinate. converted into 5,601,000 common shares of the On April 30, 2007, the Company completed a public Company. All such shares were issued directly to offering of 10,000,000 common shares at a price AMG, pursuant to ALD International’s directions. of $2.60 per common share for gross proceeds of The Canadian dollar equivalent of the United States $26,000. The offering was sold on a bought deal dollars comprised in the principal amount of the loan basis. The underwriters also exercised their over- was $2,240. allotment option in full and purchased an additional On August 31, 2006, the Company issued a convertible 1,500,000 common shares at a price of $2.60 per promissory note in exchange for US$3,000, which common share for gross proceeds of $3,900. The is held by ALD International (the “August 2006 Note”) total gross proceeds of the offering was $29,900. (see Note 16). The loan may be settled, at the lender’s On June 21, 2007, AMG entered into an option agree- option, in cash or shares at $0.40 per common share, ment with ALD International relating to common or a combination of cash and shares. The lender’s shares of the Company (the “AMG Call Option Agree- option to settle the loan in shares has been fair valued ment”) (see Note 16). Pursuant to this agreement, separately from the loan using the Black-Scholes each time ALD International exercises in whole or in option pricing model. Accordingly, the transaction was part its conversion right under the August 2006 Note recorded as $2.4 million as due to an affiliate in cur- or the March 2007 Note, AMG has the right, and must rent liabilities and $0.9 million as equity component of use its reasonable endeavours, to exercise its option convertible note in shareholders’ equity. The following requiring ALD International to instruct the Company assumptions were used to calculate the fair value of to issue the common shares issuable on the conver- the equity component: expected dividend yield of 0%, sion directly to AMG. On any exercise of this option expected stock volatility of 63%, risk-free rate of 4.0% AMG must pay to ALD International a sum of cash and expected life of 3.6 years. The expected life of equal to the closing market price for the common the loan coincides with the maturity date of the credit shares of the Company over which it is exercising agreement with Bank of America, N.A. (namely the option. March 31, 2010), to which the loan is subordinate. On July 23, 2007, the holder converted US$350 On March 1, 2007, the Company borrowed $4,500 of the principal amount of the August 2006 Note from ALD International (the “March 2007 Note”) into 913,500 common shares of the Company at (see Note 16). Under the terms of the loan, the lender a conversion rate of Cdn$0.40 per common share. has the option to convert the whole or any part of the The Canadian dollar equivalent of the United States outstanding principal amount at any time into com- dollars converted was $365. Such shares were mon shares of the Company at a conversion rate of issued directly to AMG pursuant to the AMG Call $0.42 per common share. The lender’s option to settle Option Agreement. the loan in shares has been fair valued separately On September 27, 2007, the Company completed from the loan using the Black-Scholes option pricing a public offering of 4,360,291 common shares at a model. Accordingly, the transaction was recorded as price of $8.50 per common share for gross proceeds $2.8 million as due to an affiliate in current liabilities of $37,062. The public offering was sold on a bought and $1.7 million as an equity component of the deal basis. The underwriters also exercised their convertible note in shareholders’ equity. The follow- over-allotment option in full and purchased an ing assumptions were used to calculate the fair value additional 654,043 common shares at a price of of the equity component: expected dividend yield of $8.50 per common share for gross proceeds of 0%, expected stock volatility of 65%, risk-free rate $5,559. The total gross proceeds of the offering was of 3.96% and expected life of 3.2 years. The expected $42,621. Concurrently with the public offering, the 58 Notes to Consolidated Financial Statements

Company completed a private placement to AMG 105.4% to 114.6%, risk-free interest rate of 3.19% to of 5,136,140 common shares at a price of $8.50 per 4.05% and expected option lives of seven years. The common share for gross proceeds of $43,657. share option expense is being amortized, according Subsequent to year end, the Company issued 7,042,000 to the vesting schedule, over a four year period from common shares in a private placement (see Note 23). the date of the grants. (c) Options have been granted to certain key employees On November 11, 2008, the Company established a and directors to purchase common shares of the new share option plan (the “2008 Plan”) as part of Company subject to various vesting requirements. certain long-term incentive compensation arrange- During 2004, the Company established a Share ments for key employees in the Silicon Group. The Option Plan (the “2004 Plan”) which supersedes the options are granted with an exercise price at the fair prior share option plan for directors and key employ- market value of the Company’s common shares, have ees. The 2004 Plan was last amended and restated a nine-year vesting schedule with 50% becoming as of April 28, 2008. Under the 2004 Plan, options are exercisable after the fifth anniversary of the grant granted at the discretion of the Board of Directors or date, and the remaining 50% vest equally on the sixth its compensation committee, at an exercise price no through ninth anniversary dates. The options expire less than the closing price of the common shares on ten years after the grant date. The 2008 Plan will the Toronto Stock Exchange on the last trading day be submitted for approval by the Company’s share- preceding the day of grant. The options vest equally holders at the next annual general meeting, and is over a four year period, with the initial 25% vesting also subject to Toronto Stock Exchange approval. after the first anniversary of the grant date, and Options to purchase 7,000,000 common shares of expire seven years after the grant date. the Company were granted under the 2008 Plan also During the year ended December 31, 2007, options to on November 11, 2008. The fair values of the grants, purchase 1,250,000 common shares of the Company determined using the Black-Scholes option-pricing were granted under the 2004 Plan. The fair values model at the time of the respective grants, was of the grants, determined using the Black-Scholes $7.20 per common share subject to the option. The option-pricing model at the time of the respective following assumptions were used to calculate the fair grants, were $0.19 to $10.27 per common share subject value: expected dividend yield of 0%, expected stock to the option. The following assumptions were used to volatility of 114.6%, risk-free interest rate of 3.19% calculate the fair values: expected dividend yield of 0%, and expected option life of 10 years. The share option expected stock volatility of 76.6% to 328.9%, risk-free expense is being amortized on a straight-line basis interest rate of 4.1% to 4.3% and expected option over a nine year period. These options are subject to lives of seven years. The share option expense is being approval of the 2008 Plan by the Company’s share- amortized, according to the vesting schedule, over a holders and the Toronto Stock Exchange. four year period from the date of the grants. During the year ended December 31, 2008, the During the year ended December 31, 2008, options to Company recorded stock-based compensation purchase 940,000 common shares of the Company expense amounting to $1,978 (2007 – $469) which is were granted under the 2004 Plan. The fair values included in selling and administrative expenses in of the grants, determined using the Black-Scholes the statement of operations. option-pricing model at the time of the grants, were A summary of the status of the options under both $10.05 to $13.27 per option. The following assump- the 2004 Plan and the 2008 Plan as of December 31, tions were used to calculate the fair value: expected 2008 and 2007, and changes during the years ending dividend yield of 0%, expected stock volatility of 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 Notes to Consolidated Financial Statements 59

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 As of December 31, 2008, the maximum number of is 10,000,000, representing 16.6% of the issued and common shares that may be reserved for options granted outstanding common shares of the Company. 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 The Company has determined that it will no longer fund operations located in Høyanger, Norway, is an original Fundo’s working capital deficits. Fundo’s remaining equipment manufacturer of cast aluminum wheels for shareholders did not participate in the funding advances high-end European car manufacturers. As at December 31, to Fundo on February 12 and July 11, 2008. Fundo’s 2008, the Company owns approximately 45.3% of Fundo. management has engaged the services of financial The Company accounts for the Fundo investment under advisors to secure additional capital and liquidity. There the equity method. The acquisition of the equity interest is no assurance that sufficient investment can be sourced did not create any purchase discrepancy. to secure the long-term viability of Fundo. Accordingly, The downturn in the automotive industry has significantly during the year ended December 31, 2008, the Company’s decreased overall demand for standard wheels manufac- investment in Fundo, consisting of equity and loans, has tured and sold by Fundo. Fundo is experiencing liquidity been written down to $nil, which is management’s best challenges and conditions could deteriorate to the point estimate of its fair value. of giving rise to non-compliance with its bank covenants. 60 Notes to Consolidated Financial Statements

Subsequent to year end on January 12, 2009, Fundo filed converted certain of the loan balances into equity in for bankruptcy protection. On February 13, 2009, the Fundo. The conversion of debt into equity did not create Norwegian courts instructed the receiver to liquidate any purchase discrepancy. Fundo’s assets. The Company does not anticipate a The equity method of accounting requires recognition recovery of any of its investment. of an impairment loss where there has been an other- During the year ended December 31, 2007, the Company than-temporary impairment. The determination of an and the Community of Høyanger, the controlling share- other-than-temporary impairment, if any, requires the holder, acquired shares of Fundo from treasury. The Company to assess the fair value of its investment. acquisition of the interest did not create any purchase Since a quoted market price is not available, fair value is discrepancy. determined using an appropriate valuation methodology During the years ended December 31, 2008 and 2007 the after considering the history and nature of the business, Company advanced cash to assist Fundo with its working its operating results and financial conditions, and the capital requirements. The loans are due on prescribed general economic, industry and market conditions. The dates in 2009 and 2010, bear interest at three month process of valuing an investment for which no published NIBOR plus 4% and in certain circumstances are repaid in market exists, and the assessment of an other-than- quarterly instalments commencing in 2009. The loans are temporary impairment, if any, is subject to inherent secured by a charge against Fundo’s land, buildings and uncertainties and requires the use of estimates and equipment and are subordinate to Fundo’s bank debt. significant judgment. Actual impairment, if any, could The loans are convertible into shares of Fundo at the differ from management’s estimate. Company’s option at Fundo’s book value on the date 14. Income Taxes the loans were granted or on the date of conversion at the Company’s option. The conversion of the loans is (a) Income taxes (recovery) attributable to loss before restricted such that the Company cannot exceed owner- tax differs from the amounts computed by applying ship of 49.9% of Fundo through the conversion of this loan. the combined Canadian federal and provincial income During the year ended December 31, 2008, the Company tax rates of 31.5% (34.1% in 2007) to the pre-tax loss as a result of the following: 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) Notes to Consolidated Financial Statements 61

(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 The ultimate realization of future tax assets is Approximately $4,362 of the United States tax loss carry dependent upon the generation of future taxable forwards above, are subject to restrictions that limit the income during the periods in which these temporary amount that can be utilized in any one taxation year. differences and loss carry forwards become deduct- ible. During 2008 the future income tax asset was 15. Employee Future Benefits increased by operating and non-operating losses The Company provides pension or retirement benefits generated in entities not generating taxable income. to substantially all of its employees in Canada and the Accordingly, the valuation allowance was increased United States through Group RRSPs, 401(K), a defined by a corresponding amount as there is currently no contribution plan and defined benefit plans, based on expectation of generating sufficient taxable income length of service and remuneration. Contributions to the in these legal entities. During 2007 the valuation defined contribution plan for the year end December 31, allowance was increased by $1,329 for future income 2008 were $59 (for the year ended December 31, tax assets relating to share issue costs charged 2007 – $83). directly against equity. Also during 2007, a valuation The Company sponsors a contributory defined benefit allowance of $1,481 set up in the September 2004 pension plan and other retirement benefits for certain of acquisition of Bécancour Silicon Inc. was reversed its eligible employees. Pension benefits vest immediately and credited against goodwill. and are based on years of service and average final (c) At December 31, 2008, the Company has the follow- earnings. Other retirement benefits consist of a group ing gross tax loss carry forwards available to reduce insurance plan covering plan members for life insurance, future years’ income in: disability, hospital, medical and dental benefits. At Canada expiring between 2013 and 2028 $ 64,195 retirement, employees maintain a reduced life insurance United States (Federal) expiring coverage and certain hospital and medical benefits. The between 2009 and 2028 $ 15,700 62 Notes to Consolidated Financial Statements

other retirement coverage provided by the plan is not have the next detailed actuarial valuation as at July 31, funded. The net cost of other retirement benefits includes 2008 for the Magnesium Group and December 31, 2010 for the current service cost, the interest cost and the the Silicon Group. The Magnesium Group valuation will be amortization of experience losses. performed during 2009, while the Silicon Group valuation The most recent Report on the Actuarial Valuation for will be performed during 2011. Funding Purposes for the Silicon Group Plan is dated as Information about the Company’s defined benefit plans, of December 31, 2007 and as of January 1, 2007 for the in aggregate, is as follows: Magnesium Group Plan. The Company is scheduled to 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): 2008 2007 Other Post Other Post Pension Plans Retirement Plan Pension Plans Retirement Plan 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 Notes to Consolidated Financial Statements 63

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: 2008 2007 Other Post Other Post Pension Plans Retirement Plan Pension Plans Retirement Plan 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. 64 Notes to Consolidated Financial Statements

16. Related Party Transactions rate of Cdn$0.40 per common share. The Canadian dollar In March 2007, Safeguard reorganized its indirect hold- equivalent of the United States dollars converted was ings in the Company by contributing 40,909,093 common $0.37 million. Pursuant to the AMG Call Option Agree- shares of the Company to AMG and increasing its owner- ment, all of the issued shares were issued directly to AMG. ship interest in AMG to 89.7%. In June 2007, Safeguard’s During 2008, Safeguard billed the Company for various ownership interest in AMG increased to 91.5%. In July expenses including travel expenses and for business 2007, Safeguard sold a portion of its shares of AMG and development expenses. These expenses totalled $281 retained 40.2% of the outstanding share capital of AMG. (2007 – $139). These payments were reimbursements of In October 2007, Safeguard sold a further portion of its Safeguard’s actual expenses incurred. shares of AMG, such that Safeguard’s ownership interest The Chairman of the Board and another director of in AMG reduced to 26.6%. In addition, AMG has entered Timminco are members of the Management Board of into a call option agreement with ALD International (the AMG, and are also members of the executive committee “AMG Call Option Agreement”), pursuant to which AMG of the general partner of Safeguard, which controls may, at its option, require ALD International to instruct ALD International. the Company to issue to AMG any common shares The Company and Allied Resources Corporation, whose issuable upon the conversion of certain convertible Chairman is also the Chairman and CEO of the Company, promissory notes issued by the Company, as described share the cost of one of the officers of the Company. Dur- below under “Convertible Notes”. The Company was not ing 2008, the Company contributed $429 (2007 – $310) to a party to any of the foregoing transactions among AMG, the cost of the remuneration of the officer of the Company. Safeguard or ALD International. However, the Company did enter into the transactions described below with one For the year ended December 31, 2008, the Company or more of these parties. purchased a furnace and equipment spare parts for $1,556 from ALD Vacuum Technologies GmbH, a On December 13, 2006, the Company borrowed Euro 700 wholly-owned subsidiary of AMG. This equipment, which from ALD International. The loan bore interest at 11%, facilitates the production of ingots from solar grade was due December 31, 2007 and the proceeds were used silicon, was purchased on arm’s length terms and is to invest in shares of Fundo. On May 3, 2007, the Company being used by Silicon for quality control purposes and for repaid this loan and accrued interest. research and development activities. On March 1, 2007, ALD International loaned $4,500 to the During 2008, the Company purchased $1,700 in finished Company to expedite product development and to fund its goods inventory (aluminum wheels) from Fundo. Under further investment in Fundo. The loan, which is in the form this inventory purchase arrangement, Fundo agreed to of a convertible promissory note and is secured against resell such inventory on behalf of the Company to Fundo’s certain assets of the Company, is repayable on demand, existing OEM customers and to remit the proceeds from and bears interest at the U.S. prime rate plus 1%. The loan such sales immediately to the Company. AMG agreed with and related security are subordinate to the indebtedness the Company to unconditionally pay any shortfall in the and the security provided by the Company under the credit actual proceeds of sales, as compared to the expected agreement with Bank of America, N.A. Under the terms proceeds of sales, for such inventory. Under the terms of of the loan, ALD International has the option to convert the the guarantee, AMG paid the Company the outstanding whole or any part of the outstanding principal amount at balance of $1,700 plus interest at 7%. any time into common shares of the Company at a conversion rate of $0.42 per common share. Subsequent to December 31, 2008, the Company issued 7,042,000 common shares in a private placement. AMG On April 26, 2007, ALD International exercised its right to acquired 3,938,200 of the total common shares issued convert the entire principal amount outstanding under (see Note 23). the US$2,000 convertible promissory note issued March 7, 2006 into 5,601,000 common shares of the 17. Financial Instruments Company at a conversion rate of Cdn$0.40 per common Categories of financial assets and liabilities share. The Canadian dollar equivalent of the United States dollars comprised in the principal amount of the note Under CICA Handbook Section 3862, “Financial Instru- was $2.24 million. All such shares were issued directly to ments – Disclosures”, the Company is required to provide AMG, pursuant to ALD International’s directions. disclosures regarding its financial instruments. Financial instruments are either measured at amortized cost or fair On July 23, 2007, the holder converted US$350 of the value. Held-to-maturity investments, loans and receivables principal amount outstanding under the US$3,000 and other financial liabilities are measured at amortized convertible promissory note issued August 31, 2006 into cost. Held-for-trading financial assets and liabilities and 913,500 common shares of the Company at a conversion available-for-sale financial assets are measured on the Notes to Consolidated Financial Statements 65

balance sheet at fair value. Derivative non-financial instru- financial instruments are recorded in earnings unless the ments are classified as held-for-trading and are recorded instruments are designated as cash flow hedges. The fol- on the balance sheet at fair value unless exempted as a lowing table provides the carrying value of each category non-financial derivative representing a normal purchase of financial assets and liabilities and the related balance and sale arrangement. Changes in fair value of derivative sheet item: 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 Company has determined the estimated fair values the corporate finance function, identify, evaluate and, of its financial instruments based on appropriate valua- where appropriate, mitigate financial risks. Material risks tion methodologies; however, considerable judgment is are monitored and are regularly discussed with the Audit required to develop these estimates. The carrying value Committee of the Board of Directors. of current monetary assets and liabilities approximates their fair value due to their relatively short periods to Foreign exchange risk maturity. The fair values of long term receivables, other The Company operates in Canada, the United States, long term liabilities and the debt component of the Mexico, Asia and Europe. The functional currency of amounts due to an affiliated company approximate their Timminco is Canadian dollars as is the reporting cur- carrying values as the terms and conditions are similar rency. The functional currency of the Company’s foreign to current market conditions. Foreign exchange contracts subsidiaries is the Canadian dollar. Foreign exchange risk are marked to market using quoted market prices. arises because the amount of the local currency receivable or payable for transactions denominated in foreign Risks arising from financial instruments and currencies may vary due to changes in exchange rates risk management (“transaction exposures”) and because the non-Canadian The Company’s activities expose it to a variety of dollar denominated financial statements of the subsidiar- financial risks: market risk (including foreign exchange ies may vary on consolidation into Canadian dollars. and interest rate), credit risk and liquidity risk. The In addition, approximately 90% of the Company’s sales Company’s overall risk management program focuses are transacted in U.S. dollars or Euros. As a result, the on the unpredictability of financial markets and seeks Company may experience transaction exposures because to minimize potential adverse effects on the Company’s of volatility in the exchange rate between the Canadian financial performance. The Company uses derivative and U.S. dollar and the Canadian dollar and the Euro. financial instruments to mitigate certain risk exposures. Based on the Company’s U.S. dollar denominated net The Company does not purchase any derivative financial inflows and outflows for the year ended December 31, instruments for speculative purposes. Risk management 2008, a strengthening (weakening) of the U.S. dollar of is the responsibility of the corporate finance function. The 1% would, everything else being equal, have a positive Company’s domestic and foreign operations along with (negative) effect on net income before taxes of $49, prior 66 Notes to Consolidated Financial Statements

to hedging activities. Based on the Company’s Euro Foreign exchange forward contracts denominated net inflows and outflows for the year ended The Company enters into foreign exchange forward December 31, 2008, a strengthening (weakening) of the contracts to mitigate foreign currency risk relating to Euro of 1% would, everything else being equal, have a certain cash flow exposures. The Company’s foreign positive (negative) effect on net income before taxes of exchange forward contracts reduce the Company’s risk approximately $589, prior to hedging activities. from exchange movements because gains and losses on The objective of the Company’s foreign exchange risk such contracts offset losses and gains on transactions management activities is to minimize transaction being hedged. The counterparty to the contracts is a exposures and the resulting volatility of the Company’s multinational commercial bank and therefore credit risk earnings. The Company manages this risk by entering into of counterparty non-performance is remote. Realized and foreign exchange forward contracts. The Company does unrealized gains or losses are included in net earnings not hedge its investments in Norway. (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 of the Company’s Credit Agreement, trade receivables under accrued liabilities. The forward contracts mature from customers in Europe, Australia, Mexico and Japan between January and December 2009. are insured for events of non-payment through Export Development Canada. Interest rate risk The maximum exposure to credit risk is equal to the The Company is exposed to interest rate risk to the extent carrying value of the financial assets. The objective of that cash and short term investments, bank indebted- managing counterparty credit risk is to prevent losses in ness, convertible notes receivable and amounts due to financial assets. The Company assesses the credit quality an affiliated company are at floating rates of interest. of the counterparties, taking into account their financial The Company’s maximum exposure to interest rate risk position, past experience and other factors. Credit risk is based on the effective interest rate and the current is mitigated by entering into sales contracts with only carrying value of these assets and liabilities. The Com- stable, creditworthy parties and through frequent reviews pany monitors the interest rate markets to ensure that of exposures to individual entities. In addition, the Com- appropriate steps can be taken if interest rate volatility pany enters into foreign exchange forward contracts with compromises the Company’s cash flows. a large multinational bank to mitigate associated credit Credit risk risk. In cases where the credit quality of a customer does not meet the Company’s requirements, a cash deposit Accounts receivable, convertible notes and long term is received before any goods are shipped. The carrying receivables are subject to credit risk exposure and the amount of accounts receivable is reduced through the carrying values reflect Management’s assessment of use of an allowance account and the amount of the loss is the associated maximum exposure to such credit risk. recognized in the consolidated statements of operations Substantially all of the Company’s accounts receivable within operating expenses. When a receivable balance are due from customers in a variety of different industries is considered uncollectible, it is written off against the and as such, are subject to normal credit risks in their allowance for accounts receivable. Subsequent recover- respective industries. The Company regularly monitors ies of amounts previously written off are credited against customers for changes in credit risk. As a requirement operating expenses in the consolidated statements of Notes to Consolidated Financial Statements 67

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 Liquidity risk from committed credit facilities. As at December 31, 2008, Liquidity risk arises through an excess of financial obliga- the Company was holding cash and cash equivalents of tions over available financial assets due at any point in $4,512 and had undrawn lines of credit available to it of time. The Company’s objective in managing liquidity risk is US$6,150 which the Company is able to borrow under the to maintain sufficient readily available sources of funding Revolver during the first quarter of 2009, assuming no in order to meet its liquidity requirements at any point decrease in the borrowing base during such quarter. See in time. The Company achieves this by maintaining cash Notes 8 and 19 for a further discussion of the Company’s positive operations and through the availability of funding liquidity and bank covenants. 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) At December 31, 2008, accumulated other comprehensive The Company manages its capital structure in a manner income (loss) includes the deferred unrealized foreign ex- to ensure that sufficient room is maintained under the change loss on the Fundo investment of $698 (December 31, Company’s revolving debt arrangement such that the 2007 – $681 loss) and the deferred unrealized foreign Company can make its required interest payments. For exchange loss on the consolidation of foreign subsidiaries the year ended December 31, 2008, the Company had that were previously self sustaining $170 (December 31, sufficient availability under its revolving debt arrange- 2007 – $170 loss). ment to make its required interest payments. Global economic conditions have deteriorated rapidly 19. Capital Management over the last several months, and the severity, duration The Company defines capital that it manages as the and impact of these developments are not yet fully aggregate of its shareholders’ equity and interest bearing understood. Many of the Company’s customers are debt. The Company’s objectives when managing capital experiencing financial constraints and have reduced or are to ensure that the Company will continue as a going deferred their purchases. Such customers may continue concern, so that it can provide products and services to to curtail or delay their purchases, which would reduce its customers and returns to its shareholders. the Company’s revenues and impact its liquidity. If these As at December 31, 2008, total managed capital was circumstances persist or deteriorate further, the Com- $161,036 (December 31, 2007 – $128,516), comprised of pany’s ability to raise capital in the debt or equity markets shareholders’ equity of $102,205 (December 31, 2007 – could be limited. In response to the current environment, $122,598) and interest-bearing debt of $58,831 (Decem- the Company has adopted a plan to reduce its operating ber 31, 2007 – $5,918). Included in interest bearing debt costs and realize on certain assets to improve its liquidity is the debt component of the convertible notes of $7,392 and believes it will be in compliance with its bank cov- (December 31, 2007 – $5,897), where the associated enants (Note 8) and other obligations throughout 2009. accreted interest expense is a non-cash charge. 68 Notes to Consolidated Financial Statements

20. Commitments, Contingencies and Guarantees Guarantees Commitments In the normal course of business, the Company has pro- Property, plant and equipment vided indemnifications in various commercial agreements which may require payment by the Company for breach As at December 31, 2008, the Company had capital com- of contractual terms of the agreement. Counterparties to mitments of $17,678 related to the expansion of the solar these agreements provide the Company with comparable silicon production facilities (December 31, 2007– $1,300). indemnifications. The indemnification period generally Operating leases covers, at maximum, the period of the applicable agree- The Company leases equipment and office, manufacturing ment plus the applicable limitations period under law. and warehouse space under operating leases with The maximum potential amount of future payments that minimum aggregate rent payable at December 31, 2008: the Company would be required to make under these indemnification agreements is not reasonably quantifiable 2009 $ 683 as certain indemnifications are not subject to limitation. 2010 207 However, the Company enters into indemnification agree- 2011 184 ments only when an assessment of the business circum- 2012 182 stances would indicate that the risk of loss is remote. 2013 and thereafter 1,254 The Company has agreed to indemnify its current and $ 2,510 former directors and officers to the extent permitted Environmental matters by law against any and all charges, costs, expenses, amounts paid in settlement and damages incurred by the In accordance with applicable law, the Company is directors and officers as a result of any lawsuit or any required to file a Mine Closure Plan with the Ontario other judicial administrative or investigative proceeding Ministry of Northern Development and Mines (the in which the directors and officers are sued as a result of “Ministry”) with respect to the Haley, Ontario facility their service. These indemnification claims will be subject together with appropriate financial assurance covering to any statutory or other legal limitation period. The its obligations pursuant to the plan. The Company is nature of such indemnification prevents the Company required to provide financial assurance of $1.7 million by from making a reasonable estimate of the maximum way of cash deposits over a period of five years or sooner, potential amount it could be required to pay to counter depending on the financial results of the Company. To parties. The Company has $45,000 (2007 – $15,000) in date, $1,329 has been deposited with the Ministry and the directors’ and officers’ liability insurance coverage. Company expects to deposit the balance in equal instalments over the next two years. 21. Segmented Information Contingent liabilities The Company manages its business along two principal Legal actions business segments, the production and sale of silicon metal and solar grade silicon, the Silicon Group (“Silicon”), The Company is involved in various legal matters arising and of specialty non-ferrous metals, the Magnesium in the ordinary course of business. The resolution of Group (“Magnesium”). Amounts included under “Other” these matters is not expected to have a material adverse include corporate activities and amounts related to the effect on the Company’s financial position, results of Company’s investment in Fundo. Segmented information operations or cash flows. on sales and identifiable assets by geographic region is as follows: (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 Notes to Consolidated Financial Statements 69

(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 Included in the assets related to the Silicon Group is (e) Additions to Property, Plant and Equipment: goodwill of $16,827 which arose from the acquisition of 2008 2007 the Silicon Group by the Company. During 2007, goodwill Magnesium $ 313 $ 611 was reduced from $18,308 to $16,827 due to the recogni- Silicon 94,847 28,578 tion of certain tax assets that arose from the acquisition. $ 95,160 $ 29,189 (d) Property, Plant and Equipment: Economic dependence 2008 2007 In 2008, one Silicon Group customer accounted for 14% Magnesium $ 1,991 $ 3,299 of total sales (2007 – three customers accounted for 39% Silicon 128,856 40,292 of total sales). $ 130,847 $ 43,591 70 Notes to Consolidated Financial Statements

22. Comparative Figures combined business which will be known as Applied Certain of the 2007 comparative figures have been reclas- Magnesium International. The proposed merger is subject sified to conform to the financial statement presentation to a number of conditions, including financing and the adopted in 2008. negotiation and execution of definitive agreements, and is expected to be completed in the second quarter 2009. 23. Subsequent Events The Company also announced that it would wind down production operations at its existing magnesium extru- On February 3, 2009, the Company issued 7,042,000 sion facility in Aurora, Colorado and close the facility common shares in a private placement at $3.55 per share later in 2009. for approximate net proceeds of $24,239. The Company’s controlling shareholder, AMG Advanced Metallurgical On March 17, 2009, the Company announced that it will Group N.V. (“AMG”) subscribed for 3,938,200 shares temporarily curtail production of silicon metal starting (55.9% of the private placement) and the remaining in the second quarter 2009 in recognition of difficult 3,103,800 shares were issued to public shareholders. market conditions including reduced demand for silicon After the private placement, AMG controlled 50.7% of the metal in the chemical and aluminum industries. The total issued and outstanding share capital. decrease of the Company’s silicon metal production will result in a temporary workforce reduction. During this On February 18, 2009, the Company announced a non- period, the Company will supply silicon metal to customers binding letter of intent with Winca Tech Limited (“Winca”), from existing finished goods inventory. The Company will a leading Chinese-based producer of magnesium continue to produce solar grade silicon, although at levels products, to merge the principal components of the that bring production in line with customer orders. The Company’s magnesium and specialty metals business, Company will defer further capacity expansion of its solar including its manufacturing facility in Nuevo Laredo, grade silicon facility pending recovery of demand for solar Mexico, with all of Winca’s operations. The Company grade silicon. expects to retain a minority equity interest in the Notes to Consolidated Financial Statements 71

Corporate and Shareholder Information Directors and Officers Head Office Timminco Limited 150 King Street West, Suite 2401 Directors Toronto, Ontario, Canada M5H 1J9 Dr. Heinz C. Schimmelbusch Telephone: (416) 364-5171 Chairman of Management Board, Fax: (416) 364-3451 AMG Advanced Metallurgical Group N.V. www.timminco.com Arthur R. Spector Deputy Chair of Management Board, Annual Meeting AMG Advanced Metallurgical Group N.V. May 15, 2009 at 10:00 a.m. The Fairmont Royal York John C. Fox1, 2, 3 Imperial Room Senior Managing Director, 100 Front Street West Perseus LLC Toronto, Ontario Jay C. Kellerman Partner, Stikeman Elliott LLP Auditors Ernst & Young LLP, Toronto, Ontario, Canada Jack L. Messman2, 3 Company Director Investor Relations Michael D. Winfield 1, 2 Robert J. Dietrich Company Director Executive Vice President – Finance and Chief Financial Officer Mickey M. Yaksich1, 3 Telephone: (416) 364-5171 Partner, McMillan LLP Fax: (416) 364-3451 1 Member of the Audit Committee Lawrence Chamberlain 2 Member of the Human Resources, Compensation Telephone: (416) 815-0700 and Pension Committee 3 Member of the Corporate Governance and Fax: (416) 815-0080 Nominating Committee Email: lchamberlain@equicomgroup.com Officers Stock Exchange Listing Dr. Heinz C. Schimmelbusch TSX: TIM Chief Executive Officer and Chairman of the Board Robert J. Dietrich Transfer Agent Executive Vice President – Finance English: and Chief Financial Officer Computershare Investor Services Inc. 100 University Avenue, 9th Floor René Boisvert Toronto, Ontario, Canada M5J 2Y1 President – Silicon (President and Chief Executive Officer, French: Bécancour Silicon Inc.) Services aux investisseurs Computershare 1500, rue Université, bureau 700 John Fenger Montréal, Québec, Canada H3A 3S8 President – Light Metals Peter A.M. Kalins General Counsel and Corporate Secretary Peter D. Rayner Corporate Controller © Timminco Limited 2009 72 Corporate and Shareholder Information

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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

Timminco 2008 Annual Report

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