FIRST NICKEL INC. ANNUAL REPORT 2010First Nickel Inc.120 Front Street EastSuite 206Toronto, OntarioM5A 4L9
FORWARD-LOOKING STATEMENT Corporate Information DIRECTORS OFFICERS Thomas J. Pugsley (2, 3, 4) William J. Anderson President & Chief Executive Officer C. David A. Comba Joseph Del Campo, CMA Lyle R. Hepburn (1, 3) Chief Financial Officer William J. Anderson (4) Gerry Bilodeau Richard S. Hallisey (1, 4) Chief Operating Officer Robert F. Whittall (1, 3) Paul Davis, P.Geo., M.Sc. Russell L. Cranswick Vice President Exploration (2, 4) (1) Audit Committee (2) Compensation Committee (3) Corporate Governance Committee (4) Technical Advisory Committee (2, 4) HEAD OFFICE REGISTRAR AND TRANSFER AGENT 120 Front Street East Equity Transfer Services Inc. Suite 206 200 University Avenue Toronto, Ontario Suite 400 M5A 4L9 Toronto, Ontario Phone 416-362-7050 M5H 4H1 Stock Exchange Listing Fax 416-362-9050 Investor Relations Website Annual General MeetingThis annual report may contain www.firstnickel.comforward-looking statements, which are Toronto Stock Exchange Legal Counselsubject to certain risks, uncertainties Symbol: FNI CONTENTS Thursday, June 16, 2011 at 10 a.m. ETand assumptions. A number of factors TSX Broadcast Centre – Gallerycould cause actual results to differ Fasken Martineau DuMoulin LLP The Exchange Tower 1 Highlights of 2010 and 2011 Objectivesmaterially from the results discussed 333 Bay Street 130 King Street West 2 Message to Shareholdersin such statements, and there is no Suite 2400 Toronto, Ontario 4 Production at Lockerby Mineassurance that actual results will be M5X 1J2 10 Exploration Bay Adelaide Centre 12 Environment, Health and Safetyconsistent with them. Such forward- Toronto, Ontario Auditors 13 Management’s Discussion and Analysis M5H 2T6looking statements are made as at 33 Management’s Responsibility for Financial Reportingthe date of this annual report, and 33 Independent Auditors’ Report 34 Balance Sheetsthe Company assumes no obligation KPMG LLP 35 Statements of Operations and Comprehensive Lossto update or revise it, either publicly 36 Statements of Changes in Shareholders’ Equity Bay Adelaide Centre 37 Statements of Cash Flowsor otherwise, to reflect new events, Suite 4600 38 Notes to the Financial Statements 333 Bay Streetinformation or circumstances. 52 Glossary of Terms Toronto, Ontario 53 Corporate Information 53 M5H 2S5 FIRST NICKEL INC. ANNUAL REPORT 2010
HIGHLIGHTS OF 2010 2011 OBJECTIVES • Engagement letter signed with two major international banks to arrange a $30 million debt facility • $33 million raised through a prospectus offering• Recommissioning phase of the Lockerby Depth Development Project initiated in Q4 • Finalize the project debt facility • Launch the Lockerby Depth Development Project, targeting initial ore delivery in Q3 • Continue to source new advanced projects 1 FIRST NICKEL INC. ANNUAL REPORT 2010
MESSAGE TO SHAREHOLDERS William J. Anderson President & CEO 2 During 2010 we achieved major progress in structuring the financial package needed to fund the capital plan at Lockerby Mine that will returnFIRST NICKEL INC. ANNUAL REPORT 2010 the operation to production at levels that ensure robust margins and solid cash flow.
I have remarked before that through the past couple of very difficult years, our key operating and management staff has stayed on board and undertaken a great deal of hard work keeping theIn the summer of 2010 we accepted mine site in readiness, as wellan engagement letter from two as preparing the plans for a well-large international banks to designed and tightly budgetedarrange a $30 million debt facility. capital plan. On behalf of theIn the fall of 2010 we secured a directors, I’d like to expressUS$5 million bridge loan from our our thanks for all this effortlargest shareholder, which allowed and dedication.us to begin the Recommissioningphase of the Lockerby Depth As a team, our immediate priority isproject. This initiative was followed to execute the plan we’ve built andin November with a further deliver against the milestones we$28 million in funding through have set. I am confident that byan equity offering. the second half of 2011 we will be shipping ore to Xstrata’s mill.As we begin 2011, we are in a solid I also want to emphasize to ourfinancial position, enjoying the shareholders that with the strengthstrong support of two large and experience of our operatinginstitutional shareholders, and and exploration teams, we have theare well-advanced in the lengthy skills to develop and manage muchand involved process of providing more than Lockerby, and growth ofthe documentation needed for the Company beyond the Lockerbythe $30 million loan facility. In operation will be a key focus as wethe second half of 2010 prices of move forward.our two main metals, nickel andcopper have displayed promisingpositive trajectories, and with theexpectation that demand forthese metals will remain strongover the next few years, the outlookfor First Nickel is very promising. William J. Anderson President & CEO 3 FIRST NICKEL INC. ANNUAL REPORT 2010
LOCKERBY MINE Preparing the Lockerby Mine for a return Lockerby’s No. 2 Headframe to production was the priority of First and mine complex building Nickel in 2010. The Company made have been readied for the significant strides during the year transition back to commercial production. First Nickel’s including the initiation of detailed employees and equipment engineering designs, rehabilitation are delivered to the mine work on critical conveyances and mobile via the No. 2 Shaft. equipment, securing of a new mobile fleet, signing new collective agreements with both the United Steelworkers and CAW unions for three year terms, and sourcing financing to fund the development program. Both financing and project schedules are on track for commencement of production in the third quarter of 2011 and a ramp-up to full annualized production of 10 million pounds of nickel and 7 million pounds of copper by mid 2012. Another important milestone for the Company was the engagement of J.S. Redpath Limited as the mining contractor to execute the Company’s capital development program to the 7000 Level. The work will involve the extension of the ramp, as well as lateral and vertical development on the Lockerby Depth project. J.S. Redpath Limited is During 2010, the mine staff and skeleton an internationally recognized mining crew worked diligently at keeping the contractor known for its focus on safety, Lockerby Mine on care and maintenance, project execution and attention to budgets maintaining attention to safety and a high and costing. environmental standard while focused on minimizing costs and advancing engineering and planning activities. The engineering and planning studies have focused on reducing the capital and operational costs and increasing productivity and efficiency. Opportunities have been identified in terms of mine development performance, a reduction in the mine infrastructure required to access the ore body, and streamlining the process to move ore to surface. 4FIRST NICKEL INC. ANNUAL REPORT 2010
P R O D U CT I O N This figure represents the 3-Dimensional representation of the Lockerby Depth development and mining project. The ramp is identified in yellow, access drifts in green, primary stopes in red/dark blue, secondary 5 stopes in orange/light blue and ventilation raises in light blue. FIRST NICKEL INC. ANNUAL REPORT 2010
LOCKERBY MINE Significant upside potential remains at the Lockerby Mine. The current mine plan does not incorporate any ore sourced from resources outside of the Lockerby Depth including the Lockerby East and Upper First Nickel believes that the Lockerby West zones. There exists untested Mine represents one of the best high- exploration potential for footwall, hanging grade nickel deposits positioned wall and contact zones. The mineralization for development during this period is open at depth below the 70 Level on the of strong metal markets that is Lockerby Depth Zone and opportunities anticipated to continue into the exist to further expand the Depth Zone foreseeable future. and sustain levels of production at greater than 800 tonnes per day beyond the A feasibility study on the development current mine plan. and mining of the Lockerby Depth ore body was updated by GENIVAR Limited Partnership, a consulting engineering firm based in Quebec City, Quebec, in 2010. The study derived a Probable Mineral Reserve of 1.44 million tonnes grading 2.23% nickel, 1.36% copper and 0.083% cobalt. Reserves were estimated using a 20% dilution, a 90% overall mining recovery and a 1.5% nickel equivalent cut-off grade. The Probable Mineral Reserve was derived from an estimated Indicated Mineral Resource of 1.42 million tonnes grading 2.58% nickel, 1.60% copper and 0.098% cobalt at a 1.5% nickel equivalent cut-off grade. The Lockerby Depth Mine Plan schedule extracts the Probable Mineral Reserve over a 6.5-year period including a 1-year period of pre-production and 5.5 years of development and production at a full production rate of 800 tonnes per day or 280,000 tonnes per year. The critical components of the capital plan that will ultimately increase productivity and reduce unit costs include advancing development ahead of production, acquiring new mobile equipment and improving ore/waste handling and ventilation. As activity increases on the Lockerby Depth development program, ore trucks similar to the one pictured above will transport the ore from the Lockerby Mine Site to Xstrata’s Strathcona Mill Facility for milling. 6FIRST NICKEL INC. ANNUAL REPORT 2010
P R O D U CT I O N Pictured below is high grade, massive sulphide nickel ore characteristic of the Lockerby Depth contact ore deposit. The Lockerby Depth deposit will be mined using a transverse mining method comprised of primary and secondary stopes. 7 FIRST NICKEL INC. ANNUAL REPORT 2010
LOCKERBY MINE This mining approach will support steady state mining and extraction of ore from stopes on multiple areas as well as accelerate the start of production. The mine is being developed to minimize The upper limit of the Depth Zone the build-up of stresses in the rock mass lies at 1,924 metres below surface inherent to mining in deeper zones. This (or approximately 6,300 feet). The process, when combined with consolidated Depth Zone consists of two lenses in backfill, was deemed the safest scenario to close proximity to each other. They are maintain stability of underground openings identified as the Contact Zone and the and will result in improved economics and Hanging Wall Zone. The Contact Zone is productivity during the life of the project. the main mineralized area and contains 85 stopes totalling 1,252,800 tonnes of A dedicated ventilation network to the ore at 2.34% Ni, 1.38% Cu and 0.088% new working areas will be connected Co. The Hanging Wall Zone contains to the existing ventilation network of the 16 stopes totalling 183,400 tonnes of underground mine. A new cooling strategy ore at 1.46% Ni, 1.20% Cu and 0.053% employing a compressed air network and Co. The Contact Zone will be accessed a spray chamber will be used to lower the through the Hanging Wall Zone. ambient air temperature in deeper levels during the summer period. The proposed The current plan to mine the Lockerby ventilation network of the Depth Zone will Depth Zone is a transverse accessed route cool air to work areas. blasthole stope design. Mining will be carried out along 231 vertical metres on seven 33 metre high sublevels from the floor of 65-3 Level down to the floor of 70 Level. The orebody will be accessed via a ramp and level crosscuts to main haulage drifts. The Contact Zone and Hanging Wall Zone have been subdivided into Primary and Secondary stopes. A sublevel longhole stoping method will be applied using downhole drilling. The 45 primary stopes of the Contact Zone will be mined top down (i.e. from the floor of the existing 65-3 Level downwards to the 70 Level), while the main ramp is deepened allowing access to main level development. Excavation of the ramp will be done concurrently to mining of the primary stopes of the Contact Zone. Once the ramp is developed and the primary stopes are mined out, the remaining 40 secondary stopes of the Contact Zone will be mined bottom-up. Lockerby’s mobile fleet has been refurbished and new equipment is being brought in to expand the fleet and replace 8 older, less efficient units.FIRST NICKEL INC. ANNUAL REPORT 2010
P R O D U CT I O N Minimizing the impact on the environment is a core corporate responsibility and First Nickel uses the ore storage shed above to limit the exposure of the sulphides to rain and snow. 9 FIRST NICKEL INC. ANNUAL REPORT 2010
EXPLORATION The Lockerby Mine represents an area for further exploration opportunity. Targets have been identified in the Lockerby Depth, Lockerby East and Lockerby Main areas with known nickel and copper mineralization First Nickel will continue to build a pipeline that will require significant exploration of grass roots to advanced projects through programs to define their potential. exploration, discovery and acquisition. Exploration programs have been designed to test these areas and As the Company’s Sudbury exploration are integrated into the long-term properties matured, our exploration mine plan. programs began to expand outside of the Sudbury Basin. Exploration continued First Nickel continuously searches on the Company’s large land package in for quality exploration opportunities Southeastern Ontario, exploring for nickel- throughout the world. The Company copper-platinum group element deposits reviews numerous projects submitted by in an underexplored area with known individuals and companies, and assesses occurrences of nickel and copper. the exploration potential to determine if the project represents an opportunity An exploration strategy that utilizes the to add value to our group of exploration latest technologies is employed to rank properties. A strategy of identifying our exploration targets. A systematic undervalued and overlooked areas approach that aims to maximize our with open ground for staking has exploration dollars is employed at all proven successful for the Company. phases of exploration from grass roots prospecting to deposit definition. This First Nickel is proactive in its approach has reduced our exploration approach to minimizing the impact costs and resulted in an ability to to the local environment as a result complete more exploration work of our exploration activities. All without an increase in budget. exploration tasks either completed by the Company or a contractor First Nickel has a dedicated and adhere to industry best practices. experienced exploration team that Re-contouring and re-seeding manages and directs all of the Company’s of drill pads and access roads exploration programs. All programs are is part of the Company’s standard completed under the direction of a operating procedure. Qualified Person as defined by NI 43-101 and who is a member of the Association As the Company returns to being a of Professional Geoscientists of Ontario producer, the importance of sourcing new (“APGO”). The Company follows a rigorous assets or projects for development will be quality control and quality assurance emphasized as part of its growth strategy. (“QAQC”) program that ensures that the exploration work completed meets or exceeds industry standards. Exploration work in 2010 was composed primarily of surface mapping and sampling in Southeastern Ontario to maintain the staked mining claims in good standing, and a 500 metre diamond drill program on the Henderson Property to earn the Company’s 50% interest in the property. Exploration expenditures were tightly controlled to maximize the limited exploration budget during this period while the Company focused on its Lockerby Operations. 10 Special attention is paid to First Nickel’s exploration footprint, limiting the clearing of vegetation and replanting with native species to accelerate the re-growth of any drill pads and access roads.FIRST NICKEL INC. ANNUAL REPORT 2010
E X P LO R AT I O N First Nickel’s exploration teams are highly trained and experienced in the latest exploration techniques and our exploration programs are completed year round, testing high priority targets for the presence of nickel, copper and platinum group elements. 11 FIRST NICKEL INC. ANNUAL REPORT 2010
ENVIRONMENT / HEALTH AND SAFETY At First Nickel, minimizing the impact on the environment is integrated into all of our operations and is a core corporate responsibility. We monitor our performance through ongoing testing and are always looking for ways to reduce our environmental footprint. Our Lockerby Mine has a formal environmental management system that is appropriately staffed and funded and we strive to exceed the legislated environmental standards. The health and safety of our employees and the public are a priority. Our entire team is dedicated to making safety an integral part of every workday by identifying concerns and implementing improvements to all processes. First Nickel has developed and communicated procedures that will ensure a safe and healthy working environment for all of our employees and contractors. Our guiding principles include a commitment to: • No task being so important that time cannot be taken to complete it safely • Providing a safe and healthy workplace for all of our people • Training and motivating all of our people to work in a safe and responsible manner • Integrating of health and safety into planning and decision- making processes through the lifecycle of operations • Applying “best practices” to ensure excellence in our health and safety performance • Compliance with relevant legislation • Striving for continual improvement in our safety and health performance 12 • Having all of our people accountable for health and safetyFIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSISThe following Management’s Discussion and Analysis (MD&A”) regarding the results of the operations of First Nickel Inc. (“FirstNickel” or the “Company”) constitutes management’s review of the Company’s financial and operating performance for the yearended December 31, 2010, and the Company’s financial status and future prospects. It should be read in conjunction with theCompany’s audited financial statements and related notes for the year ended December 31, 2010. The audited financial statementshave been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).Additional Company information can be accessed through the System for Electronic Document Analysis and Retrieval (“SEDAR”)website at www.sedar.com and the Company’s website at www.firstnickel.com.All dollar amounts are expressed in Canadian currency unless otherwise stated.This information is provided as at March 23, 2011.This MD&A contains forward-looking statements. For example, statements with respect to planned or expected development andproduction are all forward-looking statements. As well, statements about the adequacy of the Company’s cash resources or theneed for future financing are also forward-looking statements. All forward-looking statements, including forward-lookingstatements not specifically identified in this paragraph, are made subject to the cautionary language at the end of this document,COMPANY OVERVIEWand readers are directed to refer to that cautionary language when reading any forward-looking statements.First Nickel is a Canadian mining and exploration company, whose principal asset is the Lockerby Mine near Sudbury, Ontario.When operating, the mine produces nickel-copper ore which is sold to Xstrata Nickel (a business unit of Xstrata CanadaCorporation) (“Xstrata”) under a life of mine ore sale and processing agreement (the “Xstrata Off-take Agreement”). In October2008, in response to declining metal prices, operations were suspended and the mine was placed on care and maintenance.In February 2009, the Company received an independent feasibility study on the Depth Zone at Lockerby Mine prepared by GENIVARLimited Partnership, and a subsequent update in October 2009 which demonstrates that the existing well-defined high gradereserve can support a financial case for development that will extend mine life by more than five years.In October 2010, after receiving a bridge loan facility of US$5 million from Resource Capital Fund IV L.P., the Company began are-commissioning program in anticipation of launching a capital development project on its Lockerby Depth Orebody in 2011, whichwould lead to resumption of production later in 2011. An equity offering in November raised $28.7 million. By year end the Companyhad made significant progress in sourcing the funds for a re-start in 2011.In addition to its Lockerby Mine, the Company has a portfolio of exploration projects in the Sudbury district, and elsewhere inHIGHLIGHTS / SUMMARYOntario.• A net loss of $9.1 million was recorded in 2010. This compares to a net loss of $7.5 million recorded in 2009.• At December 31, 2010 the Company had a cash balance of $29.2 million.• During 2010, major progress was achieved toward becoming fully funded for capital and corporate needs and the Company is on track for first production in Q3 of 2011 and to produce at an annualized rate of 10 million pounds of nickel, and 7 million pounds of copper by mid-2012.• On September 1, 2010, the Company received a bridge loan of US$5 million from Resource Capital Fund IV L.P.• In October 2010, the Company launched its re-commissioning capital program at the Lockerby Mine.• On November 12, 2010, the Company completed an equity issue for gross proceeds of $28.7 million.• In March 2011 the Company received the Commitment Letter from two banks for a $30 million secured project debt facility.• Ramping back to full production is expected to start in Q3 of 2011. 13 FIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSIS LOCKERBY DEPTH ZONE DEVELOPMENT FINANCING The Company achieved great progress during 2010 and early 2011 toward securing full financing of its Lockerby Depth Development Project. The series of transactions as described below has positioned the Company for a full launch of the development program in 2011. The combination of the cash in hand plus the debt facility when completed, will be sufficient to cover the initial capital costs to start of production of approximately $34 million and ongoing capital and working capital requirements through to full production Bridge Loan – US$5 million of 10 million pounds of nickel, and 7 million pounds of copper in 2012. On September 1, 2010, the Company completed a financing with Resource Capital Fund IV L.P. (“RCF IV”) for a US$5 million bridge loan that had a maturity date of December 31, 2013 (the “Bridge Loan”). The full amount was advanced on September 1, 2010 and was used to initiate re-commissioning activities and detailed engineering studies at the Lockerby Mine. The Bridge Loan bore an interest rate of 15% per annum, which was paid quarterly in common shares of the Company (“Common Shares”) valued at the market price which equaled the 5-day weighted average trading price of the Common Shares. The Bridge Loan was provided pursuant to the terms of a convertible loan agreement between the Company and RCF IV dated July 23, 2009, as amended and restated as of September 1, 2010 (the “Restated Loan Agreement”), which also provides for the ongoing respective rights and obligations of the Company and RCF IV in respect of the US$10 million convertible loan advanced to the Company on July 24, 2009 (the “Convertible Loan”). As part of the Equity Financing (described below), RCF IV exchanged $3,375,910 (US$3,171,059) of the US$5,000,000 Bridge Loan for 28,132,580 Units based on an exchange rate of C$1.0646/US$1.00 and a price of $0.12 per Unit in connection with the Offering. The remaining $1,947,090 (US$1,828,940) of the Bridge Loan was exchanged in January 2011 for 16,225,753 Units, after receiving Proposed Senior Debt Facility – $30 million shareholder approval to convert the balance. On August 25, 2010, the Company entered into an engagement letter to appoint Société Générale (Canada Branch) (“SocGen”) and Commonwealth Bank of Australia (“CBA”) (together the “Lead Arrangers”) to act as exclusive lead arrangers for a senior secured project loan facility up to $30 million (the “Facility”). On March 1, 2011, the Company received and accepted commitments from the Lead Arrangers for a senior debt facility totalling $30 million. The proceeds from this facility when closed will be used to partially fund the development and working capital costs at the Company’s Depth Project at the Lockerby Mine in Sudbury. In connection with receiving the commitments, the Company agreed to issue 6,155,986 common share purchase warrants to the Lead Arrangers as part of the arrangement fee. The warrants are exercisable at $0.12 per share and expire March 31, 2015. Drawdown of the Facility will be subject to a number of conditions precedent, including completion of satisfactory legal documentation, implementation of a hedging program and expenditure by the Company of its required equity contribution. Under the Facility documents, the Company will be required to enter into direct agreements with several stakeholders to establish satisfactory collateral arrangements covering the Company’s assets. The Commitment to underwrite the Facility follows extensive due diligence review by both the Lead Arrangers and their Independent Engineer, Roscoe Postle Associates Inc. (RPA). 14FIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSISEquity Financing – $28.7 millionOn November 12, 2010 the Company completed an equity offering of 239,582,948 units (“Units”) of the Company at a price of $0.12per Unit for total gross proceeds of $28,749,953 (the “Offering”). Each Unit is comprised of one Common Share and one-half of oneCommon Share purchase warrant (each whole warrant, a “Warrant”). Each Warrant entitles the holder thereof to acquire oneCommon Share at a price of $0.17 until November 12, 2012.Purchasers under the Offering included West Face Long Term Opportunities Global Master L.P., which purchased 91,000,000 UnitsLOCKERBY MINEfor proceeds of $10,920,000, and Resource Capital Fund V L.P. which purchased 41,666,666 Units for proceeds of $5,000,000.The mine staff and a skeleton crew worked diligently during 2010 at maintaining the Lockerby Mine on care and maintenance atminimal cost, and while also advancing engineering and planning activities. Both financing and project schedules are currently ontrack for commencement of production in the third quarter of 2011 and a ramp-up to full annualized production of 10 million poundsof nickel and 7 million pounds of copper, per year by mid-2012.In October 2010, the Company launched its re-commissioning capital program at the Lockerby Mine after receiving a bridge facilityof US$5 million from RCF IV. Following completion of the $28.7 million equity financing in November 2010, site work wasaccelerated and the following activities are underway or completed by early 2011:• Detailed engineering began in November 2010.• Rehabilitation work on various conveyances and mobile equipment is well-advanced and on target.• The supplier for the mobile equipment lease has been chosen, and delivery of the first 42T truck has been made.• The Company anticipates selecting the mining contractor for the ramp development program in March.• A number of unionized employees have been recalled as the Company prepares for the full launch of the Development Program.On April 27, 2010 the Company signed a new collective agreement with the United Steelworkers who represent OCT (Office, Clericaland Technical) employees, and on July 23, 2010 an agreement was reached with the CAW for the P&M (Production and Maintenance)EXPLORATIONworkers. Both of these agreements have three year terms to 2013.The Company has satisfied the option payments and exploration expenditures required to earn a 70% interest in the West GrahamProperty pursuant to the option agreement entered into between the Company and Landore Resources Canada Inc. (“Landore”)dated November 21, 2005. Landore has opted not to initiate a joint venture to the extent of its 30% working interest so the Companyhas the option to increase its interest to 85% by completing a bankable feasibility study by October 12, 2012.Exploration efforts during 2010 focused on the completion and submission of assessment reports to maintain priority claim blockson the Southeastern Ontario projects. Exploration programs consisted of surface mapping and prospecting, geophysical surveysand diamond drilling designed to test priority targets on the Raglan Hills and Belmont projects in Southeastern Ontario. 15West Graham PropertySoutheastern Ontario Claims FIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSIS A diamond drill rig was mobilized onto the Henderson Property located in Raglan Township and completed a 500 metre drill program testing 3 conductive bodies defined by the surface TEM geophysical survey. Borehole TEM was completed on all three diamond drill holes. No significant mineralization was identified by the diamond drill program. The Company has satisfied the exploration expenditures of at least $60,000 required to earn a 50% interest in the Henderson Property pursuant to the option agreement entered into between the Company and Melkior Resources Inc. dated July 31, 2010. Surface prospecting and sampling has been completed on the selected claims within the Belmont project to satisfy minimum work requirements to maintain the priority claims in good standing for an additional year. Claims identified as having limited exploration potential have been allowed to lapse. On October 31, 2007, the Company entered into a then 50% – 50% joint venture agreement with Pacific Northwest Capital Corp. (“PFN”), (the “Joint Venture Agreement”) whereby both companies agreed to bear all expenditures and participate in a single purpose unincorporated joint venture for the purpose of carrying out mineral exploration on the Raglan Hills project located north- east of Bancroft, Ontario. PFN’s ownership interest in the property has been diluted according to the formula defined in the Joint Venture Agreement below 10% and converted to a 1.5% net smelter royalty. The Company continues to actively source additional high quality exploration properties and reviews property submissions from SELECTED ANNUAL INFORMATION individuals and corporations. Henderson Property The following table sets out selected financial information relating to the Company’s most recently completed financial years. Belmont Property Year ended Year ended Year ended December 31, December 31, December 31, Sales revenues $ Nil $ 4,483,662 $ 48,185,519 2010 2009 2008 Net loss $ (9,096,076) $ (7,518,262) $ (24,208,062) Net loss per share – basic and diluted $ (0.05) $ (0.05) $ (0.17) Raglan Hills Joint Venture with Pacific Northwest Capital Corp. Total assets $ 84,261,529 $ 61,714,203 $ 62,120,667 Working capital $ 28,278,092 $ 6,451,341 $ 8,377,065 Convertible loan $ 7,928,034 $ 7,849,236 $ Nil Capital stock $ 99,106,416 $ 72,655,804 $ 73,727,356 Shareholders’ equity $ 67,593,169 $ 45,301,925 $ 50,924,120 Number of common shares issued and outstanding 437,188,897 159,110,632 155,548,098 No dividends have been declared or paid by the Company in any of the periods presented above. The Company does not anticipate New Exploration Opportunities declaring or paying any dividends on its Common Shares in the foreseeable future. 16FIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSISRESULTS OF OPERATIONSThe following table presents a summary of the results of operations for the year ended December 31, 2010 and 2009: December 31, December 31,Sales Revenue $ – $ 4,483,662 2010 2009Operating costs excluding amortization – 4,173,121Care and maintenance costs 5,138,684 4,772,855Amortization of mining properties and equipment – 719,631Accretion of asset retirement obligations 199,200 193,400 5,337,884 9,859,007Operating loss from mining operations (5,337,884) (5,375,345)General and administrative 2,364,192 2,289,477Stock-based compensation 173,596 538,742Foreign exchange gain (394,619) (273,222)Depreciation and amortization 17,040 17,436Interest on convertible loan 942,080 413,468Accretion on convertible loan 535,046 218,987Interest on bridge loan 198,632 –Interest and other expenses 17,718 181,156Realized loss on sale of marketable securities – 21,429Interest and other income (78,563) (97,787) 3,775,122 3,309,686Loss before taxes (9,113,006) (8,685,031)Recovery of income and mining taxes (16,930) (1,166,769)Net loss for the year $ (9,096,076) $ (7,518,262)Loss per share – basic and diluted $ (0.05) $ (0.05)For the year ended December 31, 2010 the Company recorded a net loss of $9,096,076, or $0.05 per share, compared to a net lossof $7,518,262, or $0.05 per share, recorded for the year ended December 31, 2009. The Company has recorded a full valuationallowance against any future income tax assets for the year ended December 31, 2010.No sales revenue was recorded in 2010. The year ended December 31, 2009, includes only one month of sales revenue as theCompany suspended mining operations at the Lockerby Mine in October 2008, and therefore only had one month of productionavailable for settlement in 2009. 17Weighted average number of Common Shares outstanding 173,298,556 156,235,601 FIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSIS The following table sets out selected sales information for the periods indicated: Total Total Sales by Payable Metal 2010 2009 (i) Nickel – pounds – 486,849 Copper – pounds – 287,827 Cobalt – pounds – 9,096 Average Price Received – US$/lb Nickel – $ 5.76 Copper – $ 1.58 Cobalt – $ 13.83 Average Exchange Rate Realized US $ 1 = Canadian $ – $ 1.2280 Care and maintenance costs of $5,138,684 recorded in 2010 include ongoing costs of the staff retained at the Lockerby Mine site, energy, taxes, insurance, equipment rentals and materials required to maintain the mine. (i) only includes one month of sales General and administrative expenses recorded in 2010 totalled $2,364,192. This is $74,715 (3%) higher than the $2,289,477 expenditures recorded in 2009. The increase is mostly attributable to higher consulting, legal and transfer agent fees. Stock-based compensation costs for 2010 amounted to $173,596. In December of 2010, 6,800,000 stock options were granted to directors, officers and employees at an exercise price of $0.12. The fair value of the options granted was estimated at the grant date to be $468,155. Of this amount, $167,596 was expensed in 2010, with the balance amortized over the vesting period of the options. The Company uses the Black-Scholes pricing model in the valuations of the options. An increase in the value of the Canadian dollar relative to the U.S. dollar during 2010 resulted in a foreign exchange gain of $394,619 being recorded in 2010. Exchange gains or losses arise from the revaluation of the US dollar cash balances, and the US dollar Convertible Loan account. The interest on the loan facilities with RCF IV for the year ended December 31, 2010 amounted to $1,140,712 ($942,080 on the Convertible Loan and $198,632 on the Bridge Loan). RCF IV notified the Company of its option to receive Common Shares in payment of this interest. A total of 9,751,174 (6,691,693 in 2010 and 3,059,481 in 2011) Common Shares were issued to RCF IV in full satisfaction of this liability. Interest and other expenses of $17,718 recorded in 2010 include costs incurred on mineral properties that were previously written off, offset by a refund of interest on the flow-through funds (Part XII.6 tax). Interest and other income is mostly made up of interest earned on cash balances, and on short term deposits. The lower interest income in 2010, compared to 2009, mainly reflects lower interest rates. 18FIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSISSUMMARY OF QUARTERLY RESULTSThe following table sets out selected financial information derived from the Company’s financial statements for each of the eightmost recently completed quarters: Net loss per share – basicDecember 31, 2010 $ Nil $ (2,943,097) $ (0.01) Sales revenues Net loss and dilutedSeptember 30, 2010 $ Nil $ (1,532,483) $ (0.01)June 30, 2010 $ Nil $ (2,602,100) $ (0.02)March 31, 2010 $ Nil $ (2,018,396) $ (0.01)December 31, 2009 $ Nil $ (1,410,820) $ (0.01)September 30, 2009 $ Nil $ (1,554,114) $ (0.01)June 30, 2009 $ Nil $ (2,013,697) $ (0.01)March 31, 2009 $ 4,483,662 $ (2,539,631) $ (0.02)The first, second, third and fourth quarters of 2010 include care and maintenance costs of $1,343,900, $1,218,702, $1,078,515 and$1,497,567, respectively, on the Lockerby Mine.The first, second, third and fourth quarters of 2009 include care and maintenance costs of $1,430,234, $1,128,708, $935,230 andLIQUIDITY AND CAPITAL RESOURCES$1,278,683, respectively, on the Lockerby Mine.Working capital at December 31, 2010 was $28,278,092, an increase of $21,826,751 since December 31, 2009.As at December 31, 2010, the Company had $29,154,731 in unrestricted cash and cash equivalents, a net increase of $21,860,473since December 31, 2009. The net increase reflects net proceeds of $26,636,696 from the equity financing and the $5,332,500 BridgeLoan from RCF IV, offset by a net cash usage in operations of $7,489,432, deferred financing costs of $740,133, development costsat the Lockerby Mine of $896,038 and expenditures of $983,120 on exploration properties.The initial capital costs to start of production for the Lockerby Depth Development Project of approximately $34 million, and ongoingcapital and working capital requirements through to full production in 2012, will be financed by the combination of the cash inhand plus the debt facility when completed. See “Lockerby Depth Zone Development Financing” section of this MD&A for currentfinancing arrangements.The Company has restricted cash resources which have been pledged as security for certain obligations with respect to theLockerby Mine. As part of the acquisition of the Lockerby Mine, the Company posted an irrevocable letter of credit issued by a seniorCanadian bank in the amount of $5,900,000 in favour of the Ontario Ministry of Northern Development, Mines and Forestry to act asfinancial assurance for the Company’s Mine Closure Plan-related liabilities and obligations in respect of the Lockerby Mine. Inaddition, a letter of credit in the amount of $310,000 has been posted in favour of the Independent Electricity System Operator asfinancial assurance for the ongoing energy consumption at the Lockerby Mine. These two amounts, totalling $6,210,000, are beingshown as restricted investments in term deposits on the balance sheet. 19 FIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSIS The following table sets out, as at December 31, 2010, information with respect to the Company’s known contractual obligations and the estimated time horizon for their repayment: Payments due by period Less than More than Office Lease Obligations $ 30,561 $ 30,561 Nil Nil Nil Contractual Obligations Total 1 year 1–3 year 3–5 years 5 years Convertible Loan (i) $ 9,946,000 Nil $ 9,946,000 Nil Nil Asset retirement obligations (ii) $ 4,600,289 Nil Nil Nil $ 4,600,289 Total $ 14,576,850 $ 30,561 $ 9,946,000 $ Nil $ 4,600,289 TREND INFORMATION (i) The Convertible Loan is denominated in US dollars and is due on December 31, 2013. The loan has been converted for this purpose at the exchange rate of US$1 = C$0.9946, being the closing exchange rate on December 31, 2010. (ii) The Company has posted an irrevocable letter of credit issued by a major Canadian bank in the amount of $5,900,000 in favour of the Ontario Ministry of Northern Development, Mines and Forestry to act as financial assurance for the Company’s Mine Closure Plan-related liabilities and There are no major trends which are anticipated to have a material effect on the Company’s financial condition and results of obligations in respect of the Lockerby Mine. OFF-BALANCE SHEET ARRANGEMENTS operations in the near future. TRANSACTIONS WITH RELATED PARTIES The Company has no off-balance sheet arrangements. There were no transactions with related parties during the year ended December 31, 2010. 20FIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSISFOURTH QUARTERResults for the fourth quarter of 2010 along with prior 2010 quarters is presented below: 2010 2010 2010 2010 2010Sales Revenue $ – $ – $ – $ – $ – Q1 Q2 Q3 Q4 TotalCare and maintenance costs 1,343,900 1,218,702 1,078,515 1,497,567 5,138,684Accretion of asset retirement obligations 49,800 49,800 49,800 49,800 199,200 1,393,700 1,268,502 1,128,315 1,547,367 5,337,884Operating loss from mining operations (1,393,700) (1,268,502) (1,128,315) (1,547,367) (5,337,884)General and administrative 534,320 570,066 367,950 891,856 2,364,192Stock-based compensation 1,500 1,500 1,500 169,096 173,596Foreign exchange loss (gain) (275,392) 387,081 (404,081) (102,227) (394,619)Depreciation and amortization 4,260 4,260 4,260 4,260 17,040Interest on convertible loan 235,520 235,520 235,520 235,520 942,080Interest on bridge loan – – 66,538 132,094 198,632Accretion on convertible loan 126,800 135,706 136,081 136,459 535,046Interest and other expenses 8,585 6,546 5,297 (2,710) 17,718Interest and other income (10,897) (7,081) (8,897) (51,688) (78,563) 624,696 1,333,598 404,168 1,412,660 3,775,122Loss before taxes (2,018,396) (2,602,100) (1,532,483) (2,960,027) (9,113,006)Recovery of income & mining taxes – – – (16,930) (16,930)Net loss for the period (2,018,396) (2,602,100) (1,532,483) (2,943,097) (9,096,076)Net loss per share – basic and diluted $ (0.01) $ (0.02) $ (0.01) $ (0.01) $ (0.05)The Company recorded a net loss of $2,943,097, or $0.01 per share, in the fourth quarter of 2010. The Lockerby Mine continued tobe on care and maintenance, however, in October 2010, the Company launched its re-commissioning capital program at theLockerby Mine after receiving the bridge facility of US$5 million from RCF IV. Following completion of the $28.7 million equityNON-GAAP PERFORMANCE MEASURESfinancing in November 2010, the program was accelerated.Operating cost per tonne of ore, cash operating margin per tonne milled, net cash cost per pound of nickel produced, net cash costper pound of nickel sold, average price realized per pound of nickel and per pound of copper are included in this MD&A becausethese statistics are key performance measures that management uses to monitor performance. Management uses these statisticsto assess how well the Company is performing compared to plan and to assess the overall effectiveness and efficiency of miningoperations. These performance measures do not have a meaning within GAAP and, therefore, amounts presented may not becomparable to similar data presented by other mining companies. The data is intended to provide additional information and shouldnot be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. 21 FIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING ESTIMATES In preparing financial statements, management has to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. The most significant accounting estimates are the policy of capitalizing exploration costs on its mineral properties and the valuation of such properties, asset retirement obligations, and stock-based compensation. The Company reviews its portfolio of mineral properties on an annual basis to determine whether a write-down of the capitalized cost of any property is required. The recoverability of the amounts shown for mineral properties and deferred exploration costs is dependent on the existence of economically recoverable reserves, the ability to obtain financing to complete the development of such reserves, and meet its obligations under various agreements. Estimates of asset retirement obligations are the costs associated with respect to the mine closure plan at Lockerby Mine. These amounts are estimates of expenditures that are not due until future years. The Company uses a Black-Scholes model to determine the fair value of options and warrants. The main factor affecting the estimates of stock-based compensation is the stock price volatility used. The Company uses historical price data and comparables FUTURE ACCOUNTING CHANGES in the estimate of future volatilities. In February 2008, the CICA announced that Canadian generally accepted accounting principles for publicly accountable enterprises will be replaced by International Financial Reporting Standards (“IFRS”) for fiscal years beginning on or after January 1, 2011. Companies will be required to provide IFRS comparative information for the previous fiscal year. Accordingly, the conversion from Canadian GAAP to IFRS will be applicable to the Company’s reporting for the first quarter of 2011 for which the current and comparative information will be prepared under IFRS. The Company is required to apply all of those IFRS standards which are effective for fiscal year ending December 31, 2011 and apply them to its opening January 1, 2010 balance sheet. The Company’s IFRS implementation project consists of three primary phases which will be completed by a combination of in-house resources and external consultants. • Initial diagnostic phase (“Phase I”) – Involves preparing a preliminary impact assessment to identify key areas that may be impacted by the transition to IFRS. Each potential impact identified during this phase is ranked as having a high, moderate or low impact on our financial reporting and the overall difficulty of the conversion effort. • Impact analysis, evaluation and solution development phase (“Phase II”) – Involves the selection of IFRS accounting policies by senior management and the review by the audit committee, the quantification of the impact of changes on our existing accounting policies on the opening IFRS balance sheet and the development of draft IFRS financial statements. • Implementation and review phase (“Phase III”) – Involves training key finance and other personnel and implementation of the required changes to our information systems and business policies and procedures. It will enable the Company to collect the financial information necessary to prepare IFRS financial statements and obtain audit committee approval of IFRS financial statements. The table below summarizes the expected timing of activities related to the Company’s transition to IFRS. Adoption of International Accounting Standards Initial analysis of key areas for which changes to accounting policies may be required Completed Detailed analysis of all relevant IFRS requirements and identification of areas requiring accounting policy changes or those with accounting policy alternatives Completed Assessment of first-time adoption (IFRS 1) requirements and alternatives Completed Final determination of changes to accounting policies and choices to be made with respect to first-time adoption alternatives Completed 22 Resolution of the accounting policy change implications on information technology, internal controls and contractual arrangements Substantially completed with continuing review throughout 2011 Management and employee education and training Completed Quantification of the Financial Statement impact of changes in accounting policies Substantially completedFIRST NICKEL INC. ANNUAL REPORT 2010
MANAGEMENT’S DISCUSSION AND ANALYSISThe Company has retained external consultants to establish appropriate IFRS financial reporting expertise at all levels of thebusiness. The external consultants began to train key finance and operational staff during the second quarter of 2010. Informationregarding IFRS implications will be communicated in the normal course of the Company’s continuous disclosure filings. TheCompany also held an IFRS information session with the Audit Committee during March 2010. During this session, managementand external consultants provided a review of the timeline for implementation, the implications of IFRS standards to the businessand an overview of the impact to the financial statements. The Audit Committee will continue to receive periodic presentationsand project status updates from management. The Company will also ensure that its key stakeholders are informed about theanticipated effects of the IFRS transition.The Company has substantially completed Phase I and Phase II and will continue to finalize the differences in connection with theMarch 31, 2011 interim financial statements.The differences that have been identified in Phases I and II are summarized below.a) Transitional Impact on Financial statement presentation and classificationThe Company’s financial statements will have a different format upon transition to IFRS.The components of a complete set of IFRS financial statements are: statement of financial position (balance sheet), statement ofcomprehensive income, statement of changes in equity, statement of cash flows, and notes including accounting policies. Anincome statement will be presented as a component of the statement of comprehensive income. The balance sheet may bepresented in ascending or descending order of liquidity. The income statement is classified by each major functional area –marketing, distribution, etc.Financial reporting expertise and communication to stakeholdersb) IFRS-1 Transitional policy choices and exceptions for retrospective applicationIFRS-1 contains the following policy choices with respect to first-time adoption that are applicable to the Company.IFRS 1 provides a choice between measuring property, plant and equipment at its fair value at the date of transition and using thoseamounts as deemed cost or using the historical cost basis assuming that IFRS has been applied since inception.c) Mandatorily applicable standards with retrospective application (i.e., not specifically exempt under IFRS – 1)Upon adoption of IFRS, the Company will have a choice between retaining its existing policy of capitalizing all pre-feasibilityevaluation and exploration expenditures and electing to change its policy retrospectively to expense some or all pre-feasibility costs.IFRS: IAS 16 contains more extensive guidance with respect to components within PP&E. When an item of property, plant andequipment comprises individual components for which different depreciation methods or rates are appropriate, each componentis accounted for separately (component accounting). Canadian GAAP: Section 3061 essentially contains similar guidance but isImpact on the Company: The Company will reformat the financial statements in compliance with IAS 1.less extensive. 23Property, plant & equipment:Impact on the Company: The Company estimates that there is no material impact at transition date.Deferred mineral exploration costsImpact on the Company: The Company has decided to retain its policy of capitalizing its E & E expenditures and further determined thatthe adoption of the provisions of IFRS 6 Exploration for and Evaluation of Mineral Resources will not result in any transitional impact atJanuary 1, 2010. FIRST NICKEL INC. ANNUAL REPORT 2010Property, plant and equipment – costImpact on the Company: The Company has determined that there is no impact upon transition as at January 1, 2010.
MANAGEMENT’S DISCUSSION AND ANALYSIS IFRS: Under IAS 36 an asset is impaired if the recoverable amount is lower than the asset’s carrying amount. The recoverable amount is defined as the higher of the asset’s fair value less cost to sell and its value-in-use. The value-in-use calculation involves discounting the expected future cash flows to be generated by the asset to their net present value. Canadian companies should (i) determine the existence of any impairment loss, and (ii) measure and recognize such impairment, if any at January 1, 2010. Canadian GAAP: A two-step approach is used to measure impairment. In step 1, a recoverability test is performed by comparing the expected undiscounted future cash flows to be derived from the asset with its carrying amount. If the asset fails the recoverability test, step 2 is triggered, and the entity must record an impairment loss calculated as the excess of the asset’s carrying amount over its fair value. The Company has certain convertible debt denominated in U.S. dollars. IFRS: IAS 39 does not allow a choice of accounting policy for transaction costs – thus must be recognized as part of the financial liabilities. Canadian GAAP: Permits a choice with respect to either expensing the costs as incurred or deferring the costs as part of the related financial liability. Property, plant and equipment – impairment IFRS: Under IAS 32 the liability component of a compound instrument is measured on initial recognition by measuring any financial asset or financial liability components at fair value and applying the residual amount to equity. Canadian GAAP: Section 3863 permits an additional “relative fair value” method. The Company’s functional currency is Canadian dollars whereas the debt is denominated in U.S. dollars. IFRS: The conversion feature in the Convertible Loan is classified as a liability. Canadian GAAP: The equity conversion option is classified as a separate Impact on the Company: The Company has applied the IAS 36 methodology to the carrying values of mineral assets and property, plant component of shareholders’ equity. The effects of this transitional change are estimated as follows: and equipment and determined that there was no impairment at January 1, 2010. a) January 1, 2010: Retrospectively reclassify the equity component as a liability by reducing other reserves and increasing convertible loan by $2,372,000. Convertible debt – Transaction costs b) January 1, 2010: Retrospectively decrease the convertible loan and deficit by $244,000 to adjust amortization of costs and related foreign exchange effects. The Company has periodically financed its exploration activities by the issuance of flow-through shares. Income tax credits Impact on the Company: The Company does not expect any transitional impact as it has recognized all direct costs as part of the associated with these flow-through shares have all been renounced and all qualifying expenditures had been incurred prior to convertible debt. January 1, 2010. IFRS: There is no specific standard under IFRS that directly deals with flow-through shares. Canadian GAAP: The Company reduces Convertible debt – valuation methodology the net proceeds of the flow through share issuance by the future tax liability of the Company resulting from the renunciation of the exploration and development expenditures in favor of the flow though share subscribers. Future income tax assets (loss carry forwards and/or deductible temporary differences) not previously recognized as a result of applying the “more likely than not” test are recognized as a reduction of the future income tax liability through a credit in the income statement. 24 Impact on the Company: At initial recognition, the Company measured the liability component of the convertible loan at fair value and applied the residual amount to equity in accordance with the methodology prescribed by IFRS 7. Convertible debt – foreign exchange impact Future income taxes recognized in connection with Flow-through sharesFIRST NICKEL INC. ANNUAL REPORT 2010
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