Timminco 2008 Annual Report


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2008 annual report for Timminco Limited. Timminco (TSX: TIM) is a leader in the production of low cost solar grade silicon for the rapidly growing solar photovoltaic energy industry.

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Timminco 2008 Annual Report

  1. 1. Annual Report 2008
  2. 2. positioned to lead in the solar economy
  3. 3. 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.
  4. 4. 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
  5. 5. 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 advan- tages 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. The challenges we faced included managing the construction of a new plant in stages with a sequential start-up of furnaces commissioned, the training of personnel, acquiring the necessary skills to handle new equipment and a new process, and securing a new mix of raw materials. We are continuing the learning process in concert with our customers. The build-out of our solar grade silicon business has positioned Timminco for growth. The rapid deterioration in the global economy, however, has had an adverse impact on our markets in the first quarter of 2009, signifi- cantly dampening the demand for both silicon 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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 approxi- mately $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’ specifica- tions. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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 relation- ship 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
  19. 19. 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 emis- sions and use that data to identify opportunities to reduce emissions of both particulate and other air pollutants. Commitment to Sustainable Development 17
  20. 20. 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 distribu- tion prior to debt service, past pension service obligations, capital expenditures, income taxes and restructuring cash payments. Investors should be cautioned, however, that EBITDA should not be construed as an alternative to net income determined in accordance with GAAP as an indicator of the Company’s profitability. Also, EBITDA should not be construed as an alternative to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows. The Company’s method of calculating EBITDA may differ from other companies and, accordingly, EBITDA may not be comparable to measures used by other companies. EBITDA is calculated in the manner as described in the Management’s Discussion and Analysis included in this Annual Report. 4 Gross profit is not a recognized measure under GAAP. The Company’s management believes that in addition to net income (loss), gross profit is a useful supplemental measure as it provides investors with an indication of the profits generated on products sold to customers before corporate overhead expenses. Investors should be cautioned, however, that gross profit should not be construed as an alternative to net income determined in accordance with GAAP as an indicator of the Company’s profitability. The Company’s method of calculating gross profit may differ from other companies and accordingly, gross profit may not be comparable to measures used by other companies. Gross profit is calculated in the manner as described in the Management’s Discussion and Analysis included in this Annual Report. 18 Cautionary Note on Forward-Looking Information | Endnotes
  21. 21. 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 fis- cal 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 proceed- ings, 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
  22. 22. 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 cur- rent 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
  23. 23. 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
  24. 24. 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
  25. 25. $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
  26. 26. 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