Timminco Limited
TSX : TIM

Timminco Limited

March 31, 2006 07:57 ET

Timminco Announces 2005 Results

TORONTO, ONTARIO--(CCNMatthews - March 31, 2006) - Timminco Limited (TSX:TIM) :

HIGHLIGHTS

- Sales for the year were $184.3 million compared with $123.6 million in 2004.

- Cash from operations for 2005 increased by $8.3 million to $12.5 million compared to 2004.

- The Company completed a new Banking Agreement

- The Company increased its ownership stake in Fundo Wheels AS of Norway.

- The Company is subject to a United States Department of Commerce scope inquiry regarding import duties

Timminco Limited (TSX:TIM) announced its financial results for the fourth quarter and full year ended December 31, 2005.

There were several significant factors that made 2005 very challenging. The weakness of the US dollar, soft markets for certain of the Company's products and manufacturing issues combined to produce negative results for the year. To remedy the situation the Company has made significant organizational changes and continues to restructure the magnesium business in order to make it competitive. Over the past 15 months, the Haley Plant, the key focus of the restructuring, reduced its head count by 40%. Despite these challenges, $12.5 million of operating cash was generated and debt was reduced.

"During 2005, Timminco faced a number of challenges that translated into a disappointing year," noted Dr. Charles Entrekin, President and Chief Executive Officer of Timminco. "Although changes were made to the Magnesium business in 2004, difficult market conditions have necessitated continued organizational moves to restore the business to profitability. The actions taken in the fourth quarter of 2005 are a recognition that the status quo will not be acceptable," continued Dr. Entrekin.

"Despite the disappointing earnings, Timminco aggressively managed working capital to generate $12.5 million of operating cashflow and to reduce bank debt by $4.9 million. In 2006, Timminco will continue to experience challenges, but we feel that the changes required to improve results are in process. Focus and commitment to improvement will be imperative in 2006," noted Dr. Entrekin.

The Company is divided into two segments: the Magnesium Group and the Silicon Group. The Silicon Group was added when the Company purchased Becancour Silicon on September 30, 2004.

Full Year Results

For the year ended 2005, the net loss was $15.8 million compared with a loss of $6.9 million in 2004. Sales for 2005 were $184.3 million compared to $123.6 million in 2004.

Magnesium Group

For the year ended 2005, sales of the Magnesium Group were $85.1 million, down 13.6% from $98.5 million in 2004. The strength of the Canadian dollar had a $6.0 million dollar unfavourable impact on sales. Sales volume in tonnes decreased 8% compared with 2004 levels. The majority of the sales loss was due to reductions at customers that no longer require the product and to duty barriers, which cause the price of certain products to be uncompetitive. There was minimal share loss due to competitive activity. The continued weakness of the US dollar had an adverse impact on sales as approximately 83% of the Magnesium Group's sales are denominated in US dollars.

Gross profit for 2005 was $8.2 million or 9.6% of sales compared to $10.9 million or 11.0% of sales in 2004. During the year, there were a number of efficiency, quality and production variances that resulted in the lower gross margin. These were partially offset by lower overheads due to reduced headcount. Overheads decreased 18.5% to $10.4 million for the year ended December 31, 2005. The largest variance in gross margin during the year was due to an isolated quality problem in one specific product line that has since been corrected. In response to this issue, the Company re-organized the departments responsible for this problem. The Company estimates that the quality problem negatively affected margins by $3 million to date.

Re-organization expenses in 2005 were $4.6 million, of which $3.8 million occurred in the fourth quarter, compared with $2.8 million in 2004. The 2005 expenses related to the closure of certain activities at the Haley facility and a reduction of headcount at the Haley and Aurora facilities. The majority of these costs are in respect of severance and pension benefits of $3.1 million and the write-off of machinery and equipment of $1.5 million.

Silicon Group

For the year ended 2005, sales of the Silicon Group were $99.3 million, down 3.4% from $102.7 million in 2004. Sales volume in tonnes was consistent with 2004, with decreases in ferrosilicon and silicon metal, offset by increases in by-product revenues. The strength of the Canadian dollar had a $6.4 million dollar unfavourable impact on sales as the majority of the Silicon Group's sales are denominated in US dollars or Euros.

Gross profit for 2005 was $7.9 million or 8.0% of sales compared to $5.4 million or 5.2% of sales in 2004. During the year, the plant efficiency was improved over 2004, electricity used per tonne was improved and maintenance costs were also improved.

Results for the Fourth Quarter

For the quarter ended December 31, 2005, the net loss was $6.6 million compared with a loss of $2.0 million in 2004. Sales for the fourth quarter of 2005 were $42.8 million compared to $49.4 million in 2004. The results of the Silicon Group were included in the consolidated statements of the Company as of September 30, 2004.

Magnesium Group

Sales for the Magnesium Group for the fourth quarter of 2005 were $21.0 million compared to $24.2 million in the final quarter of 2004. The strength of the Canadian dollar had a $1.0 million dollar unfavourable impact on sales. The remainder of the shortfall was predominantly due to customers who ceased buying because they no longer required magnesium and general weakness in the foundry business.

Gross margin in the Magnesium Group was $1.9 million or 9.3% of sales compared to $2.2 million or 9.2% of sales in the fourth quarter of 2004. Lower input costs were the largest contributor to the increased margin. Compared to the fourth quarter in the prior year, overheads were stable.

Re-organization expenses in the quarter were $3.8 million compared with $2.2 million in the same quarter in 2004. The expense was related to the closure of certain operations in Haley and included severance, pension costs, and the write-off of machinery and equipment.

Silicon Group

In the Silicon Group, sales for the fourth quarter of 2005 were $21.8 million compared with $25.2 million in 2004. In the fourth quarter, the largest decrease compared to the prior year was ferrosilicon, the sales of which decreased $3.2 million compared to 2004. The strong Canadian dollar had an unfavourable impact on sales of $1.1 million.

For the quarter ended December 31, 2005, the gross margin in the Silicon Group was $0.6 million compared with $0.5 million in 2004. The increase was due to favourable pricing in the silicon metal market offset by higher costs of product sales.

US Anti-Dumping Duties

During 2005, U.S. Magnesium LLC ("US Mag"), a Utah based magnesium company, requested the United States Department of Commerce ("DOC") initiate a scope inquiry to determine whether Timminco's product exported from Canada is covered by the anti-dumping orders on magnesium from China and Russia. US Mag also requested the DOC initiate a similar review of another unrelated company's exports. In response, the DOC initiated a scope review in September 2005. The Company has filed a response to the inquiry to the DOC. In the event that US Mag is successful with its request, duties may be imposed on the Corporation. The Company expects to learn the results of this matter in the second quarter of 2006. No provisions have been made in the accounts related to this matter. Management believes that the inquiry is without merit, however management estimates that an adverse ruling could result in a duty payment by the Company in the range of $1.3 million to $2.3 million for the period from September, when the scope enquiry was initiated, to December 2005. In the event that the Company is subject to an unfavourable ruling, the Company has plans to implement strategies to cure any non-compliance. Such actions would have material impacts on net income, working capital and cashflow and would likely take a minimum of several months and require significant funds to execute. The Company does not currently have these funds available and would have to secure them. In the event that the Company cannot secure these funds, the Company's ability to operate as a going concern could be called into question.



FINANCIAL HIGHLIGHTS

Three Months Ended Year Ended
(unaudited) (audited)
December 31, December 31, December 31, December 31,
2005 2004 2005 2004
----------------------------------------------------

Sales $42,756 $49,365 $184,348 $123,631

Gross profit 3,348 2,670 17,496 11,333

Net income (loss) (6,572) (1,967) (15,795) (6,907)

Earnings (loss)
per common share,
basic and diluted (.09) (.03) (.22) (.15)
Working capital
(excluding
available cash
items) 32,653 47,306 32,653 47,306
Bank debt 31,851 36,793 31,851 36,793
Weighted average
common shares
outstanding (000's) 75,132 69,383 72,848 44,662


FORWARD LOOKING STATEMENTS

This news release contains forward-looking statements concerning the Company's business and operations. The Company cautions that, by their nature, forward-looking statements involve risk and uncertainty and the Company's actual results could differ materially from those expressed or implied in such statements.

There are financial and operational risks inherent in the business, which include, but are not limited to: commodity prices, currency exchange, interest rate, capital, credit, regulatory, political, operational and environmental risks. The Company takes specific measures to manage these risks, and any forward-looking statements in this news release were based on the assumption of no significant changes or trends with respect such risk factors. Although the Company maintains insurance against risks that are typical in its industry, such insurance may not provide adequate coverage under all circumstances. Reference should be made to the most recent Management Discussions and Analyses for a description of the major risk factors. The Company disclaims any duty to update forward-looking statements other than through relevant future Management Discussions and Analyses.

ABOUT TIMMINCO

TIMMINCO LIMITED is an international company, a world leader in the production and marketing of alloy magnesium, silicon metal and specialty ferrosilicon, calcium and strontium alloys. The Company's products are used in a broad range of specialized industrial applications and industries such as engineered extruded products, chemical, pharmaceutical, electronics, automotive and metallurgical. The Company's common shares are traded on the Toronto Stock Exchange under the symbol TIM.

OTHER INFORMATION

Additional information relating to the Company, including the Company's Annual Information Form, is available at www.sedar.com.



Timminco Limited

Consolidated Balance Sheets

As at December 31 2005 2004
---------------------------------------------------------------------
(in thousands of dollars)

ASSETS
Current Assets
Cash $ 2,480 $ 568
Accounts receivable 22,157 24,507
Inventories (Note 5) 38,148 47,147
Prepaid expenses and deposits (Note 14) 1,871 4,560
Future income taxes (Note 11) 713 652
---------------------------
65,369 77,434
---------------------------

Long term receivables (Note 13) 296 724
Capital assets (Note 6) 48,590 50,353
Investment in Fundo Wheels AS (Note 4) 10,584 6,514
Employee future benefits (Note 12) 1,837 1,012
Deferred financing costs (Note 8) 749 161
Future income taxes (Note 11) 3,555 7,714
Intangible assets (Note 7) 4,812 -
Goodwill (Note 3) 18,396 24,508
---------------------------
$ 154,188 $ 168,420
---------------------------
---------------------------

LIABILITIES
Current Liabilities
Bank indebtedness (Note 8) $ 26,153 $ 9,471
Accounts payable and accrued liabilities 27,470 25,704
Current portion of long term
bank debt (Note 8) 1,341 27,322
Future income taxes (Note 11) 51 1,971
Current portion of long term
provisions (Note 9) 2,715 1,885
---------------------------
57,730 66,353

Long term bank debt (Note 8) 4,357 -
Employee future benefits (Note 12) 16,788 16,497
Future income taxes (Note 11) 1,747 -
Long term provisions (Note 9) 3,829 3,822
---------------------------
84,451 86,672
---------------------------

SHAREHOLDERS' EQUITY
Capital stock (Note 10) 84,191 79,802
Warrants (Note 10(b)) 1,393 1,393
Contributed surplus (Note 10(d)) 1,362 1,021
Deficit (16,257) (462)
Foreign currency translation adjustment (952) (6)
---------------------------
69,737 81,748
---------------------------
$ 154,188 $ 168,420
---------------------------
---------------------------

The accompanying notes are an integral part of these consolidated
financial statements.
Please see Notes 1 and 15 regarding Commitments, Contingencies and
Guarantees,

On behalf of the Board:

(signed) Charles H. Entrekin (signed) Richard L. Lister

President, CEO & Director Chairman of the Audit Committee


Timminco Limited

Consolidated Statements of Operations

---------------------------------------------------------------------
Years ended December 31 2005 2004
---------------------------------------------------------------------
(in thousands of dollars, except
for earnings per share information)

Sales $ 184,348 $ 123,631

Expenses
Cost of goods sold 166,852 112,298
Selling and administrative 15,012 10,851
Amortization of capital assets 6,644 4,867
Amortization of intangible assets 688 -
Amortization of deferred financing costs 320 106
Interest (Note 8) 2,699 1,721
Foreign exchange loss (gain) 11 (1,292)
---------------------------

Loss before the undernoted (7,878) (4,920)

Environmental remediation costs (Note 9) (171) (42)
Gain (loss) on sale of capital assets (238) 660
Reorganization costs (Note 9) (4,592) (2,781)
Other income 90 129
Equity earnings of Fundo Wheels AS 521 74
---------------------------

Loss before income taxes (12,268) (6,880)
Income taxes (Note 11)
Current 1,420 264
Future 2,107 (237)
---------------------------
3,527 27
---------------------------
---------------------------

---------------------------
Net loss $ (15,795) $ (6,907)
---------------------------
---------------------------

Loss per common share - basic and diluted $ (0.22) $ (0.15)
---------------------------
---------------------------

Weighted average number of common
shares outstanding - basic and
diluted (Note 10 (b)) 72,848,367 44,661,874
---------------------------
---------------------------


Consolidated Statements of Deficit

---------------------------------------------------------------------
Years ended December 31 2005 2004
---------------------------------------------------------------------
(in thousands of dollars)

Retained earnings (deficit) at
beginning of year $ (462) $ 6,445
Net loss (15,795) (6,907)
---------------------------

Deficit at end of year $ (16,257) $ (462)
---------------------------
---------------------------

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


Timminco Limited

Consolidated Statements of Cash Flows

---------------------------------------------------------------------
Years ended December 31 2005 2004
---------------------------------------------------------------------
(in thousands of dollars)

Cash flows from operating activities
Net loss $ (15,795) $ (6,907)
Adjustments for items not requiring cash
Amortization of capital assets 6,644 4,867
Amortization of intangible assets 688 -
Amortization of deferred financing costs 320 106
Stock based compensation (Note 10(d)) 341 276
Reorganization costs (Note 9) 4,592 2,781
Environmental remediation costs (Note 9) 171 42
Benefits plan expense 2,034 948
Loss (gain) on disposal of capital assets 238 (660)
Future income taxes and tax benefit of
share issue costs 2,101 (237)
Equity earnings of Fundo Wheels AS (Note 4) (521) (74)
Defined benefit pension plan contributions (1,852) (893)
Expenditures charged against provision for
reorganization (Note 9) (1,677) (849)
Expenditures charged against other long term
provisions (Note 9) (44) (189)

Change in non-cash working capital items
Decrease (increase) in accounts receivable 2,342 (755)
Decrease in inventories 8,284 94
Decrease in prepaid expenses and deposits 2,220 1,817
Increase in accounts payable and accrued
liabilities 2,458 3,865
---------------------------
12,544 4,232
---------------------------

Cash flows from investing activities
Capital expenditures (3,464) (3,151)
Acquisition costs for the purchase of
Becancour Silicon Inc. (Note 3) (370) (1,560)
Investment in Fundo Wheels AS (Note 4) (102) (6,276)
Decrease (increase) in long term
receivables 436 (543)
Proceeds on disposal of capital assets 29 330
Decrease (increase) in restricted cash - 200
Other 101 18
---------------------------
(3,370) (10,982)
---------------------------

Cash flows from financing activities
Increase in bank indebtedness (Note 8) 16,682 4,396
Decrease in long term bank debt (Note 8) (21,624) (4,049)
Decrease in loan from related party (1,407) -
Issuance of capital stock and warrants
(Note 10(b)) (5) 7,052
Expenditures charged against deferred
financing costs (908) (134)
---------------------------
(7,262) 7,265
---------------------------

(Decrease) increase in cash 1,912 515

Cash at beginning of year 568 53

---------------------------
Cash at end of year $ 2,480 $ 568
---------------------------
---------------------------

Supplemental information
Cash paid during the period:
Interest $ 2,507 $ 1,302
---------------------------
---------------------------
Income taxes $ 669 $ 139
---------------------------
---------------------------

Supplementary disclosure of non-cash
investing and financing activities:
Common stock issued on the
acquisition of Becancour
Silicon Inc. $ - $ 28,436
---------------------------
---------------------------
Common stock issued on the
acquisition of shares in
Fundo Wheels AS $ 4,393 $ -
---------------------------
---------------------------

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


Timminco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2005 and 2004


1. NATURE OF OPERATIONS AND SIGNIFICANT CONTINGENCY

Timminco Limited (the "Corporation" or "Timminco") is a global supplier of specialty and light metals, whose customized magnesium, aluminium, calcium, silicon and strontium products are used in a broad range of industries. The Corporation manages its business along two principle business segments, the production and sale of specialty non-ferrous metals, the Magnesium Group, and silicon based metals, the Silicon Group.

During 2005, U.S. Magnesium LLC ("US Mag"), a Utah based magnesium company, requested the United States Department of Commerce ("DOC") initiate a scope inquiry to determine whether Timminco's product exported from Canada is covered by the anti-dumping orders on magnesium from China and Russia. US Mag also requested the DOC initiate a similar review of another unrelated company's exports. In response, the DOC initiated a scope review in September 2005. The Corporation has filed a response to the inquiry to the DOC. In the event that US Mag is successful with its request, duties may be imposed on the Corporation. The Corporation expects to learn the results of this matter in the second quarter of 2006. No provisions have been made in the accounts related to this matter. Management believes that the inquiry is without merit, however management estimates that an adverse ruling could result in a duty payment by the Corporation in the range of $1.3 million to $2.3 million for September, when the scope review was initiated, to December 2005. In the event that the Corporation is subject to an unfavourable ruling, the Corporation has plans to implement strategies to cure any non-compliance. Such actions would have material impacts on net income, working capital and cashflow and would likely take a minimum of several months and require significant funds to execute. The Corporation does not currently have these funds available and would have to secure them. In the event that the Corporation cannot secure these funds, the Corporation's ability to operate as a going concern could be called into question.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation

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

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

Use of estimates

The preparation of the Corporation's financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting year. Due to the inherent uncertainty involved with making such estimates, actual results reported in future periods could differ from those estimates. Significant estimates include provisions for environmental remediation, goodwill, economic lives of mining assets and mine closure and site remediation costs, valuation allowance of future income tax assets and pension return and discount rates. In arriving at these estimates, management consults with outside experts as it deems necessary.

Foreign currency translation

Foreign currency transactions entered into by the Corporation and financial statements of integrated foreign operations are translated using the temporal method. Under this method, monetary assets and liabilities are translated at year end rates of exchange, non-monetary assets and liabilities are translated at historic rates of exchange and income statement items are translated at average rates prevailing during the year. Exchange gains and losses are of a current nature and are included in income.

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

Revenue recognition

The Corporation recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.

Financial instruments

The Corporation operates internationally, giving rise to significant exposure from changes in foreign exchange rates. The Corporation enters into contracts to hedge anticipated but not yet committed transactions when such transactions are probable and the significant characteristics and expected timing are identified. Realized and unrealized gains and losses not designated as a hedge are included in income on a mark-to-market basis. The Corporation does not enter into hedging contracts for speculative purposes. For contracts designated as hedges, the Corporation has adopted Accounting Guideline 13, Hedging Relationships as at January 1, 2004.

Inventories

Raw material and stores inventories are valued at the lower of direct acquisition cost and replacement cost. Finished goods and work in progress inventories are stated at the lower of average cost and net realizable value. Inventory costs include direct costs, an allocation of manufacturing overhead and capital asset amortization.

Capital assets

Capital assets are stated at cost less accumulated amortization. Amortization is provided over the estimated useful life of the assets as follows:



Buildings 4 - 5%
Roads and sidings 3%
Plant equipment 10-50%
Cast house equipment Units of production
Office equipment 15-30%
Computer software 20%
Mobile equipment 30%
Leasehold improvements Straight-line over the lease period
Machinery and equipment under
capital leases 10%


No amortization is taken on construction in progress until placed into service. When placed into service, a half-year convention is used.

Deferred charges representing direct costs incurred for major overhauls of furnaces are amortized over periods from 60 to 84 months depending on the estimated useful life of the overhaul.

Goodwill

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

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

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

Asset retirement obligations

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

Intangible Assets

Purchased intangible assets, which consist of technology and customer relationships, are recorded at fair value less accumulated amortization. Intangible assets are amortized on a straight-line basis over the estimated useful lives of the related assets as follows:

- Technology 10 years

- Customer relationships 10 years

The Corporation reviews the carrying value of amortizable intangible assets for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value of the asset exceeds the fair value of the asset.

Deferred financing costs

Deferred financing costs represent the unamortized costs related to bank credit facilities. Amortization is provided on a straight line basis over the term of the related debt.

Deferred costs

Expenditures incurred during the pre-operating period of an operation that meet the criteria for deferment are deferred and amortized on a straight-line basis over twenty four months.

Impairment of long-lived assets

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

Research and development expenditures

Research costs, other than capital expenditures, are expensed as incurred. Development costs are expensed as incurred unless they meet the criteria under Canadian generally accepted accounting principles for deferral and amortization. The Corporation has not deferred any such development costs to date. During 2005, the Corporation incurred research and development expenses of $0.7 million (2004 - $0.7 million).

Employee future benefits

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

Income taxes

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

Loss per common share

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

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

Stock-based compensation

The Corporation accounts for all stock-based payments granted on or after January 1, 2002, using the fair value based method. Under the fair value based method, compensation cost, attributable to awards to employees or directors that are direct awards of stock appreciation rights that call for settlement by the issuance of equity instruments, is measured at fair value at the grant date and recognized over the vesting period. Compensation cost is recognized on a straight-line basis over the vesting period. Consideration paid by employees on the exercise of stock options is recorded as share capital.

Comparative figures

Certain comparative figures have been reclassified to conform with the current year presentation.

3. ACQUISITION OF BECANCOUR SILICON INC.

On September 30, 2004, the Corporation acquired 100 percent of the outstanding shares of Becancour Silicon Inc. ("Becancour Silicon") and assumed a promissory note totalling $9.0 million including accrued interest. Becancour Silicon is a Quebec based producer of high quality chemical and electronics grade silicon metal and specialty ferrosilicon. Becancour Silicon's products are used globally in the manufacture of many consumer and industrial products including silicone sealants, pigments, cosmetics, semiconductors and fiber optic cables.

Becancour Silicon was owned indirectly by Safeguard International Fund L.P., the controlling shareholder of the Corporation.

The aggregate purchase price was approximately $30.4 million, including acquisition costs of $2.0 million and was satisfied through the issuance of 30,909,091 common shares issued from treasury valued at $28.4 million, net of tax. The value was determined using the weighted average of the share price for the two days before and after the transaction announcement. The Corporation employed independent valuators to value the capital and intangible assets of Becancour Silicon.

The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition. The purchase price discrepancy has been allocated to future income taxes, capital assets, intangible assets, goodwill and employee future benefits as noted in the table below.



(000's)
---------------------------------------------------------------------
Current assets $ 40,403
Capital assets 13,172
Intangible assets 5,500
Future income taxes 2,452
Goodwill 18,672
---------------------------------------------------------------------
Total assets acquired 80,199
Bank loan 19,519
Current liabilities 10,716
Employee future benefits 16,516
Future income taxes 3,098
---------------------------------------------------------------------
Total liabilities assumed 49,849
---------------------------------------------------------------------
Net assets acquired $ 30,350
---------------------------------------------------------------------
---------------------------------------------------------------------


Subsequent to the completion of the purchase equation, goodwill was further reduced $0.3 million in respect of a reduction to the future tax asset valuation allowance. None of the Goodwill is anticipated to be deductible for tax purposes.

All of Becancour Silicon's assets are located in Canada.

4. INVESTMENT IN FUNDO WHEELS AS

On January 28, 2004, the Corporation entered into a Call Option and Fees agreement pursuant to which the Corporation was granted an option to indirectly acquire a 24.4% interest in the common shares of Fundo Wheels AS (formerly Fundamus AS) ("Fundo"). However, the Corporation had no rights or obligations under such agreement until the option was exercised and the exercise of the option was subject to approval by the Corporation's lenders and certain financing conditions. On March 15, 2004, the Corporation exercised the option, using the proceeds of a private placement completed on March 12, 2004 (Note 10) to indirectly acquire the 24.4% interest in Fundo, for $6,276,000.

Fundo, located in Hoyanger, Norway, is an original equipment manufacturer of cast aluminium wheels for high end European car manufacturers. To complete the acquisition, Timminco acquired 100% of the shares of a Norwegian Company, Nor-Wheels AS ("Nor-Wheels"), which held 24.4% of the shares of Fundo. Nor-Wheels has become a subsidiary of Timminco and has assumed the Corporation's rights and obligations under the Call Option and Fees Agreement and other existing agreements with the controlling shareholder of Fundo, which is the Community of Hoyanger (the "Community"). Under these agreements, Nor-Wheels holds a call option to purchase the Community's Fundo shares before December 31, 2006 on the satisfaction of certain conditions. As at December 31, 2005, the Community owns approximately 53% of Fundo. Beginning January 1, 2008, the Community may exercise a put option requiring Nor-Wheels to purchase the Community's shares, at book value determined on the date of exercise.

The initial agreements with the Community and the investment in Fundo were negotiated by an unaffiliated corporation whose Chairman is also the Chairman and Chief Executive Officer of Timminco. The rights in these agreements were then transferred to a subsidiary of Safeguard International Fund, LP, the controlling shareholder of Timminco, so that Timminco could complete its review of the opportunity, obtain the consent of its lenders and arrange financing. On March 22, 2004, the transaction was completed. The purchase price for the 24.4% interest was US $4.6 million which included US $1.2 million for fees and expenses reimbursed to the unaffiliated Corporation. Nor-Wheels also agreed to pay additional fees up to a maximum of US $1.4 million depending on the amount of additional equity of Fundo indirectly acquired and the actual financial performance of Fundo. The Corporation accounts for the Fundo investment under the equity method. The acquisition of the equity interest did not create any purchase discrepancy.

On May 25, 2005, the Corporation acquired an additional 726 shares of Fundo from an unrelated third party. The purchase price was satisfied by the issuance of 5,750,000 common shares of the Corporation from treasury, valued at $4,393,000. The value was determined using the weighted average share price for the two days before and after the transaction announcement. The acquisition of the equity interest did not create any purchase discrepancy. As a result of the transaction, the Corporation's ownership interest increased from 24.4% to 47% of Fundo.



5. INVENTORIES

(000's) 2005 2004
---------------------------------------------------------------------
Raw materials $ 12,900 $ 13,627

Work in process 2,945 4,779

Finished goods 16,591 22,038

Stores inventory 5,712 6,703
---------------------------------------------------------------------

$ 38,148 $ 47,147
---------------------------------------------------------------------
---------------------------------------------------------------------

Stores inventory includes spare parts for the Corporation's plant and
equipment.


6. CAPITAL ASSETS

(000's) 2005 2004
---------------------------------------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---------------------------------------------------------------------
Land $ 3,365 $ - $ 3,365 $ 1,271 $ - $ 1,271
Buildings
and
equipment 159,682 116,447 43,235 161,633 114,329 47,304
Deferred
charges 8,876 7,478 1,398 7,471 6,279 1,192
Leased
equipment 317 239 78 317 215 102
Construction
in progress 514 - 514 484 - 484
---------------------------------------------------------------------
$ 172,754 $ 124,164 $48,590 $171,176 $ 120,823 $50,353
---------------------------------------------------------------------
---------------------------------------------------------------------


7. INTANGIBLE ASSETS

(000's) 2005 2004
---------------------------------------------------------------------
Accumulated
Cost Amortization Net Net
---------------------------------------------------------------------
Customer relationships $ 1,500 $ 188 $ 1,312 $ -
Technology 4,000 500 3,500 -
---------------------------------------------------------------------
$ 5,500 $ 688 $ 4,812 $ -
---------------------------------------------------------------------
---------------------------------------------------------------------


8. BANK DEBT

(000's) 2005 2004
---------------------------------------------------------------------

Bank indebtedness $ 26,153 $ 9,471
Current portion of long term bank debt 1,341 27,322
Long term bank debt 4,357 -
---------------------------------------------------------------------
$ 31,851 $ 36,793
---------------------------------------------------------------------
---------------------------------------------------------------------


At December 31, 2005, total debt denominated in US dollars amounted to US$27.4 million.

(a) On April 15th, 2005, the Corporation entered into a Credit Agreement (the "Agreement") with Bank of America, NA. The Agreement provides for maximum credit lines of US$32.8 million, limited by a borrowing base, in a revolving loan (the "Revolver") and a US$5.75 million term loan. The Revolver bears interest at the prime rate plus 0.5% to 1.25% and does not require minimum repayments. The term loan bears interest at the prime rate plus 1.5% to 2.25% and requires quarterly repayments of $0.3 million. The Agreement expires on November 30, 2007 and, at the option of the Corporation and subject to meeting certain requirements, may be extended to April 30, 2010. The loans are secured by the assets of the Corporation.

At the initial funding, the Corporation borrowed $37.5 million retiring all the outstanding bank debt with the Corporation's Canadian banks and repaying Safeguard International Fund L.P., the controlling shareholder of the Corporation, $1.4 million for a note payable and accrued interest. Fees for the transaction were $1.0 million.

As at December 31, 2005, the Bank amended the banking agreement to adjust the fixed charge ratio covenant ("FCR covenant") as at December 31, 2005 and for the fiscal year of 2006 to permit the Corporation to maintain its compliance with the banking covenants. The FCR covenant measures the ratio of adjusted cash flow from net income less capital expenditures and taxes divided by the cashflow related to interest and principal repayments. For the twelve months ended December 31, 2005, the FCR covenant has been amended such that the Corporation meets the requirements of the agreement. For 2006, the amended banking agreement requires the Company to maintain minimum levels of earnings before interest, taxes, depreciation and amortization ("EBITDA") as defined by the banking agreement and limits the amount of capital expenditures. Both the EBITDA and capital expenditure requirements will be measured at March 31, June 30 and September 30, 2006. For the twelve months ending December 31, 2006, the Corporation must return to the original FCR covenant of 1.1 to 1. Furthermore, the Bank has amended the banking agreement for 2006 to expand the Corporation's borrowing base by a maximum of US$1.3 million through the inclusion of receivables from certain countries outside of North America previously considered to be ineligible by the Bank. This increase in borrowing base is a temporary relief for a period of one year.

Interest expense in 2005 includes $400,000 of interest on long term debt ($467,000 in 2004).

(b) As at December 31, 2004 the Corporation's two credit facilities were structured as follows: one related to the Magnesium Group and one related to the Silicon Group.

Magnesium Group:

At December 31, 2004, the Magnesium Group had drawn approximately $16,895,000 (including US $10,940,000) against maximum lines of credit of approximately $20,941,000, measured at the exchange rate of US/Canadian 1.20. The Magnesium Group's credit agreement was subject to certain covenants, conditions and reporting requirements and matured on March 31, 2005. As at December 31, 2004, the Magnesium Group was not in compliance with certain covenants. The loans were repaid in April 2005.

Silicon Group:

At December 31, 2004, the Silicon Group had drawn approximately $3,738,000 against an authorized credit facility in the maximum amount of $4,000,000 and a special additional operating credit in the amount of $1,800,000 available from December 13, 2004 to January 31, 2005. Under this credit agreement, the Silicon Group was subject to certain covenants, conditions and reporting requirements. As at December 31, 2004, the Silicon Group was not in compliance with certain covenants. The loans were repaid in April 2005.



9. LONG TERM PROVISIONS

Long term provisions are comprised as follows:


(000's) 2005 2004
---------------------------------------------------------------------

Provision for reorganization $ 4,676 $ 3,966
Provision for environmental remediation 1,264 1,140
Other long term provisions 604 601
---------------------------------------------------------------------

6,544 5,707
Less current portion 2,715 1,885
---------------------------------------------------------------------

$ 3,829 $ 3,822
---------------------------------------------------------------------
---------------------------------------------------------------------


Provision for reorganization

(000's) 2005 2004
---------------------------------------------------------------------

Balance, beginning of the year $ 3,966 $ 1,730
Costs transferred from environmental
remediation provision - 304
Costs recognized 4,592 2,781
Amounts charged against provision (3,882) (849)
---------------------------------------------------------------------

Balance, end of the year $ 4,676 $ 3,966
---------------------------------------------------------------------
---------------------------------------------------------------------


The costs recognized during the year are separately disclosed in the consolidated statement of operations.

The provision for reorganization relates primarily to amounts accrued related to the closure of certain departments at the Haley plant on December 31, 2005, certain accrued retirement obligations for Haley and a retention agreement with a former President and Chief Operating Officer.

During November 2005, the Corporation announced the closure of certain departments at the Haley Plant, effective December 31, 2005. The departments were closed to reduce costs and overheads. The Corporation has accrued $3.5 million in respect of the closure to cover severance, related pension expense and the write-off of machinery and equipment.

Total termination benefits for the Haley closures are expected to be $1.8 million. To date, $0.1 million has been expended.



Provision for environmental remediation

(000's) 2005 2004
---------------------------------------------------------------------

Balance, beginning of the year $ 1,140 $ 1,514
Costs transferred to reorganization
provision - (304)
Costs recognized 71 -
Accretion 100 42
Amounts charged against provision (47) (112)
---------------------------------------------------------------------
Balance, end of the year $ 1,264 $ 1,140
---------------------------------------------------------------------
---------------------------------------------------------------------


The costs recognized during the year are separately disclosed in the consolidated statement of operations.

During 2005 and 2004, the Corporation reassessed its environmental liability, resulting in the recognition of $99,000 and $42,000, respectively, of additional expense. In 2004, the Corporation revised the estimated economic life of the Haley mine from 20 to 10 years, resulting in an increase in the present value of the remediation liability, and increased the estimate of the remediation costs associated with the future Haley mine closure.

In 2004 the main decrease related to the Haley environmental cost transferred to reorganization provision.

Other long term provisions

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

Long term provision expenditures

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



(000's)
---------------------------------------------------------------------
2006 $ 2,715
2007 490
2008 736
2009 389
2010 859
Thereafter 1,355
---------------------------------------------------------------------

$ 6,544
---------------------------------------------------------------------
---------------------------------------------------------------------


10. CAPITAL STOCK

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

Issued: none

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



Issued capital is:

Common Shares
No. of Shares Amount
---------------------------------------------------------------------
Balance as at December 31, 2003 30,618,523 $ 45,618
Issued for cash 7,855,000 5,748
Issued to acquire Becancour Silicon
(Note 3) 30,909,091 28,436
---------------------------------------------------------------------
Balance as at December 31, 2004 69,382,614 79,802
Issued to acquire shares in Fundo
Wheels AS (Note 4) 5,750,000 4,389
---------------------------------------------------------------------
Balance as at December 31, 2005 75,132,614 $ 84,191
---------------------------------------------------------------------
---------------------------------------------------------------------


On March 12, 2004, the Corporation completed a private placement, the proceeds of which were used by the Corporation to finance the first stage of an acquisition of Fundo (Note 4) and for general corporate purposes. The Corporation issued 6,750,000 Units at a price of $1.00 per Unit, resulting in aggregate gross proceeds to the Corporation of $6.75 million. Each Unit consists of one common share and one half of one common share purchase warrant. Each whole warrant is exercisable into one common share of the Corporation at a price of $1.50 per share for a period of 24 months from March 12, 2004. Under the terms of an Agent's option, the Corporation issued an additional 1,105,000 Units on March 30, 2004 on the same terms and conditions as the initial sale of units, taking the gross proceeds of the private placement to $7,855,000. Gross proceeds were reduced by $714,000 of expenses associated with the transaction, net of tax. The fair value of the warrants, determined using the Black-Scholes option-pricing model, was $0.30 ($0.42 for the 480,000 warrants issued to the Agent). The following assumptions were used to calculate the fair value: expected dividend yield of 0%, expected stock volatility of 73%, risk free interest rate of 2.3% and expected warrant life of 2 years. No warrants have been exercised to December 31, 2005.

On September 30, 2004, the Corporation issued 30,909,091 shares to acquire Becancour Silicon (Note 3).

On May 25, 2005, the Corporation issued 5,750,000 shares to acquire shares in Fundo Wheels AS (Note 4).

(c) The Corporation's shares rank in the priority of Class A and Class B preference shares and then common shares with respect to the payment of dividends and the return of capital.

(d) Stock options have been granted to certain key employees and directors to purchase common shares of the Corporation subject to various vesting requirements. During 2004, the Corporation established a Share Option Plan (the "Plan") which supersedes the Stock Option Plans for Directors and Key Employees. Under the Plan, options are granted at the discretion of the Board at an exercise price equal to the closing price of the common shares on the Toronto Stock Exchange on the last trading day preceding the day of grant. The options vest equally over a four year period, with the initial 25% vesting after one year. The options have a life of seven years. The Plan was approved at the 2004 Annual and Special Meeting. On April 25, 2005, the Board of Directors approved an amendment to the Plan to increase the maximum number of shares that can be granted under the Plan by an additional 3,028,250.

On November 10, 2005, 1,740,000 stock options were granted under the Plan. The fair value of the grant, determined using the Black-Scholes option-pricing model, was $0.36 per option. The following assumptions were used to calculate the fair value: expected dividend yield of 0%, expected stock volatility of 57%, risk free interest rate of 3.85% and expected option life of 7 years. The share option expense is being amortized, according to the vesting schedule, over a four year period. On March 26, 2004, 2,210,000 stock options were granted under the Plan. The fair value of the grant, determined using the Black-Scholes option-pricing model, was $0.68 per option. The following assumptions were used to calculate the fair value: expected dividend yield of 0%, expected stock volatility of 73%, risk free interest rate of 3.5% and expected option life of 7 years. The share option expense is being amortized, according to the vesting schedule, over a four year period.

During the year ended December 31, 2005, the Corporation recorded stock-based compensation amounting to $341,000 (2004 - $276,000) which is included in selling and administrative expenses in the statement of operations.

A summary of the status of the Corporation's two stock option plans as of December 31, 2005 and 2004, and changes during the years ending on those dates is presented below:



2005 2004
-----------------------------------------------
Weighted Weighted
Shares Average Shares Average
Exercise Exercise
(000's) Price (000's) Price
---------------------------------------------------------------------
Outstanding at
January 1 2,145 $ 1.11 160 $ 2.93
Issued under new plan 1,740 $ 0.59 2,210 $ 0.96
Forfeited (235) $ 2.30 (225) $ 0.96
---------------------------------------------------------------------
Outstanding at
December 31 3,650 $ 0.78 2,145 $ 1.11
---------------------------------------------------------------------
---------------------------------------------------------------------


At December 31, 2005, 477,500 options outstanding were exercisable at a price of $0.96, with a weighted average remaining life of 5.25 years. The maximum number of shares that can be granted under the Plan is 6,778,250.

11. INCOME TAXES

(a) Income taxes (recovery) attributable to loss before tax differs from the amounts computed by applying the combined Canadian federal and provincial income tax rates of 34.1% (34% in 2004) to the pre-tax loss as a result of the following:



(000's) 2005 2004
---------------------------------------------------------------------
Loss before income taxes $ (12,268) $ (6,880)
Computed 'expected' tax expense (recovery) (4,183) (2,337)
Increase (reduction) in income taxes
resulting from:
Income taxed at different rates in other
jurisdictions (39) 21
Adjustment to future tax assets and
liabilities, beginning of the year, for
changes in tax rates 361 -
Adjustment to future tax assets and
liabilities, beginning of the year, for
changes in exchange rates 574
Increase in valuation allowance 6,608 2,200
Recognized benefit of share issue costs
(Notes 3 and 10(b)) - 58
Other, including large corporations tax 206 85
---------------------------------------------------------------------

Income taxes $ 3,527 $ 27
---------------------------------------------------------------------
---------------------------------------------------------------------


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



(000's) 2005 2004
---------------------------------------------------------------------
Future tax assets:
Inventories $ 682 $ 652
Capital assets 814 -
Deferred financing costs 94 130
Share issue costs 381 546
Accruals and long term provisions 2,700 2,028
Employee future benefits 4,486 4,774
Tax loss carry forwards (Note 11(c)) 15,497 14,065
Investment tax credit carry forwards
expiring between 2006 and 2015 1,775 2,236
Research and development expenditures 113 25
Alternative and corporate minimum tax
carry forwards 133 93
---------------------------------------------------------------------
26,675 24,549
Less valuation allowance 22,407 16,183
---------------------------------------------------------------------
4,268 8,366
---------------------------------------------------------------------
Future income tax liabilities:
Capital assets - 1,338
Intangible assets 1,463 -
Foreign exchange gains 319 -
Foreign exchange contracts 16 633
---------------------------------------------------------------------
1,798 1,971
---------------------------------------------------------------------
Net future income tax asset $ 2,470 $ 6,395
---------------------------------------------------------------------
---------------------------------------------------------------------


The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences and loss carry forwards become deductible.

(c) At December 31, 2005, the Corporation has the following gross tax loss carry-forwards available to reduce future years' income in:



(000's)
---------------------------------------------------------------------
Canada (Federal) expiring between 2013 and 2015 $ 39,261
-------------
-------------

Canada (Provincial) expiring between 2013 and 2015 $ 30,666
-------------
-------------

United States (Federal) expiring between 2008 and 2024 $ 6,489
-------------
-------------


Approximately $5,881,000 of the United States tax loss carry forwards above, are subject to restrictions that limit the amount that can be utilized in any one taxation year.

12. EMPLOYEE FUTURE BENEFITS

The Corporation provides pension or retirement benefits to substantially all of its employees in Canada and the United States through Group RRSPs, 401(K) and defined benefit plans, based on length of service and remuneration.

The Corporation sponsors a contributory defined benefit pension plan and other retirement benefits for certain of its eligible employees. Pension benefits vest immediately and are based on years of service and average final earnings. Other retirement benefits consist of a group insurance plan covering plan members for life insurance, disability, hospital, medical and dental benefits. At retirement, employees maintain a reduced life insurance coverage and certain hospital and medical benefits. The other retirement coverage provided by the plan is not funded. The net cost of other retirement benefits includes the current service cost, the interest cost and the amortization of experienced losses.

The Corporation is scheduled to have the next detailed actuarial valuation as at December 31, 2005 for the Magnesium Group and for the Silicon Group. These valuations will be performed during the first half of 2006.

Employer contributions for the Silicon Group pension plan were made in accordance with the Report on the Actuarial Valuation for Funding Purposes as at December 31, 2002 dated February 26, 2003 and projected to December 31, 2005.

Employer contributions for the Magnesium Group pension plan were made in accordance with the Report on the Actuarial Valuation for Funding Purposes as at January 1, 2002 dated September 30, 2002 and projected to December 31, 2005.

Information about the Corporation's defined benefit plans, in aggregate is as follows:



(000's) 2005 2005 2004 2004
---------------------------------------------------------------------
Other Post Other Post
Pension Retirement Pension Retirement
Plans Plan Plans Plan

Accrued benefit
obligation:
Balance, beginning
of year $ 46,785 $ 9,190 $ 9,973 $ -
Obligation at
acquisition of
Becancour Silicon - - 35,107 8,998
Adjustment to reflect
new valuation results 805 - - -
Current service cost,
net of plan expenses 1,297 225 494 53
Employee contribution 284 - 70 -
Past service cost of
current year plan
amendment - 82 347 -
Cost of early retirement
window 147 - 166 -
Interest cost 2,863 561 1,015 110
Net actuarial loss 6,994 3,550 402 59
Benefits paid (1,625) (141) (789) (30)
---------------------------------------------------------------------
Balance, end of year $ 57,550 $ 13,467 $ 46,785 $ 9,190
---------------------------------------------------------------------

Plan assets:
Fair value, beginning
of year $ 37,239 $ - $ 8,255 $ -
Plan assets at
acquisition of
Becancour Silicon - - 27,589 -
Actual contributions
by the Corporation 2,431 141 863 30
Actual contributions
by employees 284 - 70 -
Actual return on
plan assets 4,030 - 1,326 -
Expected plan expenses (75) - (75) -
Benefits paid (1,625) (141) (789) (30)
---------------------------------------------------------------------
Fair value, end of year $ 42,284 $ - $ 37,239 $ -
---------------------------------------------------------------------

Funded status - deficit $ (15,266) $ (13,467) $ (9,546) $ (9,190)
Unamortized
transitional asset (361) - (397) -
Unamortized past
service cost 806 78 938 -
Unamortized net
actuarial loss 9,557 3,702 2,710 -
Employee future benefits $ (5,264) $ (9,687) $ (6,295) $ (9,190)
---------------------------------------------------------------------
---------------------------------------------------------------------


The significant actuarial assumptions adopted in measuring the Corporation's accrued obligations and benefit costs are as follows (weighted-average assumptions as of December 31, 2005 and December 31, 2004):



2005 2004
---------------------------------------------------------------------
Other Post Other Post
Pension Retirement Pension Retirement
Plans Plan Plans Plan
---------------------------------------------------------------------
Accrued benefit obligation
as of December 31: % % % %

Discount rate 5.0 5.0 6.0 6.0

Rate of compensation increase 2.5 n/a 2.5 n/a
---------------------------------------------------------------------
Benefit costs for years ended
December 31:

Discount rate 6.0 6.0 6.0-6.25 6.0

Expected long-term rate of
return on plan assets 7.5 n/a 7.5-8.0 n/a
Rate of compensation increase 2.5 n/a 3.5 n/a
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------

Assumed other retirement benefit costs
trend rates as of December 31:
Initial weighted average health care
trend rate 6.42 8.28
Ultimate weighted average health care
trend rate 4.30 4.63
Year ultimate rate reached 2010 2010

Assumed other retirement benefit costs
trend rates for years ended December 31:
Initial weighted average health care
trend rate 7.78 9.01
Ultimate weighted average health care
trend rate 4.58 4.63
Year ultimate rate reached 2010 2010


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



Aggregate of service cost and
Accrued Benefit Obligation interest cost for the period
as at December 31, 2005 ending December 31, 2005
---------------------------------------------------------------------
Valuation
trend + 1% $ 16,447 $ 962
Valuation
trend -1% $ 11,171 $ 657
---------------------------------------------------------------------


The Corporation's net benefit plan expense is as follows:
(000's) 2005 2004
---------------------------------------------------------------------
Other Post Other Post
Pension Retirement Pension Retirement
Plans Plan Plans Plan

Current service cost $ 1,372 $ 225 $ 569 $ 53
Past service cost arising
from current period plan
initiation / amendment 147 82 513 -
Interest cost on accrued
benefit obligation 2,863 561 1,015 110
Actual return on plan assets (4,030) - (1,326) -
Actuarial loss during
current period on accrued
benefit obligation 6,994 3,550 402 59
---------------------------------------------------------------------
7,346 4,418 1,173 222

Adjustments to recognize
long-term nature of future
employee benefit costs:
Difference between actual
and expected return on
plan assets 1,201 - 141 -
Difference between recognized
and actual actuarial loss (7,246) (3,702) (295) -
Difference between
amortization of past service
costs and actual plan
amendments 132 (79) (257) -
Amortization of transitional
asset (36) - (36) -
---------------------------------------------------------------------
Net benefits plan expense $ 1,397 $ 637 $ 726 $ 222
---------------------------------------------------------------------
---------------------------------------------------------------------


Plan assets by asset category

2005 2004
--------------------------
% %

Pension plan
Equity 59 59
Debt 39 38
Other 2 3
---------------------------------------------------------------------
100 100
---------------------------------------------------------------------
---------------------------------------------------------------------


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

13. RELATED PARTY TRANSACTIONS

In addition to the related party transactions noted elsewhere in the financial statements, the Corporation made a loan of $117,000 to an executive of the Corporation to assist in relocation. The loan is non interest bearing with a ten year term.

During 2005, the Corporation's controlling shareholder, Safeguard, billed the Corporation for various expenses including travel expenses, payroll for certain of the Corporation's executives and for business development expenses. These expenses totalled $0.6 million. These payments were re-imbursements of Safeguard's actual expenses incurred.

In 2004, the Corporation made loans of $472,000, $133,000 and $500,000 to executives of the Corporation to assist in relocation. The loan for $472,000 was repayable in 5 months, which occurred, the loan of $133,000 was repayable over ten years. The $500,000 was repaid in November 2005. All the loans were non-interest bearing.

During March 2004, certain officers and directors of the Corporation participated in the Private Placement (Note 10(b)). Collectively they purchased 400,000 units on the same terms and conditions as the other participants of the Private Placement.

In 2004, the Corporation's Silicon business obtained a subordinated loan of $1,407,000 from Safeguard, the Company that controls Timminco, bearing interest at prime rate plus 1% (5.25% as of December 31, 2004). The loan was outstanding as at December 31, 2004 and was recorded under Accounts payable and accrued liabilities. The loan and related accrued interest was repaid in April 2005.

14. FINANCIAL INSTRUMENTS

The Corporation enters into foreign currency contracts to hedge foreign currency risk relating to certain cash flow exposures. The Corporation's forward exchange contracts reduce the Corporation's risk from exchange movements because gains and losses on such contracts offset losses and gains on transactions being hedged. The counterparties to the contracts are multinational commercial banks and therefore credit risk of counterparty non-performance is remote.

As at December 31, 2005, the Corporation held the following forward exchange contracts:



Notional Notional Canadian dollars equivalent
amount of --------------------------------------
currency Contract Unrealized
sold amount Fair value gain
(000's) US$ C$ C$ C$
---------------------------------------------------------------------

United States
dollars 21,900 25,539 25,393 (147)


The unrealized gain on foreign exchange is recorded under prepaid expenses for contracts not designated as hedges.

The carrying value of current monetary assets and liabilities approximates their fair value due to their relatively short periods to maturity. The fair value of long term debt approximates its carrying amount as the terms and conditions are similar to current market conditions.

15. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments

Operating leases

The Corporation leases equipment and office, manufacturing and warehouse space under operating leases with minimum aggregate rent payable at December 31, 2005:



(000's)
---------------------------------------------------------------------

2006 $ 918
2007 723
2008 654
2009 399
2010 -
---------------------------------------------------------------------
$ 2,694
---------------------------------------------------------------------
---------------------------------------------------------------------


Environmental matters

In accordance with applicable law, the Corporation is required to file a Mines Closure Plan with the Ontario Ministry of Northern Development and Mines with respect to the Haley, Ontario facility together with appropriate financial assurance covering its obligations pursuant to the plan. The Corporation expects to provide financial assurance of $1,682,700 by way of a letter of credit over a period of 4 years or sooner, depending on the financial results of the Corporation.

Contingent liabilities

Sales and use tax

In 2002, the State of Colorado concluded a sales and use tax audit of one of the Corporation's United States subsidiaries and alleged a deficiency, including interest and penalties of approximately US $330,000. The Corporation settled this action in 2004 for US $128,000.

Legal actions

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

Economic dependence

In 2005, two customers accounted for 16% and 12% (2004 - 12% and 5%) of total sales respectively.

Guarantees

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

The Corporation has posted a letter of credit in the amount of $40,000 in favour of the Ministry of Environment of Ontario. The letter of credit may be drawn upon in the event the Corporation fails to perform certain remediation duties at one of the Corporation's properties.

The Corporation has agreed to indemnify its current and former directors and officers to the extent permitted by law against any and all charges, costs, expenses, amounts paid in settlement and damages incurred by the directors and officers as a result of any lawsuit or any other judicial administrative or investigative proceeding in which the directors and officers are sued as a result of their service. These indemnification claims will be subject to any statutory or other legal limitation period. The nature of such indemnification prevents the Corporation from making a reasonable estimate of the maximum potential amount it could be required to pay to counter parties. The Corporation has $15.0 million in directors' and officers' liability insurance coverage.

16. SEGMENTED INFORMATION

The Corporation manages its business along two principle business segments, the production and sale of specialty non-ferrous metals, the Magnesium Group ("Magnesium") and silicon based metals, the Silicon Group ("Silicon"). Amounts included under "Other" include corporate activities and amounts related to the Corporation's investment in Fundo. Amounts after September 30, 2004 include Becancour Silicon. Segmented information on sales and identifiable assets by geographic region is as follows:



(a) Sales:

2005 2004
---------------------------------------------------------------------
(000's) Magnesium Silicon Total Magnesium Silicon Total
---------------------------------------------------------------------

Canada $ 10,214 $ 14,773 $ 24,987 $ 11,249 $ 4,592 $ 15,841
United
States 54,086 56,622 110,708 57,280 10,726 68,006
Mexico 4,149 11 4,160 4,673 15 4,688
Europe 8,651 26,520 35,171 14,773 9,568 24,341
Australia 4,642 - 4,642 5,906 - 5,906
Pacific Rim 1,963 1,223 3,186 2,740 - 2,740
Other 1,383 111 1,494 1,851 258 2,109
---------------------------------------------------------------------
$ 85,088 $ 99,260 $184,348 $ 98,472 $ 25,159 $123,631
---------------------------------------------------------------------
---------------------------------------------------------------------


(b) Net loss:

2005
---------------------------------------------------------------------
(000's) Magnesium Silicon Other Total
---------------------------------------------------------------------

Net income before the
following $ 1,541 $ 5,846 $ (4,995) $ 2,392
Amortization of capital
assets and deferred
financing costs 3,945 3,673 18 7,636
Interest 1,266 1,449 - 2,715
Gain on disposal of
capital assets 238 - - 238
Reorganization costs 4,592 - - 4,592
Income tax expense 3,328 199 - 3,527
Equity in the earnings
of Fundo - - (521) (521)
---------------------------------------------------------------------
Net income / (loss) $ (11,828) $ 525 $ (4,492)$(15,795)
---------------------------------------------------------------------
---------------------------------------------------------------------


2004
---------------------------------------------------------------------
(000's) Magnesium Silicon Other Total
---------------------------------------------------------------------

Net income before the
following $ 6,455 $ 730 $ (5,324) $ 1,861
Amortization of capital
assets and deferred
financing costs 4,172 610 191 4,973
Interest 1,304 417 - 1,721
Gain on disposal of
capital assets (660) - - (660)
Reorganization costs 2,781 - - 2,781
Income tax expense (recovery) 142 (115) - 27
Equity in the earnings of Fundo - - (74) (74)
---------------------------------------------------------------------
Net loss $ (1,284) $ (182) $ (5,441) $(6,907)
---------------------------------------------------------------------
---------------------------------------------------------------------


(c) Identifiable assets:

(000's) Magnesium Silicon December 31,2005
---------------------------------------------------------------------

Canada $ 44,738 $ 74,994 $ 119,732
United States and Other 34,456 - 34,456
---------------------------------------------------------------------
$ 79,194 $ 74,994 $ 154,188
---------------------------------------------------------------------
---------------------------------------------------------------------
(000's) Magnesium Silicon December 31, 2004
---------------------------------------------------------------------

Canada $ 53,240 $ 82,127 $ 135,367
United States and Other 33,053 - 33,053
---------------------------------------------------------------------
$ 86,293 $ 82,127 $ 168,420
---------------------------------------------------------------------
---------------------------------------------------------------------

(d) Capital assets:

(000's) 2005 2004
---------------------------------------------------------------------

Magnesium $ 35,801 $ 40,043
Silicon 12,789 10,310
---------------------------------------------------------------------
$ 48,590 $ 50,353
---------------------------------------------------------------------
---------------------------------------------------------------------


(e) Additions to Capital assets:

(000's) 2005 2004
---------------------------------------------------------------------

Magnesium $ 1,417 $ 2,598
Silicon 2,047 553
---------------------------------------------------------------------
$ 3,464 $ 3,151
---------------------------------------------------------------------
---------------------------------------------------------------------


17. SUBSEQUENT EVENT

Subsequent to year end, on March 9, 2006, the Corporation's controlling shareholder, Safeguard International Fund LP, through an affiliate, loaned the Corporation US$2 million to expedite the restructuring of its magnesium business and to fund its strategic initiatives including growth in Mexico. The loan is repayable on demand, and bears interest at the U.S. prime rate plus 1%. The loan and related security are subordinate to the indebtedness and the security provided by the Corporation's senior lender, Bank of America, N.A. Under the terms of the loan, Safeguard, through its affiliate, has the option to convert the whole or any part of the outstanding principal amount at any time into common shares of the Corporation at a conversion rate of CAD$0.40 per common share.

Contact Information

  • Timminco Limited
    Dr. Charles Entrekin
    President and CEO
    (416) 364-5171
    (416) 364-3451 (FAX)
    centrekin@timminco.com
    or
    Timminco Limited
    Keith S. D'Souza
    Vice President & Secretary
    (416) 364-5171
    (416) 364-3451 (FAX)
    kdsouza@timminco.com