Timminco Limited
TSX : TIM

Timminco Limited

March 29, 2007 21:32 ET

Timminco Announces 2006 Results

TORONTO, ONTARIO--(CCNMatthews - March 29, 2007) - Timminco Limited (TSX:TIM) -

HIGHLIGHTS

- Sales for the year were $176.2 million compared with $184.3 million in 2005.

- The Company recorded an impairment charge of $31.2 million in the fourth quarter

- The Company amended its Banking Agreement

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

- The Company was cleared of dumping charges by the U.S. Department of Commerce

Timminco Limited (TSX:TIM) announced its financial results for the fourth quarter and full year ended December 31, 2006. The Company is divided into two segments: the Magnesium Group and the Silicon Group.

The past year has marked a significant change in the Magnesium business and positive trends in the Silicon business. The Company took a restructuring charge of $2.0 million and an impairment charge of $31.2 million in recognition of the evolution of and changes in the Magnesium business. Specifically the ability to buy high quality, semi-finished extrusions and calcium and strontium based products at lower costs has reduced future projected operating rates at the Company's Haley facility, thereby necessitating a write down in the value of the casthouse and certain other related assets.

In the Silicon business, the strength of the Canadian dollar and weak prices for silicon resulted in a net loss of $1.3 million. However, during the fourth quarter, due to growing demand and lower supplies worldwide, the market price of silicon increased approximately 10% to 12%.

"The past year has brought significant change in our Magnesium Group and improving conditions in the Silicon business," noted John Walsh, President and Chief Executive Officer of Timminco. "The evolution of the Magnesium business, which should yield positive results in 2007, has required us to record a large charge against earnings in recognition of these changes. The drive towards low cost manufacturing and the related asset impairment has resulted in a most disappointing year, however we are determined to return the Magnesium business to profitability," continued Mr. Walsh.

"In the Silicon business, 2006 was a not a good year, but towards the later part of the year, market conditions improved. With healthy market price increases for Silicon, results and cash flows for our Silicon Group should improve. In 2007, Timminco faces a number of challenges, but should begin to see the benefit of significant re-organization. Execution and commitment to improvement will be imperative in 2007," noted Mr. Walsh.

Full Year Results

For the year, the net loss was $46.2 million or ($0.62) per share, compared with a loss of $15.8 million in 2005 or ($0.22) per share. Included in the 2006 loss is restructuring and impairment charges of $33.2 million which occurred in the fourth quarter. Sales for the year were $176.2 million compared with $184.3 million in 2005.

Magnesium Group

For the year ended 2006, sales of the Magnesium Group were $73.7 million, down 13.4% from $85.1 million in 2005. The strength of the Canadian dollar had a $4.8 million dollar unfavourable impact on sales. The average US/CAD exchange rate was approximately 1.21 in 2005 while in 2006 it was approximately 1.13. Sales volume in tonnes decreased 5.3% compared with 2005 levels. The majority of the sales loss was due to increased competition in the specialty metals business and market demand weakness in the water heater and hand tool segment. There was minimal market share loss in the extrusion business related to competitive activity. The continued weakness of the US dollar versus the Canadian dollar had an adverse impact on sales as approximately 88% of the Magnesium Group's sales are denominated in US dollars.

Gross profit for 2006 was $7.7 million or 10.5% of sales compared to $8.2 million or 9.6% of sales in 2005. Lower sales caused the decrease in gross margin, while lower manufacturing variances and overheads resulted in an increased gross earnings percentage. Overheads decreased 17.2% to $8.6 million for the year ended December 31, 2006 which represents a decrease from 12.2% of sales in 2005 to 11.6% of sales in 2006 and reflects the impact of changes made in the 2005 reorganization.

Amortization of capital assets declined to $3.5 million in 2006 from $3.8 million in 2005 due largely to a reduction in the net asset base from the December 2005 asset impairment adjustments and the absence of major expansion projects in 2006 and 2005. With the significant reduction of assets resulting from the 2006 impairment charge, depreciation expense in 2007 is expected to be significantly lower.

Re-organization expenses in 2006 were $1.8 million compared with $2.4 million in 2005. The 2006 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.

Silicon Group

For the year ended 2006, sales of the Silicon Group were $102.5 million, up 3.2% from $99.3 million in 2005. Sales volume in tonnes increased 2.9% when compared to 2005, with increases in tonnes sold of ferrosilicon and silicon metal, offset by a small decrease in tonnes sold of by-products. The strength of the Canadian dollar had a $4.2 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 2006 was $3.5 million or 3.4% of sales compared to $7.9 million or 8.0% of sales in 2005. The main reason for the decrease in margin was lower pricing for silicon metal when compared to 2005. Selling prices for silicon metal decreased approximately 6.2% in 2006 when compared to 2005.

Amortization of capital assets decreased slightly by $0.5 million to $2.5 million in 2006 from $3.0 million in 2005 due to lower amortization of furnace improvements.

Results for the Fourth Quarter

For the quarter ended December 31, 2006, the net loss was $38.7 million compared with a loss of $6.6 million in the fourth quarter of 2005. Sales for the quarter ended December 31, 2006 were $46.0 million compared to $42.8 million in the fourth quarter of 2005.

Magnesium Group

Sales for the Magnesium Group for the fourth quarter of 2006 were $15.5 million compared to $21.0 million in the final quarter of 2005. The strength of the Canadian dollar had a $0.3 million dollar unfavourable impact on sales. The average US/CAD exchange rate was approximately 1.17 in the fourth quarter of 2005 while in the fourth quarter of 2006 it was approximately 1.14. The majority of the shortfall was due to a general weakness in the specialty metals business and certain segments of the extrusion business including the water heater and concrete tool segments. The weakness was not the result of share loss.

Gross margin in the Magnesium Group was a loss of $0.4 million or (2.5) % of sales compared to a loss of $1.9 million or 9.3% of sales in the fourth quarter of 2005. Although manufacturing overheads decreased 18.5%, costs related to the introduction of selected aluminium products, a new product line for the Group, were substantial. By year end, the variances related to the aluminium extrusion business had been reduced to negligible levels.

Amortization of capital assets decreased to $0.7 million compared to $1.0 million in the fourth quarter of 2005. During the quarter, there were no major expansion projects. The decrease in depreciation was related to the smaller asset base.

Re-organization expenses in the quarter were $1.8 million compared with $3.8 million in the same quarter in 2005. The expense was related to the closure of certain operations in Haley, ON and Aurora, CO 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 2006 were $30.5 million compared with $21.8 million in the fourth quarter of 2005. In the quarter, sales of ferrosilicon, silicon metal and by-products all increased when compared to the same period in 2005. Sales of silicon metal, the Group's main product, increased 37.5% in tonnes sold when compared to the fourth quarter of 2005. The strong Canadian dollar had an unfavourable impact on sales of $0.3 million versus 2005.

For the quarter ended December 31, 2006, the gross margin in the Silicon Group was $1.8 million or 5.8% of sales compared with $0.6 million or 2.6% of sales in 2005. The increase was due to better pricing in the by-products market and lower manufacturing costs in the ferrosilicon business.

Amortization of capital assets in the fourth quarter of 2006 was $0.6 million, down $0.2 million from the fourth quarter of 2005. During the quarter, the majority of capital spending was on furnace improvements.



FINANCIAL HIGHLIGHTS
Three Months Ended Year Ended
(unaudited) (audited)
December 31, December 31, December 31, December 31,
2006 2005 2006 2005
---- ---- ---- ----

Sales $46,036 $42,756 $176,238 $184,348

Gross profit 1,693 3,348 12,492 17,496

Net income (loss) (38,733) (6,572) (46,233) (15,795)
Earnings (loss)
per common share,
basic and diluted (0.53) (0.09) (0.62) (0.22)
Working capital
(excluding
available
cash items) 22,627 32,653 22,627 32,653

Bank debt 30,598 31,851 30,598 31,851

Weighted average
common shares
outstanding (000's) 75,133 75,133 75,133 72,848


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. The Company disclaims any duty to update forward-looking statements other than through relevant future Management Discussions and Analyses. Reference should be made to the most recent Annual Information Form for a description of the major risk factors.

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.



Timminco Limited

Consolidated Balance Sheets

As at December 31 2006 2005
---------------------------------------------------------------------------
(in thousands of Canadian dollars)

ASSETS
Current Assets
Cash $ 804 $ 2,480
Accounts receivable 19,834 22,157
Inventories (Note 5) 33,830 38,148
Prepaid expenses and deposits (Note 15) 2,160 1,871
Future income taxes (Note 12) 225 713
---------- -----------
56,853 65,369
---------- -----------

Long term receivables (Note 14) 135 296
Property, plant and equipment (Note 6) 18,280 48,590
Investment in Fundo Wheels AS (Note 4) 9,173 10,584
Employee future benefits (Note 13) 2,034 1,837
Deferred financing costs (Note 8) 526 749
Future income taxes (Note 12) 3,431 3,555
Intangible assets (Note 7) 4,262 4,812
Goodwill 18,308 18,396
---------- -----------
$ 113,002 $ 154,188
---------- -----------
---------- -----------

LIABILITIES
Current Liabilities
Bank indebtedness (Note 8) $ 26,243 $ 26,153
Accounts payable and accrued liabilities 25,062 27,470
Current portion of long term bank debt (Note 8) 4,355 1,341
Due to affiliated companies (Note 9 and 11(b)) 5,497 -
Future income taxes (Note 12) - 51
Current portion of long term provisions (Note 10) 2,863 2,715
---------- -----------
64,020 57,730

Long term bank debt (Note 8) - 4,357
Loan - other 202 -
Employee future benefits (Note 13) 17,508 16,788
Future income taxes (Note 12) 1,324 1,747
Long term provisions (Note 10) 3,720 3,829
---------- -----------
86,774 84,451
---------- -----------

SHAREHOLDERS' EQUITY
Capital stock (Note 11) 84,191 84,191
Equity Component of convertible note (Note 11(b)) 1,693 -
Warrants (Note 11(b)) - 1,393
Contributed surplus (Note 11(d)) 3,192 1,362
Deficit (62,490) (16,257)
Foreign currency translation adjustment (358) (952)
---------- -----------
26,228 69,737
---------- -----------
$ 113,002 $ 154,188
---------- -----------
---------- -----------

The accompanying notes are an integral part of these consolidated financial
statements.
Please see Note 16 regarding Commitments, Contingencies and Guarantees.


On behalf of the Board:

(signed) John P. Walsh (signed) Richard L. Lister

President, CEO & Director Chairman of the Audit Committee



Timminco Limited

Consolidated Statements of Operations

---------------------------------------------------------------------------
Years ended December 31 2006 2005
---------------------------------------------------------------------------
(in thousands of Canadian dollars,
except for earnings per share information)

Sales $ 176,238 $ 184,348

Expenses
Cost of goods sold 163,746 166,852
Selling and administrative 14,011 15,012
Amortization of property, plant and equipment 5,911 6,644
Amortization of intangible assets 550 688
Amortization of deferred financing costs 458 320
Interest (Note 8) 3,433 2,699
Foreign exchange (gain) loss (1,838) 11
---------- -----------

Loss before the undernoted (10,033) (7,878)

Environmental remediation costs (Note 10) (127) (171)
Gain (loss) on sale of property, plant and equipment 301 (238)
Reorganization costs (Note 10) (2,034) (4,592)
Other income (expenses) (18) 90
Impairment of property, plant and equipment (Note 3) (31,223) -
Equity (loss) earnings of Fundo Wheels AS (3,063) 521
---------- -----------

Loss before income taxes (46,197) (12,268)
Income taxes (Note 12)
Current (178) 1,420
Future 214 2,107
---------- -----------
36 3,527
---------- -----------

---------- -----------
Net loss $ (46,233) $ (15,795)
---------- -----------
---------- -----------

Loss per common share - basic and diluted $ (0.62) $ (0.22)
---------- -----------
---------- -----------

Weighted average number of common shares
outstanding - basic and diluted (Note 11 (b)) 75,132,614 72,848,367
----------- -----------
----------- -----------



Consolidated Statements of Deficit

---------------------------------------------------------------------------
Years ended December 31 2006 2005
---------------------------------------------------------------------------
(in thousands of Canadian dollars)

Deficit at beginning of year $ (16,257) $ (462)
Net loss (46,233) (15,795)
----------- -----------

Deficit at end of year $ (62,490) $ (16,257)
----------- -----------
----------- -----------

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



Timminco Limited

Consolidated Statements of Cash Flows

---------------------------------------------------------------------------
Years ended December 31 2006 2005
---------------------------------------------------------------------------
(in thousands of Canadian dollars)

Cash flows from operating activities
Net loss $ (46,233) $ (15,795)
Adjustments for items not requiring cash
Amortization of property, plant and equipment 5,911 6,644
Amortization of intangible assets 550 688
Amortization of deferred financing costs 458 320
Stock based compensation (Note 11(d)) 437 341
Reorganization costs (Note 10) 2,034 4,592
Environmental remediation costs (Note 10) 127 171
Benefits plan expense 3,053 2,034
(Gain) loss on disposal of property, plant
and equipment (301) 238
Future income taxes 214 2,101
Impairment of property, plant and equipment
(Note 3) 31,223 -
Equity loss (earnings) of Fundo Wheels AS (Note 4) 3,063 (521)
Defined benefit pension plan contributions (3,246) (1,852)
Expenditures charged against provision for
reorganization (Note 10) (2,000) (1,677)
Expenditures charged against other long term
provisions (Note 10) (122) (44)

Change in non-cash working capital items
Decrease in accounts receivable 2,323 2,342
Decrease in inventories 2,071 8,284
(Increase) decrease in prepaid expenses and
deposits (289) 2,220
(Decrease) increase in accounts payable and
accrued liabilities (1,692) 2,458
----------- -----------
(2,419) 12,544
----------- -----------

Cash flows from investing activities
Capital expenditures (4,292) (3,464)
Investment in Becancour Silicon Inc. - (370)
Investment in Fundo Wheels AS (Note 4) (1,058) (102)
Decrease in long term receivables 161 436
Proceeds on disposal of property, plant and
equipment 388 29
Other (360) 101
----------- -----------
(5,161) (3,370)
----------- -----------

Cash flows from financing activities
Increase in bank indebtedness (Note 8) 90 16,682
Decrease in long term bank debt (Note 8) (1,343) (21,624)
Decrease in loan from related party - (1,407)
Increase in loans from affiliated companies
(Note 11(b)) 7,190 -
Increase in loan - other 202 -
Issuance of capital stock (Note 11(b)) - (5)
Expenditures charged against deferred financing
costs (235) (908)
----------- -----------
5,904 (7,262)
----------- -----------

(Decrease) increase in cash (1,676) 1,912

Cash at beginning of year 2,480 568

----------- -----------
Cash at end of year $ 804 $ 2,480
----------- -----------
----------- -----------

Supplemental information
Cash paid during the period:
Interest $ 3,082 $ 2,507
----------- -----------
----------- -----------
Income taxes $ 1,113 $ 669
----------- -----------
----------- -----------

Supplementary disclosure of non-cash investing
and financing activities:
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, 2006 and 2005


1. NATURE OF OPERATIONS

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 principal business segments, the production and sale of specialty non-ferrous metals, the Magnesium Group, and silicon based metals, the Silicon Group.

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.

Financial instruments such as bonds and debentures convertible at the holder's option into common shares of the Corporation take the form of a debt security but include both liability and equity components. On initial recognition of this type of financial instrument, the carrying amount ascribed to the holder's right of conversion is presented as a separate component of equity on the balance sheet. This equity component is fair valued using the Black-Scholes option pricing model.

Inventories

Raw material and stores inventories are valued at the lower of direct acquisition cost and replacement cost, using an average 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 property, plant and equipment amortization.

Property, Plant & Equipment

Property, Plant & Equipment ("PP&E") is 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, 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 PP&E 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 2006, the Corporation recovered net research and development expenses of $1.0 million (2005 - expense of $0.7 million) through the Governments of Canada and Quebec research and development credit programs.

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.

INCOME (LOSS) PER COMMON SHARE

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

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

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.

3. IMPAIRMENT OF PROPERTY, PLANT & EQUIPMENT

In 2006, the Corporation recognized asset impairment losses of $25.1 million for a group of assets at the Haley, Ontario plant and $6.1 million for the Aurora, Colorado plant and the related spare parts at both facilities. Asset impairments arise when the carrying amount of a long-lived asset exceeds its fair value. The impairment losses were measured as the excess of the net carrying amount of the asset groups over their fair value. Fair value was estimated based on the expected present value of cash flows associated with the asset groups and inclusive of residual values.

The section of the Haley, Ontario plant determined to be impaired is that group of assets pertaining to the cast house and the specialty metals production equipment. The impairment has resulted from declining volumes resulting from foreign competition, increasing per-unit costs from operating at reduced levels and the sourcing of inputs from Asia. The impairment at the Aurora facility resulted from lower expected volume throughput on certain equipment due to increased semi-finished material sourcing from Asia.

4. INVESTMENT IN FUNDO WHEELS AS

Fundo Wheels AS ("Fundo"), located in Hoyanger, Norway, is an original equipment manufacturer of cast aluminium wheels for high end European car manufacturers. On March 22, 2004 the Corporation indirectly acquired a 24.4% interest in Fundo Wheels AS ("Fundo"), for $6,276,000.

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 no sooner than January 1, 2008, on the satisfaction of certain conditions. As at December 31, 2006, 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 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.

In December 2006, the Corporation acquired an additional 264 shares of Fundo from treasury for $1,058,000. The Community also invested in Fundo such that the Corporation's ownership interest remained at 47%. The acquisition of the interest did not create any purchase discrepancy.

During 2006, the Corporation charged $3,063,000 against income as its proportionate share of the losses of Fundo for the year ($521,000 in earnings in 2005) and reduced the carrying value of its investment accordingly.

5. INVENTORIES



(000's) 2006 2005
---------------------------------------------------------------------------
Raw materials $ 12,586 $ 12,900
Work in process 2,945 2,945
Finished goods 13,415 16,591
Stores inventory 4,884 5,712
---------------------------------------------------------------------------
$ 33,830 $ 38,148
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


6. PROPERTY, PLANT & EQUIPMENT

(000's) 2006 2005
---------------------------------------------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---------------------------------------------------------------------------
Land $ 3,365 $ - $ 3,365 $ 3,365 $ - $ 3,365
Buildings
and
equipment 102,930 90,558 12,372 159,682 116,447 43,235
Deferred
charges 10,695 8,366 2,329 8,876 7,478 1,398
Leased
equipment 317 262 55 317 239 78
Construc-
tion in
progress 159 - 159 514 - 514
---------------------------------------------------------------------------
$ 117,466 $ 99,186 $ 18,280 $ 172,754 $ 124,164 $48,590
---------------------------------------------------------------------------
---------------------------------------------------------------------------

7. INTANGIBLE ASSETS

(000's) 2006 2005
---------------------------------------------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---------------------------------------------------------------------------

Customer
Relation-
ships $ 1,500 $ 338 $ 1,162 $ 1,500 $ 188 $ 1,312

Technology 4,000 900 3,100 4,000 500 3,500
---------------------------------------------------------------------------
$ 5,500 $ 1,238 $ 4,262 $ 5,500 $ 688 $ 4,812
---------------------------------------------------------------------------
---------------------------------------------------------------------------


8. BANK DEBT

(000's) 2006 2005
---------------------------------------------------------------------------

Bank indebtedness $ 26,243 $ 26,153

Current portion of long term bank debt 4,355 1,341

Long term bank debt - 4,357
---------------------------------------------------------------------------
$ 30,598 $ 31,851
---------------------------------------------------------------------------
---------------------------------------------------------------------------


At December 31, 2006, total debt denominated in US dollars amounted to US$27.3 million.

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. As at December 31, 2006, the Corporation had fully utilized its availability under the Revolver.

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 which are being amortized over the life of the Agreement.

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 cash flow related to interest and principal repayments. For the twelve months ended December 31, 2005, the FCR covenant was amended such that the Corporation met the requirements of the agreement. As at March 31, 2006, the Corporation was in compliance with its banking covenants. As at June 30, 2006, the Bank further amended the banking agreement requiring the Corporation to maintain minimum levels of earnings before interest, taxes, depreciation and amortization ("EBITDA") as defined by the banking agreement and limiting the amount of capital expenditures. Both the EBITDA and capital expenditure requirements were to be measured at June 30, September 30 and December 31, 2006. As at December 31, 2006, the Bank amended the covenants such that the Corporation was in compliance. The Bank also amended the covenants for fiscal 2007. For the first three quarters of 2007, the Corporation must meet certain EBITDA levels and submit to limits on capital spending. The revised covenants for 2007 were based on the Corporation's 2007 budget. 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 Australia, Japan and Mexico into the borrowing base formula. These receivables were previously considered ineligible by the Bank. This increase in borrowing base is a temporary relief expiring on November 30, 2007.

Interest expense in 2006 includes $516,000 of interest on long term debt ($400,000 in 2005).

9. LOANS FROM AFFILIATED COMPANIES

The Corporation has loans due to affiliated companies (See Note 11):



(000's) 2006 2005
---------------------------------------------------------------------------

Due to Safeguard International Fund L.P. $ 2,659 $ -

Due to ALD International LLC 2,838 -
---------------------------------------------------------------------------
$ 5,497 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


10. LONG TERM PROVISIONS

Long term provisions are comprised as follows:

(000's) 2006 2005
---------------------------------------------------------------------------

Provision for reorganization $ 4,630 $ 4,676

Provision for environmental remediation 1,338 1,264

Other long term provisions 615 604
---------------------------------------------------------------------------

6,583 6,544

Less current portion 2,863 2,715
---------------------------------------------------------------------------

$ 3,720 $ 3,829
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Provision for reorganization

(000's) 2006 2005
---------------------------------------------------------------------------

Balance, beginning of the year $ 4,676 $ 3,966

Costs recognized 1,567 4,592

Amounts charged against provision (1,613) (3,882)
---------------------------------------------------------------------------

Balance, end of the year $ 4,630 $ 4,676
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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 and during November 2006, 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.

On November 14, 2006, the Corporation announced the closure of certain production facilities at its Haley, Ontario plant. The closure resulted in the elimination of 45 positions and the idling of certain equipment. The Corporation accrued $2.3 million in respect of the closure to cover severance.

Total termination benefits for the Haley closures are expected to be $2.3 million (2005 - 1.8 million). To date, nil (2005 - $0.1 million) has been expended.



Provision for environmental remediation

(000's) 2006 2005
---------------------------------------------------------------------------

Balance, beginning of the year $ 1,264 $ 1,140

Costs recognized (9) 71

Accretion 136 100

Amounts charged against provision (53) (47)
---------------------------------------------------------------------------

Balance, end of the year $ 1,338 $ 1,264
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

During 2006 and 2005, the Corporation reassessed its environmental liability, resulting in the recognition of $136,000 and $99,000 respectively, of additional expense.

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)
---------------------------------------------------------------------------

2007 $ 2,863

2008 300

2009 736

2010 389

2011 859

Thereafter 1,436
---------------------------------------------------------------------------

$ 6,583


11. 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, 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 and 2006 75,132,614 $ 84,191
---------------------------------------------------------------------------
---------------------------------------------------------------------------


During March 2006, the warrants related to the Corporation's private placement, which occurred during March 2004, expired. The balance of $1.4 million was added to contributed surplus.

On March 9, 2006, the Corporation borrowed US$2 million from an affiliate of Safeguard, the Corporation's controlling shareholder. 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 Company's senior lender, Bank of America, N.A. The loan may be settled, at the lender's option, in cash or shares at $0.40 per share, or a combination or cash and shares. The lender's option to settle the debt in shares has been fair valued separately from the debt using the Black-Scholes option pricing model. Accordingly, the transaction was recorded as $1.6 million as Due to an affiliate in Current liabilities and $0.8 million as Convertible note in Shareholders' equity. The following assumptions were used to calculate the fair value of the equity component: expected dividend yield of 0%, expected stock volatility of 64%, risk free rate of 4.1% and expected life of 4.1 years. The expected life of the debt coincides with the maturity of the Bank of America Credit Agreement including the optional renewal period, to which the debt is subordinate.

On August 31, 2006, the Company and Safeguard entered into a promissory note pursuant to which Safeguard loaned US$3 million to the Company. 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 Company's senior lender, Bank of America, N.A. The loan may be settled, at the lender's option, in cash or shares at $0.40 per share, or a combination or cash and shares. The lender's option to settle the debt in shares has been fair valued separately from the debt using the Black-Scholes option pricing model. Accordingly, the transaction was recorded as $2.4 million as Due to an affiliate in Current liabilities and $0.9 million as Convertible note in Shareholders' equity. The following assumptions were used to calculate the fair value of the equity component: expected dividend yield of 0%, expected stock volatility of 63%, risk free rate of 4.0% and expected life of 3.6 years. The expected life of the debt coincides with the maturity of the Bank of America Credit Agreement including the optional renewal period, to which the debt is subordinate.

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 May 8, 2006, 200,000 stock options were granted under the Corporation's Stock Option Plan. The fair value of the grant, determined using the Black-Scholes option-pricing model, was $0.19 per option. The following assumptions were used to calculate the fair value: expected dividend yield of 0%, expected stock volatility of 62.9%, risk free interest rate of 4.38% 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 December 15, 2006, 700,000 stock options were granted under the Corporation's Stock Option Plan. The fair value of the grant, determined using the Black-Scholes option-pricing model, was $0.19 per option. The following assumptions were used to calculate the fair value: expected dividend yield of 0%, expected stock volatility of 74.8%, risk free interest rate of 3.94% 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, 2006, the Corporation recorded stock-based compensation amounting to $437,000 (2005 - $341,000) 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, 2006 and 2005, and changes during the years ending on those dates is presented below:



2006 2005
---------------------------------------------
Weighted Weighted
Shares Average Shares Average
Exercise Exercise
(000's) Price (000's) Price
---------------------------------------------------------------------------
Outstanding at January 1 3,650 $0.78 2,145 $1.11
Granted 900 $0.38 1,740 $0.59
Forfeited (825) $0.66 (235) $2.30
---------------------------------------------------------------------------
Outstanding at December 31 3,725 $0.71 3,650 $0.78
---------------------------------------------------------------------------
---------------------------------------------------------------------------


At December 31, 2006, 1,196,250 options outstanding were exercisable at a weighted average price of $0.88, with a weighted average remaining life of 4.6 years. The maximum number of shares that can be granted under the Plan is 6,778,250.

12. 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% (34.1% in 2005) to the pre-tax loss as a result of the following:



(000's) 2006 2005
---------------------------------------------------------------------------
Loss before income taxes $ (46,197) $ (12,268)
Computed 'expected' tax expense (recovery) (15,761) (4,183)
Increase (reduction) in income taxes resulting
from:
Income taxed at different rates in other
jurisdictions (340) (39)
Adjustment to future tax assets and liabilities
for changes in tax rates 2,986 361
Exchange rate effects 469 574
Increase in valuation allowance 11,434 6,608
Permanent differences 1,050 (46)
Other, including large corporations tax 198 252
---------------------------------------------------------------------------
Income taxes $ 36 $ 3,527
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(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) 2006 2005
---------------------------------------------------------------------------
Future tax assets:
Inventories $ 225 $ 399
Property, Plant & Equipment 9,853 814
Deferred financing costs 124 94
Share issue costs 192 381
Accruals and long term provisions 3,490 2,700
Employee future benefits 4,817 4,486
Tax loss carry forwards (Note 12(c)) 15,674 14,845
Investment tax credit carry forwards expiring
between 2007 and 2016 1,652 1,775
Research and development expenditures 101 113
Foreign exchange losses 214 -
Alternative and corporate minimum tax carry
forwards 132 133
---------------------------------------------------------------------------
36,474 25,740
Less valuation allowance 32,818 21,472
---------------------------------------------------------------------------
3,656 4,268
---------------------------------------------------------------------------
Future income tax liabilities:
Intangible assets 1,324 1,463
Foreign exchange gains - 319
Foreign exchange contracts - 16
---------------------------------------------------------------------------
1,324 1,798
---------------------------------------------------------------------------
Net future income tax asset $ 2,332 $ 2,470
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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, 2006, 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 2026 $ 45,932
------------
------------

Canada (Provincial) expiring between 2013 and 2016 $ 37,101
------------
------------

United States (Federal) expiring between 2008 and 2024 $ 7,154
------------
------------

Approximately $5,014,000 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.


13. 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 most recent Report on the Actuarial Valuation for Funding Purposes for the Silicon Group Plan is dated as of December 31, 2005 and as of January 1, 2006 for the Magnesium Group Plan. The Corporation is scheduled to have the next detailed actuarial valuation as at January 1, 2007 for the Magnesium Group and December 31, 2008 for the Silicon Group. The Magnesium Group valuation will be performed during 2007, while the Silicon Group valuation will be performed during 2009.

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



(000's) 2006 2006 2005 2005
---------------------------------------------------------------------------
Other Post Other Post
Pension Retirement Pension Retirement
Plans Plan Plans Plan

Accrued benefit
obligation:
Balance, beginning of year $ 57,550 $ 13,467 $ 46,785 $ 9,190
Adjustment to reflect new
valuation results - - 805 -
Current service cost, net
of plan expenses 1,462 352 1,297 225
Employee contribution 315 - 284 -
Past service cost of
current year plan
amendment 437 - - 82
Cost of early retirement
window - - 147 -
Interest cost 2,945 645 2,863 561
Net actuarial loss 1,417 (595) 6,994 3,550
Benefits paid (2,815) (147) (1,625) (141)
---------------------------------------------------------------------------
Balance, end of year $ 61,311 $ 13,722 $ 57,550 $ 13,467
---------------------------------------------------------------------------

Plan assets:
Fair value, beginning of
year $ 42,284 $ - $ 37,239 $ -
Actual contributions by
the Corporation 2,380 147 2,431 141
Actual contributions by
employees 315 - 284 -
Actual return on plan assets 4,544 - 4,030 -
Expected plan expenses (75) - (75) -
Benefits paid (2,815) (147) (1,625) (141)
---------------------------------------------------------------------------
Fair value, end of year $ 46,633 $ - $ 42,284 $ -
---------------------------------------------------------------------------

Funded status - deficit $ (14,678) $ (13,722) $(15,266) $(13,467)
Unamortized transitional
asset (325) - (361) -
Unamortized past service
cost 1,051 68 806 78
Unamortized net actuarial
loss 9,197 2,935 9,557 3,702
---------------------------------------------------------------------------
Employee future benefits $ (4,755) $ (10,719) $ (5,264) $ (9,687)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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, 2006 and December 31, 2005):



2006 2006 2005 2005
---------------------------------------------------------------------------
Other Post Other Post
Pension Retirement Pension Retirement
Plans Plan Plans Plan
---------------------------------------------------------------------------
Accrued benefit obligation % % % %
as of December 31:

Discount rate 5.0 - 5.25 5.25 5.0 5.0

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

Benefit costs for years
ended December 31:

Discount rate 5.0 5.0 6.0 6.0
Expected long-term rate of
return on plan assets 7.0 n/a 7.5 n/a

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


2006 2005
--------------------
Assumed other retirement benefit costs trend rates
as of December 31:
Initial weighted average health care trend rate 5.89 6.42
Ultimate weighted average health care trend rate 4.30 4.30
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 6.42 7.78
Ultimate weighted average health care trend rate 4.30 4.58
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, 2006 ending December 31, 2006
---------------------------------------------------------------------------
Valuation trend + 1% $ 16,868 $ 1,298
Valuation trend -1 % $ 11,378 $ 844
---------------------------------------------------------------------------




The Corporation's net benefit plan expense is as follows:
(000's) 2006 2006 2005 2005
---------------------------------------------------------------------------
Other Post Other Post
Pension Retirement Pension Retirement
Plans Plan Plans Plan
Current service cost $ 1,537 $ 352 $ 1,372 $ 225
Past service cost arising
from current period plan
initiation / amendment 437 - 147 82
Interest cost on accrued
benefit obligation 2,945 645 2,863 561
Actual return on plan assets (4,544) - (4,030) -
Actuarial loss during
current period on
accrued benefit
obligation 1,417 (595) 6,994 3,550
---------------------------------------------------------------------------
1,792 402 7,346 4,418

Adjustments to recognize
long-term nature of future
employee benefit costs:
Difference between actual
and expected return on
plan assets 1,538 - 1,201 -
Difference between recognized
and actual actuarial loss (1,175) 767 (7,246) (3,702)
Difference between amortization
of past service costs and
actual plan amendments (244) 12 132 (79)
Amortization of transitional
asset (36) - (36) -
---------------------------------------------------------------------------
Net benefits plan expense $ 1,875 $ 1,181 $ 1,397 $ 637
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Plan assets by asset category
2006 2005
--------------------
% %

Pension plan
Equity 54 59
Debt 46 38
Other - 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.

14. RELATED PARTY TRANSACTIONS

In addition to the related party transactions noted elsewhere in the financial statements, in 2005 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 2006, 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 $0.2 million (2005: $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 $500,000 was repaid in November 2005, and the loan of $133,000 was repaid in October 2006.

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

On December 13, 2006, the Company borrowed Euro 700,000 from an affiliate of Safeguard, the Company's controlling shareholder. The loan bears interest at 11%, is due December 31, 2007 and the proceeds were used to invest in the common shares of Fundo.

15. 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, 2006, the Corporation held the following forward exchange contracts:



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

United States dollars 26,380 29,581 28,634 (947)
Euros 3,390 5,058 4,919 (139)


The unrealized gain/loss 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.

16. 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, 2006:



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

2007 $ 898
2008 820
2009 494
2010 -
2011 -
---------------------------------------------------------------------------
$ 2,212
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

Legal actions

During 2006, the Company was subject to a United States Department of Commerce ("DOC") scope inquiry to determine whether Timminco's product, exported from Canada into the United States, was covered by anti-dumping orders on magnesium from China and Russia. On September 1, 2006 the DOC released a preliminary finding which indicated that Timminco's products were not covered by the anti dumping orders on magnesium from China and Russia and on November 9 the DOC released a final ruling in this matter which confirmed their preliminary findings that Timminco's exports were not in violation of the anti-dumping ruling.

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.

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.

17. SEGMENTED INFORMATION

The Corporation manages its business along two principal 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. Segmented information on sales and identifiable assets by geographic region is as follows:



(a) Sales:

2006 2005
---------------------------------------------------------------------------
(000's) Magnesium Silicon Total Magnesium Silicon Total
---------------------------------------------------------------------------
Canada $ 9,526 $ 18,155 $ 27,681 $ 10,214 $ 14,773 $ 24,987
United
States 47,764 43,822 91,586 54,086 56,622 110,708
Mexico 4,836 - 4,836 4,149 11 4,160
Europe 4,906 39,333 44,239 8,651 26,520 35,171
Australia 3,840 - 3,840 4,642 - 4,642
Pacific Rim 2,036 719 2,755 1,963 1,223 3,186
Other 828 473 1,301 1,383 111 1,494
---------------------------------------------------------------------------
$ 73,736 $ 102,502 $ 176,238 $ 85,088 $ 99,260 $ 184,348
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(b) Net loss:

2006
---------------------------------------------------------------------------
(000's) Magnesium Silicon Other Total
---------------------------------------------------------------------------
Net income (loss) before
the following: $ 1,672 $ 2,901 $ (4,399) $ 174
Amortization of PP&E and
deferred financing costs 3,778 3,122 19 6,919
Interest 1,737 1,696 - 3,433
Gain on disposal of PP&E (301) - - (301)
Reorganization costs 1,816 218 - 2,034
Impairment of PP&E 31,223 - - 31,223
Income tax expense
(recovery) 841 (805) - 36
Equity in the loss of
Fundo - - 3,063 3,063
---------------------------------------------------------------------------
Net loss $ (37,422) $ (1,330) $ (7,481) $ (46,233)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

Net income (loss) before
the following: $ 1,541 $ 5,846 $ (4,995) $ 2,392
Amortization of PP&E and
deferred financing costs 3,961 3,673 18 7,652
Interest 1,250 1,449 - 2,699
Loss on disposal of PP&E 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 (loss) income $ (11,828) $ 525 $ (4,492) $ (15,795)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(c) Identifiable assets:

(000's) Magnesium Silicon December 31,2006
---------------------------------------------------------------------------

Canada $12,092 $76,602 $88,694
United States and Other 24,308 - 24,308
---------------------------------------------------------------------------
$36,400 $76,602 $113,002
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(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
---------------------------------------------------------------------------


(d) Property, Plant & Equipment:

(000's) 2006 2005
---------------------------------------------------------------------------
Magnesium $ 4,033 $ 35,801
Silicon 14,247 12,789
---------------------------------------------------------------------------
$ 18,280 $ 48,590
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(e) Additions to Property, Plant & Equipment:

(000's) 2006 2005
---------------------------------------------------------------------------

Magnesium $ 484 $ 1,417
Silicon 3,808 2,047
---------------------------------------------------------------------------
$ 4,292 $ 3,464
---------------------------------------------------------------------------
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Economic dependence

In 2006, three customers accounted for 15%, 12% and 11% (2005 - 9%, 16% and 12%) of total sales respectively.

18. COMPARATIVE FIGURES

Certain of the 2005 comparative figures have been reclassified to conform with the financial statement presentation adopted in 2006.

19. SUBSEQUENT EVENTS

Subsequent to year end, in March 2007, the Corporation and Safeguard, through an affiliate, entered into a promissory note pursuant to which Safeguard loaned $4.5 million to the Corporation to expedite product development and to fund its further investment in Fundo Wheels. 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 $0.42 per common share.

On March 15, 2007, the Corporation announced that its Silicon Group has signed a contract to supply up to 4,000 tonnes of high purity silicon to a customer. This contract is the Silicon Group's first sale of high grade silicon used in the solar cell market.

Sedar File Profile #00000838

Contact Information

  • Timminco Limited
    Mr. John Walsh
    President & CEO
    (416) 364-5171
    (416) 364-3451 (FAX)
    Email: jwalsh@timminco.com
    or
    Timminco Limited
    Robert Dietrich
    Executive Vice President & CFO
    (416) 364-5171
    (416) 364-3451 (FAX)
    Email: rdietrich@timminco.com