Timminco Limited
TSX : TIM

Timminco Limited

August 14, 2006 22:25 ET

Timminco Announces Second Quarter 2006 Results

TORONTO, ONTARIO--(CCNMatthews - Aug. 14, 2006) - Timminco Limited (TSX:TIM) -

HIGHLIGHTS

- For the quarter, the net loss was $2.5 million or $0.03 per share, compared with a net loss of $3.0 million or $0.04 per share in the second quarter of 2005.

- Sales for the quarter were $41.2 million compared with $47.3 million in the second quarter of 2005.

- The Company completed an amended Banking Agreement

- 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 second quarter ended June 30, 2006.

OVERVIEW

The second quarter results were disappointing as operational problems in both the Magnesium and Silicon businesses resulted in significant costs.

"During the second quarter, sales of certain products in both Magnesium and Silicon were lower than forecast and operating challenges continued" stated Dr. Charles Entrekin, President and Chief Executive Officer of Timminco. "Both Silicon and Magnesium had difficult quarters, and current results require significant improvement. In the Silicon Group, the required maintenance of production equipment was performed in the second quarter, so the second half should demonstrate improvement and a return to normalized operating conditions and efficiencies. For Magnesium, continuing attention to operating conditions and variances must be maintained through the balance of 2006," continued Dr. Entrekin.

"In addition to restoring profitability, the continued reduction of bank debt through careful working capital management will also be critical to the Company for the balance of 2006. I have made these goals very clear to my team and I expect them to drive towards these goals aggressively, " noted Dr. Entrekin.

Results for the Second Quarter

For the quarter ended June 30, 2006, the net loss was $2.5 million or $0.03 per share, compared with a net loss of $3.0 million or $0.04 per share in the second quarter of 2005. For the six months ended June 30, 2006, the net loss was $4.4 million or $0.06 per share, compared with a net loss of $3.4 million or $0.05 per share in the first six months of 2005. Sales for the second quarter of 2006 were $41.2 million compared with $47.3 million in the second quarter of 2005. For the six months ended June 30, 2006, sales were $86.1 million, compared with $95.6 million during the first six months of 2005.

Magnesium Group

Sales for the Magnesium Group for the second quarter of 2006 were $20.4 million compared to $22.0 million in the second quarter of 2005. For the six months ended June 30, 2006, sales were $42.3 million compared to $44.2 million in the first six months of 2005. The strength of the Canadian dollar had a $1.8 million dollar unfavourable impact on sales in the quarter and $3.3 million for the first six months of 2006. Actual tonnes sold decreased in the second quarter of 2006 by 12.2% when compared to the second quarter of 2005. For the six months ended June 30, 2006, actual tonnes sold decreased 7.3% when compared to the first six months of 2005.

Gross margin in the Magnesium Group was $2.6 million or 12.6% of sales compared to $1.0 million or 4.7% of sales in the second quarter of 2005. For the six months ended June 30, 2006, gross margin was $6.0 million or 14.3% of sales compared to $3.8 million or 8.6% of sales during the first six months of 2005. During 2005, there was a significant production problem that had an impact of $1.5 million during the quarter. During the second quarter of 2006, overhead costs decreased $0.3 million compared to the second quarter of 2005, the result of the re-organization which commenced in December 2005.

Silicon Group

In the Silicon Group, sales for the second quarter of 2006 were $20.8 million compared with $25.2 million in the second quarter of 2005, a decrease of $4.4 million. For the six months ended June 30, 2006, sales in the Silicon Group were $43.9 million compared with $51.4 million for the first six months of 2005. The decrease in the quarter and the year to date was predominantly related to production problems in the Company's furnace facility and lower sales volumes for certain of the Group's products. During the quarter, the Company completed the partial refurbishment of two of its three furnaces. As a result of this activity, the Silicon Group does not anticipate similar production issues for the remaining two quarters of 2006. The strong Canadian dollar had an unfavourable impact on sales of $1.4 million during the second quarter of 2006 and $2.6 million for the first six months of 2006.

For the quarter ended June 30, 2006, the Silicon Group had a negative gross margin of $0.3 million or 1.8% of sales compared with a positive gross margin of $3.0 million or 12.0% in the second quarter of 2005. For the six months ended June 30, 2006, gross margin was nil compared with $5.8 million or 11.3 % of sales in the first six months of 2005. The decrease in gross margin was predominantly caused by lower production yields. Although the equipment repairs were completed on time and within budget, they resulted in lost production capacity. Furthermore, production capacity for the portion of the year prior to the repairs was lower than expected.

During the quarter, the Silicon Group recorded a gain of $1.4 million related to a research & development tax claim. The gain was recorded as a reduction of research and development expense, a component of manufacturing overhead. As well, during the second quarter, the Silicon Group sold certain foreign exchange forward contracts resulting in a gain of $1.2 million.

Selling and Administration Expenses of the Company

Selling and administration expenses were $3.9 million for quarter ended June 30, 2006, an increase of $0.6 million compared with the same quarter in 2005. For the six months ended June 30, 2006, selling and administration expenses were $6.9 million compared to $6.4 million for the first six months of 2005. The majority of the increase was legal expenses related to the United States Department of Commerce duty matter.

LIQUIDITY AND CAPITAL RESOURCES

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 Company 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 Company meets the requirements of the agreement. As at March 31, 2006, the Company was in compliance with its banking covenants. As at June 30, 2006, the Bank has further amended the banking agreement requiring the Company 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 will be measured at June 30, September 30 and December 31, 2006 and at March 31, 2007. As at June 30, 2006, the Company was in compliance with its covenants. For the twelve months ending June 30, 2007, the Company 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 Company'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 June 30, 2007.

On March 9, 2006, an affiliate of the Company's controlling shareholder, Safeguard International Fund L.P. ("Safeguard"), through an affiliate, loaned the Company 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 subordinated to the indebtedness and the security provided by the Company'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 Company at a conversion rate of CAD$0.40 per common share.

On August 8, 2006, Safeguard agreed to loan the Company US$3 million to assist in the development of new products and for general corporate purposes. 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. Under the terms of the loan, Safeguard has the option to convert the whole or any part of the outstanding principal amount at any time into common shares of the Company at a conversion rate of CAD$0.40 per common share.

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 responses to the inquiry to the DOC and a supplementary questionnaire in July 2006. In the event that US Mag is successful with its request, duties may be imposed on the Company. The DOC has indicated that it expects to reach a preliminary finding in this matter during the third 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 $4.8 million to $7.9 million for the period from September 2005, when the scope review was initiated, to June 2006. In the event that the Company is subject to an unfavourable ruling, the Company has plans to implement strategies to mitigate the impact. 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.



QUARTERLY INFORMATION
(000's except per share data)
-----------------------------------------
Three Months ended Six Months ended
(unaudited) (unaudited)
-----------------------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
-----------------------------------------
Sales 41,213 47,250 86,137 95,583
Gross profit 2,516 4,423 6,680 9,990
Gross profit percentage 6.1% 9.4% 7.8% 10.5%
Net income (loss) (2,524) (2,960) (4,395) (3,388)
Earnings (loss) per common
share, basic and diluted (0.03) (0.04) (0.06) (0.05)
Working capital (excluding
cash items) 33,939 40,831 33,939 40,831
Total assets 149,127 163,797 149,127 163,797
Bank debt 29,268 34,256 29,268 34,256
Total long term liabilities
excluding bank debt 22,981 20,941 22,981 20,941
Cash flow from operations 2,459 3,921 211 9,304
Weighted average number of
common shares outstanding,
basic and diluted 75,133 71,657 75,133 70,526


OUTLOOK

The quarter was disappointing as both business segments struggled with profitability. In the Magnesium business, the first quarter demonstrated improvements resultant from last year's restructuring, but in the second quarter, manufacturing variances and duty case expenses offset the positive gains from the first quarter. In the Silicon business, equipment repairs, although completed on time and within budget, resulted in lost production capacity. Furthermore, production capacity for the portion of the year prior to the repairs was lower than expected.

The Magnesium Group has implemented cost reductions in the first half of 2006. Their challenge is to continue with the cost reductions and reduce the variances such that profitability is maintained on a month-to-month basis.

For the Silicon Group, the first half of the year was difficult, but having spent the capital required to restore the furnaces to proper operating capacity, the challenge is to return to consistent profitability. We do not expect that the losses in the Silicon Group in the first half of 2006 can be recovered during the balance of 2006.

The Company believes it will continue to face a challenging operating environment for the balance of the fiscal year given current exchange and interest rates. However, changes made in past quarters, combined with new product and sourcing initiatives will contribute to improvements in operating performance in future quarters. The Company is focusing on enhancing cashflow from operations with tight working capital management to meet its banking covenants and fund new business initiatives that will drive profitable operations in 2007.

An adverse ruling in the Department of Commerce scope review would have a material impact on the Company. The cost of duties and the cost of the strategies required to remedy the situation would be material and without sufficient access to capital the Company's ability to operate as a going concern could be called into question.

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.

Sedar File Profile #00000838



Timminco Limited

Consolidated Balance Sheets
As at
June 30 December 31
2006 2005
(unaudited)
-----------------------------------------------------------------------
(in thousands of Canadian dollars)

ASSETS
Current Assets
Cash $ 88 $ 2,480
Accounts receivable 21,253 22,157
Inventories 38,753 38,148
Prepaid expenses and deposits 1,941 1,871
Future income taxes 713 713
------------ ------------
62,748 65,369
------------ ------------

Long term receivables 251 296
Capital assets 47,827 48,590
Investment in Fundo Wheels AS 9,394 10,584
Employee future benefits 1,761 1,837
Deferred financing costs 601 749
Future income taxes 3,700 3,555
Intangible assets 4,537 4,812
Goodwill 18,308 18,396
------------ ------------
$ 149,127 $ 154,188
------------ ------------
------------ ------------

LIABILITIES
Current Liabilities
Bank indebtedness (Note 3) $ 24,223 $ 26,153
Accounts payable and accrued
liabilities 26,967 27,470
Due to affiliated company (Note 2) 1,542 -
Current portion of long term bank
debt (Note 3) 1,282 1,341
Future income taxes 144 51
Current portion of long term
provisions 1,610 2,715
------------ ------------
55,768 57,730

Long term bank debt (Note 3) 3,763 4,357
Employee future benefits 17,555 16,788
Future income taxes 1,686 1,747
Long term provisions 3,740 3,829
------------ ------------
82,512 84,451
------------ ------------

SHAREHOLDERS' EQUITY
Capital stock (Note 4) 84,191 84,191
Convertible note (Note 4(b)) 750 -
Warrants (Note 4(b)) - 1,393
Contributed surplus (Note 4(b)) 2,990 1,362
Deficit (20,652) (16,257)
Foreign currency translation
adjustment (664) (952)
------------ ------------
66,615 69,737
------------ ------------
$ 149,127 $ 154,188
------------ ------------
------------ ------------

The accompanying notes are an integral part of these consolidated
financial statements. Please see Note 1 regarding a significant
contingency.

Timminco Limited
Consolidated Statements of Operations
(unaudited)

Three months ended June 30 Six months ended June 30
2006 2005 2006 2005
------------------------------------------------------------------------
(in thousands of Canadian dollars, except for
earnings per share information)

Sales $ 41,213 $ 47,250 $ 86,137 $ 95,583

Expenses
Cost of goods
sold 38,697 42,827 79,457 85,593
Selling and
administrative 3,914 3,251 6,947 6,402
Amortization of
capital assets 1,593 1,738 3,176 3,270
Amortization of
intangible
assets 137 - 275 -
Amortization of
deferred
financing costs 112 67 207 93
Interest 760 694 1,446 1,410
Foreign exchange
(gain) loss (2,340) 243 (2,465) 715
------------ ---------- -------------------------

Loss before the
undernoted (1,660) (1,570) (2,906) (1,900)

Gain on sale of
capital assets 100 - 115 -
Reorganization
costs - (839) (28) (839)
Other income 4 4 21 21
Equity (loss)
earnings of
Fundo Wheels AS (1,025) (168) (1,478) 30
------------ ---------- ----------- -----------

Loss before
income taxes (2,581) (2,573) (4,276) (2,688)
Income taxes
Current (83) 1,208 214 1,490
Future 26 (821) (95) (790)
------------ ----------- ------------ ------------
(57) 387 119 700
------------ ----------- ------------ ------------
Net loss $ (2,524) $ (2,960) $ (4,395) $ (3,388)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Loss per common
share - basic
and diluted $ (0.03) $ (0.04) $ (0.06) $ (0.05)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------

Weighted average
number of common
shares
outstanding -
basic and
diluted (Note 4
(b)) 75,132,614 71,657,339 75,132,614 70,526,260
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------


Consolidated Statements of Deficit
(unaudited)

Three months ended June 30 Six months ended June 30
2006 2005 2006 2005
------------------------------------------------------------------------
(in thousands of Canadian dollars)

Deficit at
beginning of
period $ (18,128) $ (890) $ (16,257) $ (462)
Net loss (2,524) (2,960) (4,395) (3,388)
------------ ----------- ------------ ------------
Deficit at end
of period $ (20,652) $ (3,850) $ (20,652) $ (3,850)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------

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


Timminco Limited

Consolidated Statements of Cash Flows
(unaudited)

Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-----------------------------------------------------------------------
(in thousands of Canadian dollars)

Cash flows from operating
activities
Net loss $ (2,524) $ (2,960) $ (4,395) $ (3,388)
Adjustments for items not
requiring cash
Amortization of capital
assets 1,593 1,738 3,176 3,270
Amortization of intangible
assets 137 - 275 -
Amortization of deferred
financing costs 112 67 207 93
Stock based compensation 110 84 235 168
Reorganization costs - 839 28 839
Benefits plan expense 747 640 1,494 1,280
Gain on disposal of capital
assets (100) - (115) -
Future income taxes and tax
benefit of share issue costs 97 (821) (25) (790)
Equity loss (earnings) of
Fundo Wheels AS 1,025 168 1,478 (30)
Defined benefit pension plan
contributions (267) (344) (1,367) (692)
Expenditures charged against
provision for reorganization (446) (93) (1,169) (206)
Expenditures charged against
other long term provisions (60) 24 (53) 27

Change in non-cash working
capital items
Decrease in accounts
receivable 2,301 610 904 1,001
(Increase) decrease in
inventories (1,599) 2,087 (605) 6,447
Decrease (increase) in
prepaid expenses and
deposits 32 (500) (70) 1,239
Increase in accounts payable
and accrued liabilities 1,301 2,382 213 46
-------- --------- ------- --------
2,459 3,921 211 9,304
-------- --------- ------- --------

Cash flows from investing
activities
Capital expenditures (1,842) (1,485) (2,162) (1,999)
Investment in Fundo Wheels
AS - (2) - (2)
Decrease in long term
receivables 27 17 45 39
Proceeds on disposal of
capital assets 100 - 115 -
Other (256) (4) (251) (83)
-------- --------- ------- --------
(1,971) (1,474) (2,253) (2,045)
-------- --------- ------- --------

Cash flows from financing
activities
(Decrease) increase in bank
indebtedness (Note 3) (437) 18,141 (1,930) 17,996
Decrease in long term bank
debt (Note 3) (324) (18,858) (653) (20,533)
Decrease in loan from
related party - (1,407) - (1,407)
(Decrease) increase in loan
from affiliated company
(Note 2) (55) - 2,292 -
Expenditures charged against
deferred financing costs (2) (752) (59) (835)
Issuance of capital stock - (50) - (50)
Change in restricted cash - (40) - (40)
-------- --------- ------- --------
(818) (2,966) (350) (4,869)
-------- --------- ------- --------

(Decrease) increase in cash (330) (519) (2,392) 2,390

Cash at beginning of period 418 3,477 2,480 568
-------- --------- ------- --------

Cash at end of period $ 88 $ 2,958 $ 88 $ 2,958
-------- --------- ------- --------
-------- --------- ------- --------
Supplemental information
Cash paid during the
period:
Interest $ 747 $ 738 $ 1,423 $ 1,131
-------- --------- ------- --------
-------- --------- ------- --------
Income taxes $ 312 $ 202 $ 651 $ 324
-------- --------- ------- --------
-------- --------- ------- --------

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

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


Timminco Limited
Notes to Consolidated Financial Statements
For the quarter ended June 30, 2006
Unaudited

The notes presented in these interim consolidated financial statements refer to only significant events and transactions since December 31, 2005 and are not fully inclusive of all matters normally disclosed in the Corporation's annual audited financial statements including the disclosures required by Canadian Generally Accepted Accounting Principles ("GAAP"). Accordingly, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2005. These interim financial statements follow the same accounting policies and methods of application as the most recent annual financial statements.

1. SIGNIFICANT CONTINGENCY

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 into the United States, 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 and submitted a supplementary questionnaire in July 2006. In the event that US Mag is successful with its request, duties may be imposed on the Corporation. The DOC has indicated that it expects to reach a preliminary finding in this matter during the third 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 $4.8 million to $7.9 million for the period from September 2005, when the scope review was initiated, to June 2006. 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. RELATED PARTY TRANSACTION

On March 9, 2006, the Corporation's controlling shareholder, Safeguard International Fund L.P. ("Safeguard"), 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.

On August 8, 2006, Safeguard agreed to loan the Corporation US$3 million to assist in the development of new products and for general corporate purposes. 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 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.

3. BANK DEBT

(a) Bank debt at June 30, 2006 and December 31, 2005 was comprised as follows:



(000's) June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Bank indebtedness $ 24,223 $ 26,153
Current portion of long term bank debt 1,282 1,341
Long term bank debt 3,763 4,357
------------------------------------------------------------------------
$ 29,268 $ 31,851
------------------------------------------------------------------------
------------------------------------------------------------------------


At June 30, 2006, total bank debt denominated in US dollars amounted to US$26.4 million.

(b) 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. As at March 31, 2006, the Corporation was in compliance with its banking covenants. As at June 30, 2006, the Bank has 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 will be measured at June 30, September 30 and December 31, 2006 and at March 31, 2007. As at June 30, 2006, the Corporation was in compliance with its covenants. For the twelve months ending June 30, 2007, 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 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 June 30, 2007.

4. 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
(000's)
------------------------------------------------------------------------
Balance as at June 30, 2006 and
December 31, 2005 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 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 agreement including the optional renewal period, to which the debt is subordinate.

(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) A summary of the status of the Corporation's two stock option plans as of June 30, 2006 and 2005, and changes during the periods ending on those dates is presented below:



Weighted Weighted
2006 Average 2005 Average
Shares Exercise Shares Exercise
(000's) Price (000's) Price
----------------------------------------------------------------------
Outstanding at January 1 3,650 $ 0.78 2,145 $ 1.11
Granted 200 $ 0.29 - -
Forfeited (200) $ 0.59 (90) $ 1.33
----------------------------------------------------------------------
Outstanding at June 30 3,650 $ 0.77 2,055 $ 1.10
----------------------------------------------------------------------
----------------------------------------------------------------------


On May 8, 2006, 200,000 stock options were granted under the 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.

At June 30, 2006, 955,000 options were exercisable at a price of $0.96, with a weighted average remaining life of 4.7 years.

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

5. 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 June 30, 2006, the Corporation had outstanding exchange contracts to sell 24.0 million US dollars over a period of 6 months at a weighted average exchange rate of $1.11. These contracts have been designated as hedges and are accounted for as such.

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.

6. 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"). Segmented information on sales and identifiable assets by geographic region is as follows:

(a) Sales:



Three months ended June 30
Total Total
(000's) Magnesium Silicon 2006 Magnesium Silicon 2005
------------------------------------------------------------------------
Canada $ 2,609 $ 2,916 $ 5,525 $ 3,224 $ 3,773 $ 6,997
United States 13,766 9,861 23,627 13,580 16,002 29,582
Mexico 1,129 - 1,129 954 6 960
Europe 1,115 7,688 8,803 2,061 5,081 7,142
Australia 1,015 - 1,015 1,259 - 1,259
Pacific Rim 547 277 824 669 332 1,001
Other 231 59 290 276 33 309
------------------------------------------------------------------------
$ 20,412 $ 20,801 $ 41,213 $ 22,023 $ 25,227 $ 47,250
------------------------------------------------------------------------
------------------------------------------------------------------------

Six months ended June 30
Total Total
(000's) Magnesium Silicon 2006 Magnesium Silicon 2005
------------------------------------------------------------------------
Canada $ 5,722 $ 5,312 $ 11,034 $ 5,973 $ 6,563 $ 12,536
United States 27,641 19,584 47,225 27,862 30,627 58,489
Mexico 2,376 - 2,376 1,995 6 2,001
Europe 3,124 18,269 21,393 4,232 13,460 17,692
Australia 1,866 - 1,866 2,441 - 2,441
Pacific Rim 1,008 606 1,614 1,144 649 1,793
Other 531 98 629 565 66 631
------------------------------------------------------------------------
$ 42,268 $ 43,869 $ 86,137 $ 44,212 $ 51,371 $ 95,583
------------------------------------------------------------------------
------------------------------------------------------------------------

(b) Net profit (loss):
Three months ended June 30, 2006
(000's) Magnesium Silicon Other Total
------------------------------------------------------------------------
Income (loss) before the
following: $ 1,476 $ 806 $ (1,336) $ 946

Amortization 1,014 711 5 1,730
Interest 365 395 - 760
Amortization of deferred
financing cost 57 55 - 112
(Gain) loss on disposal of
capital assets (100) - - (100)
Equity earnings of Fundo
Wheels AS - - 1,025 1,025
Income tax expense (recovery) 137 (194) - (57)
------------------------------------------------------------------------
Net profit (loss) $ 3 $ (161) $ (2,366) $ (2,524)
------------------------------------------------------------------------
------------------------------------------------------------------------

Three months ended June 30, 2005
(000's) Magnesium Silicon Other Total
------------------------------------------------------------------------
Income (loss) before the
following: $ (267) $ 2,515 $ (1,314) $ 934

Amortization 900 789 49 1,738
Interest 320 389 - 709
Amortization of deferred
financing cost 52 - - 52
(Gain) loss on disposal of
capital assets 1 - - 1
Reorganization expense 839 - - 839
Equity earnings of Fundo
Wheels AS - - 168 168
Income tax expense (recovery) (23) 410 - 387
------------------------------------------------------------------------
Net profit (loss) $ (2,356) $ 927 $ (1,531) $ (2,960)
------------------------------------------------------------------------
------------------------------------------------------------------------

Six months ended June 30, 2006
(000's) Magnesium Silicon Other Total
------------------------------------------------------------------------
Income (loss) before the
following: $ 3,555 $ 896 $ (2,232) $ 2,219

Amortization 2,031 1,411 9 3,451
Interest 731 715 - 1,446
Amortization of deferred
financing cost 102 105 - 207
(Gain) loss on disposal of
capital assets (115) - - (115)
Reorganization expense 28 - - 28
Equity earnings of Fundo
Wheels AS - - 1,478 1,478
Income tax expense (recovery) 662 (543) - 119
------------------------------------------------------------------------
Net profit (loss) $ 116 $ (792) $ (3,719) $ (4,395)
------------------------------------------------------------------------
------------------------------------------------------------------------

Six months ended June 30, 2005
(000's) Magnesium Silicon Other Total
------------------------------------------------------------------------
Income (loss) before the
following: $ 1,011 $ 4,530 $ (2,636) $ 2,905

Amortization 1,821 1,351 98 3,270
Interest 614 811 - 1,425
Amortization of deferred
financing cost 78 - - 78
(Gain) loss on disposal of
capital assets 11 - - 11
Reorganization expense 839 - - 839
Equity earnings of Fundo
Wheels AS - - (30) (30)
Income tax expense 10 690 - 700
------------------------------------------------------------------------
Net profit (loss) $ (2,362) $ 1,678 $ (2,704) $ (3,388)
------------------------------------------------------------------------
------------------------------------------------------------------------

(C) Identifiable assets:
June
(000's) Magnesium Silicon 30,2006
-----------------------------------------------------------------------

Canada $ 41,787 $ 74,454 $ 116,241
United States and Other 32,886 - 32,886
-----------------------------------------------------------------------
$ 74,673 $ 74,454 $ 149,127
-----------------------------------------------------------------------
-----------------------------------------------------------------------

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

Canada $ 44,738 $ 74,994 $ 119,732
United States and Other 34,456 - 34,456
-----------------------------------------------------------------------
$ 79,194 $ 74,994 $ 154,188
-----------------------------------------------------------------------
-----------------------------------------------------------------------

(d) Capital assets:
(000's) June 30, 2006 December 31, 2005
---------------------------------------------------------------------

Magnesium $ 34,144 $ 35,801
Silicon 13,683 12,789
---------------------------------------------------------------------
$ 47,827 $ 48,590
---------------------------------------------------------------------
---------------------------------------------------------------------

(e) Additions to Capital assets:

Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
----------------------------------------------------------------------

Magnesium $ - $ 346 $ 132 $ 572
Silicon 1,842 1,139 2,030 1,427
----------------------------------------------------------------------
$ 1,842 $ 1,485 $ 2,162 $ 1,999
----------------------------------------------------------------------
----------------------------------------------------------------------


(f) Major customers:

In 2006, two customers accounted for approximately 25% (24% in 2005) and 10% (10% in 2005) respectively, of total sales in the Magnesium Group.

In the Silicon Group three customers accounted for 31%, 24% and 13% (17%, 32% and 13% in 2005) respectively, of total sales respectively.

7. SUBSEQUENT EVENT

On August 8, 2006, the Corporation's controlling shareholder, Safeguard agreed to loan the Corporation US$3 million to assist in the development of new products and for general corporate purposes. 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 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