Timminco Limited
TSX : TIM

Timminco Limited

August 13, 2007 19:42 ET

Timminco Announces Second Quarter 2007 Results

- The Company raised $27.8 million in a common share offering that closed April 30, 2007 - Proceeds of the Offering were used to repay the Company's revolving bank line - A US$ 2 million convertible note payable to Safegauard International was converted into common equity on April 30, 2007 - The Company broke ground on its new solar silicon production facility on July 30, 2007

TORONTO, ONTARIO--(Marketwire - Aug. 13, 2007) - Timminco Limited (TSX:TIM) announced its financial results for the second quarter ended June 30, 2007.

OVERVIEW

For the quarter ended June 30, 2007, the net loss was $1.5 million or $0.02 per share compared with a net loss of $2.5 million or $0.03 per share in the second quarter of 2006. For the six months ended June 30, 2007, the net loss was $4.6 million or $0.06 per share compared with a net loss of $4.4 million or $0.06 per share in the same period in 2006.

Sales for the second quarter of 2007 were $41.2 million which is the same figure as the sales in the second quarter of 2006. For the six months ended June 30, 2007, sales were $82.9 million compared with $86.1 million in the first six months of 2006.

On a segmented basis both the Silicon and Magnesium businesses reported a net profit in the second quarter of 2007 offset by corporate expenses and the Company's equity accounting for its share of the net loss of Fundo Wheels.

"The Company continued to make progress towards its goal of sustainable profitable operations in the second quarter, with both operating businesses reporting a net profit and positive cash flow before investment in working capital, despite challenges in the second quarter which reduced their results," noted Robert Dietrich, Executive Vice-President and Chief Financial Officer of Timminco. "The Silicon Group's base business is well positioned with increasing pricing and strong demand for its production. The solar silicon production facility is proceeding on schedule for initial production in the fourth quarter with long lead-time equipment ordered and with ground breaking on the construction site on July 30, 2007", continued Mr. Dietrich.

"The Magnesium Group results are stabilizing due to a continued focus on cost reduction, operational improvement and extension of its off-shore supply chain," noted Mr. Dietrich.

RESULTS FOR THE SECOND QUARTER

The Company is divided into two segments: the Silicon Group and the Magnesium Group.

Silicon Group

In the Silicon Group, sales for the second quarter of 2007 were $24.4 million compared with $20.8 million in the second quarter of 2006, an increase of $3.6 million. For the six months ended June 30, 2007, sales in the Silicon Group were $47.5 million compared with $43.9 million for the first six months of 2006. In the second quarter and on a year to date basis, there has been an increase in the sales of silicon metal compared to the same periods in 2006. Sales of ferrosilicon were increased marginally in the second quarter when compared to the second quarter of 2006. Sales of solar silicon from the Company's prototype facility were $0.8 million in the second quarter of 2007.

For the quarter ended June 30, 2007, the Silicon Group had a gross margin of $0.4 million or 1.5% of sales compared with a negative gross margin of $0.3 million or 1.5% of sales in the second quarter of 2006. For the six months ended June 30, 2007, gross margin was $2.0 million or 4.3% of sales compared with nil in the first six months of 2006. The increase in gross margin is related to higher selling prices for materials, predominantly silicon metal, negotiated for the 2007 fiscal year.

For the quarter ended June 30, 2007, the Silicon Group generated net profit of $0.5 million compared with a net loss of $0.2 million in the second quarter of 2006. For the six months ended June 30, 2007, net profit was $0.5 million compared with a net loss of $0.8 million in 2006.

Magnesium Group

Sales for the Magnesium Group for the second quarter of 2007 were $16.8 million compared to $20.4 million in the second quarter of 2006. For the six months ended June 30, 2007, sales were $35.4 million compared to $42.3 million in the first six months of 2006. Comparing the second quarter and the six months ended June 30, 2007 with the respective periods in the prior year, sales of anodes and concrete tools were lower in 2007. In addition, the Company withdrew from the photo engraving plate market in the first quarter of 2007. Actual tonnes sold decreased 3.8% in the second quarter of 2007 compared to the same quarter in 2006 and were flat on a year to date basis when compared to the prior year.

Gross margin in the Magnesium Group was $2.2 million or 13.4% of sales in the second quarter of 2007 compared to $2.6 million or 12.6% of sales in the second quarter of 2006. For the six months ended June 30, 2007, gross margin was $3.3 million or 9.4% of sales compared to $6.0 million or 14.3% of sales during the first six months of 2006. In the second quarter of 2007, the increase in gross margin percentage was due to lower manufacturing variances and lower overheads. For the six months ended June 30, 2007, the decrease in gross margin percentage when compared to the same period in 2006 is due to higher manufacturing variances, which predominantly occurred in the first quarter, and was partially offset by lower overheads costs.

Amortization of capital assets in the second quarter of 2007 was $0.1 million, down from $1.0 million in the second quarter of 2006. The decrease in amortization was caused by the lower level of property, plant and equipment in the Magnesium Group, an outcome of the asset impairment charge of $31.2 million taken in December 2006.

For the quarter ended June 30, 2007, the Magnesium Group generated net profit of $0.5 million compared with a breakeven net profit in the second quarter of 2006. For the six months ended June 30, 2007, net loss was $1.2 million compared with a net profit of $0.1 million in 2006.

Other Matters

On March 7, 2006, the Company borrowed US$2 million from an affiliate of Safeguard International, the Company's controlling shareholder. On April 26, 2007, Safeguard exercised its right to convert the entire principal amount outstanding under this note into 5,601,000 common shares of the Company at a conversion rate of Cdn$0.40 per common share. The Canadian dollar equivalent of the United States dollars comprised in the principal amount of the note was $2.24 million.

Financial Highlights



(000's except per share data)
---------------------------------------
Three Months ended Six Months ended
(unaudited) (unaudited)
---------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
---------------------------------------
Sales 41,202 41,213 82,897 86,137

Gross profit 2,952 2,516 5,999 6,680

Gross profit percentage 7.2% 6.1% 7.2% 7.8%

Net income (loss) (1,502) (2,524) (4,621) (4,395)

Earnings (loss) per common share,
basic and diluted (0.02) (0.03) (0.06) (0.06)

Working capital (excluding cash
items) 22,143 33,939 22,143 33,939

Total assets 115,047 149,127 115,047 149,127

Bank debt 9,744 29,268 9,744 29,268

Total long term liabilities
excluding bank debt 22,903 22,981 22,903 22,981

Cash flow from operations (6,001) 2,459 (829) 211

Weighted average number of
common shares outstanding, basic
and diluted 86,913 75,133 81,055 75,133


ABOUT TIMMINCO

TIMMINCO LIMITED is a leader in the production of silicon metal for the electronics, chemical and aluminum industries. The Company has also commenced production of solar grade silicon metal. Other businesses of the Company include its leading global position as a producer and marketer of magnesium, calcium and strontium alloys and magnesium extruded and fabricated products. The Company's products are used in a broad range of specialized industrial applications and industries such as electronics, solar energy, chemical, engineered extruded products, pharmaceutical, automotive and metallurgical. The Company's common shares are traded on the Toronto Stock Exchange under the symbol TIM.

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. Such statements include comments regarding progress towards sustainable profitable operations, positioning of the silicon business, pricing and demand for the products of the Silicon Group, the value of its sales of high purity silicon, future demand for high purity silicon and the future pricing of such product.

Factors that may affect the Company and successful operations of the Company include 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. However, there can be no assurance that future developments affecting the Company will be those anticipated by the Company. 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 Discussion and Analysis for a description of the major risk factors. The Company disclaims any duty to update forward-looking statements other than through relevant future Management Discussion and Analysis.





Timminco Limited

Consolidated Balance Sheets
As at
June 30 December 31
2007 2006
(unaudited)
---------------------------------------------------------------------------
(in thousands of Canadian dollars)

ASSETS
Current Assets
Cash $ 758 $ 804
Accounts receivable 19,223 19,834
Inventories 31,272 33,830
Prepaid expenses and deposits 1,691 2,160
Future income taxes 225 225
---------- ----------
53,169 56,853
---------- ----------

Long term receivables 120 135
Property, plant and equipment 23,447 18,280
Investment in Fundo Wheels AS 9,448 9,173
Employee future benefits 2,085 2,034
Deferred financing costs - 526
Future income taxes 3,307 3,431
Intangible assets (Note 10) 5,163 4,262
Goodwill 18,308 18,308
---------- ----------
$ 115,047 $ 113,002
---------- ----------
---------- ----------

LIABILITIES
Current Liabilities
Bank indebtedness (Note 5) $ 6,382 $ 26,243
Accounts payable and accrued liabilities 22,738 25,062
Term bank debt (Note 5) 3,362 4,355
Due to affiliated companies (Note 4, 6 and 13) 5,451 5,497
Future income taxes 183 -
Current portion of long term provisions
(Note 11) 1,896 2,863
---------- ----------
40,012 64,020

Loan - other 184 202
Employee future benefits 17,832 17,508
Future income taxes 1,264 1,324
Long term provisions 3,623 3,720
---------- ----------
62,915 86,774
---------- ----------

SHAREHOLDERS' EQUITY
Capital stock (Note 6) 114,516 84,191
Equity component of convertible notes (Note
4, 6 and 13) 2,631 1,693
Contributed surplus 3,316 3,192
Deficit (67,552) (62,490)
Accumulated other comprehensive loss (Note
2 and 9) (779) (358)
---------- ----------
52,132 26,228
---------- ----------
$ 115,047 $ 113,002
---------- ----------
---------- ----------

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



Timminco Limited

Consolidated Statements of Operations, Comprehensive Loss and Deficit
(unaudited)

Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
---------------------------------------------------------------------------
(in thousands of Canadian dollars, except for earnings per share
information)

Sales $ 41,202 $ 41,213 $ 82,897 $ 86,137

Expenses
Cost of goods sold 38,250 38,697 76,898 79,457
Selling and
administrative 4,165 3,910 7,324 6,926
Amortization of
property, plant and
equipment 672 1,593 1,332 3,176
Amortization of
intangible assets 137 137 275 275
Amortization of
deferred financing
costs - 112 - 207
Interest 634 760 1,565 1,446
Foreign exchange
(gain) loss (2,484) (2,340) (1,443) (2,465)
------------- ------------ ------------- -----------

Loss before the
undernoted (172) (1,656) (3,054) (2,885)

Gain (loss) on sale
of property, plant
and equipment (44) 100 31 115
Reorganization costs (26) - (34) (28)
Equity loss of Fundo
Wheels AS (955) (1,025) (1,127) (1,478)

Loss before income
taxes (1,197) (2,581) (4,184) (4,276)
Income taxes
Current 107 (83) 187 214
Future 198 26 250 (95)
------------- ------------ ------------- -----------
305 (57) 437 119
------------- ------------ ------------- -----------

------------- ------------ ------------- -----------
Net loss $ (1,502) $ (2,524) $ (4,621) $ (4,395)
------------- ------------ ------------- -----------
------------- ------------ ------------- -----------

Other Comprehensive
Loss, net of income
taxes

Loss on foreign
exchange forwards
realized in the period - - 1,086 -

Unrealized gain
(loss) on
translating
financial
statement of
self-sustaining
foreign operation
- Fundo Wheels AS (409) 50 (421) 288
-------------- ------------ ------------- -----------
Comprehensive Loss $ (1,911) $ (2,474) $ (3,956) $ (4,107)
-------------- ------------ ------------- -----------
-------------- ------------ ------------- -----------

Loss per common share
basic and diluted $ (0.02) $ (0.03) $ (0.06) $ (0.06)
-------------- ------------ ------------- -----------
-------------- ------------ ------------- -----------

Weighted average
number of common
shares outstanding
- basic and
diluted (Note 6 (b)) 86,912,782 75,132,614 81,055,240 75,132,614
-------------- ------------ ------------- -----------
-------------- ------------ ------------- -----------



Consolidated Statements of
Deficit (unaudited)
Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
---------------------------------------------------------------------------
(in thousands of Canadian
dollars)

Deficit at beginning of
period $ (66,050) $ (890) $ (62,490) $ (16,257)
Net loss (1,502) (2,524) (4,621) (4,395)
Adjustment for changes
in accounting policy
(Note 2) - - (441) -
---------- -------- ---------- ----------
Deficit at end of
period $ (67,552) $(3,414) $ (67,552) $ (20,652)
---------- -------- ---------- ----------
---------- -------- ---------- ----------

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



Timminco Limited

Consolidated Statements of Cash Flows
(unaudited)
Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
---------------------------------------------------------------------------
(in thousands of Canadian dollars)

Cash flows from operating
activities
Net loss $(1,502) $(2,524) $(4,621) $(4,395)
Adjustments for items not
requiring cash
Amortization of property,
plant and equipment 672 1,593 1,332 3,176
Amortization of intangible assets 137 137 275 275
Amortization of deferred
financing costs - 112 - 207
Stock based compensation 120 110 234 235
Reorganization costs 26 - 34 28
Benefits plan expense 655 747 1,395 1,494
Gain on disposal of property,
plant and equipment 44 (100) (31) (115)
Future income taxes 247 97 332 (25)
Equity loss of Fundo Wheels AS 955 1,025 1,127 1,478
Defined benefit pension plan
contributions (500) (267) (1,122) (1,367)
Expenditures charged against
provision for reorganization (384) (446) (1,061) (1,169)
Expenditures charged against
other long term provisions (19) (60) (37) (53)

Change in non-cash working
capital items
(Increase) decrease in
accounts receivable (3,684) 2,301 611 904
(Increase) decrease in
inventories (3,383) (1,599) 2,558 (605)
(Increase) decrease in prepaid
expenses and deposits (514) 32 469 (70)
Increase (decrease) in accounts
payable and accrued liabilities 1,129 1,301 (2,324) 213
------------------------------------------
(6,001) 2,459 (829) 211
------------------------------------------

Cash flows from investing
activities
Capital expenditures (5,398) (1,842) (7,190) (2,162)
Development costs capitalized
(Note 10) (1,176) - (1,176) -
Investment in Fundo Wheels AS
(Note 3 and 4) - - (1,823) -
Decrease in long term receivables 10 27 15 45
Proceeds on disposal of property,
plant and equipment (43) 100 764 115
Other (23) (256) (42) (251)
------------------------------------------
(6,630) (1,971) (9,452) (2,253)
------------------------------------------

Cash flows from financing
activities
Decrease in bank indebtedness (12,755) (437) (19,861) (1,930)
Decrease in term bank debt (624) (324) (1,011) (653)
(Decrease) increase in loans
from affiliated companies (1,408) (55) 3,132 2,292
Expenditures charged against
deferred financing costs - (2) - (59)
Issuance of capital stock 27,975 - 27,975 -
------------------------------------------
13,188 (818) 10,235 (350)
------------------------------------------

Increase (decrease) in cash 557 (330) (46) (2,392)

Cash at beginning of period 201 418 804 2,480

------------------------------------------
Cash at end of period $ 758 $ 88 $ 758 $ 88
------------------------------------------
------------------------------------------

Supplemental information
Cash paid during the period:
Interest $ 554 $ 747 $ 1,269 $ 1,423
------------------------------------------
------------------------------------------
Income taxes $ 12 $ 312 $ 134 $ 651
------------------------------------------
------------------------------------------

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


Timminco Limited

Notes to the Interim Consolidated Financial Statements

For the quarter ended June 30, 2007 and 2006

Unaudited

The notes presented in these interim consolidated financial statements refer to only significant events and transactions since December 31, 2006 and are not fully inclusive of all matters normally disclosed in the Company'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, 2006.

1. NATURE OF OPERATIONS

Timminco Limited (the "Company" 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 Company 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. During the first quarter, the Company's controlling shareholder, Safeguard International Fund, L.P. ("Safeguard") transferred its common shares of the Company to AMG Advanced Metallurgical Group, NV ("AMG"). On July 11, 2007, Safeguard publicly listed AMG in the Netherlands on the Euronext Amsterdam stock exchange.

2. CHANGE IN ACCOUNTING POLICIES AND ACCOUNTING CHANGES

These interim consolidated financial statements have been prepared using the same accounting policies and methods as were used for the consolidated financial statements for the year ended December 31, 2006, except for the following new accounting pronouncements which have been adopted effective January 1, 2007:

On January 1, 2007, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants ("CICA") Handbook: Section 1530, Comprehensive Income, Section 3251, Equity, Section 3855, Financial Instruments - Recognition and Measurement, Section 3861, Financial Instruments - Disclosure and Presentation and Section 3865, Hedges. These new Handbook Sections, which apply to fiscal years beginning on or after October 1, 2006, provide comprehensive requirements for the recognition and measurement of financial instruments, as well as standards on when and how hedge accounting may be applied. Section 1530 also establishes standards for reporting and displaying comprehensive income. Comprehensive income is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income, but that are excluded from net income calculated in accordance with generally accepted accounting principles.

Under Section 3855, all financial instruments are classified into one of the following five categories: held-for trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are included in the consolidated balance sheet and are measured at fair value with the exception of loans and receivables, investments held-to- maturity and other financial liabilities, which are measured at amortized cost. Subsequent measurement and recognition of changes in fair value of financial instruments depend on their initial classification. Held-for- trading investments are measured at fair value and all gains and losses are included in net income in the period in which they arise. Available-for-sale financial assets are measured at fair value with revaluation gains and losses included in other comprehensive income until the asset is derecognized or impaired. As a result of the adoption of these new standards, the Company has classified its cash as held-for-trading. Receivables are classified as loans and receivables. Foreign forward exchange contracts, included in prepaid expenses and deposits, are classified as held-for-trading. The Company's investment in Fundo Wheels AS is accounted for under the equity method. Unrealized gains and losses from the translation into Canadian dollars of this equity investment are now presented as a separate component of other comprehensive income (loss). In accordance with Section 3251, accumulated other comprehensive income (loss) is presented as a separate component of shareholders' equity in the Consolidated Balance Sheets. Previously, these gains and losses were deferred and included in the foreign currency translation adjustment as part of shareholders' equity. Accounts payable and accruals and short-term debt, including interest payable, are classified as other financial liabilities. The principal changes in the accounting for financial instruments and hedging relationships due to the adoption of these accounting standards are described below.

Comprehensive Income

The Company's comprehensive loss is composed of net loss and other comprehensive loss ("OCL"). OCL includes the deferred loss on the foreign exchange forward contracts (see discussion under "Hedges" below) and their reclassification in the statements of operations during the period, as well as the foreign currency loss on the Company's investment in Fundo Wheels AS.

Equity

Accumulated other comprehensive income ("AOCI") is included on the consolidated balance sheet as a separate component of shareholders' equity.

Derivatives

Derivatives are carried at fair value and are reported as assets where they have a positive fair value and as liabilities where they have a negative fair value. Non-financial derivatives are carried at fair value unless exempted from derivative treatment as a normal purchase and sale. The Company has reviewed all significant contractual arrangements and determined there are no material non-financial derivatives that need to be carried at fair value.

Embedded derivatives

Derivatives embedded in other financial instruments or contracts are separated from their host contracts and accounted for as derivatives when their economic characteristics and risks are not closely related to those of the host contract; the terms of the embedded derivative are the same as those of a free standing derivative; and the combined instrument or contract is not measured at fair value, with changes in fair value recognized in interest and other expenses, net. These embedded derivatives are measured at fair value with changes therein recognized in interest and other expenses, net. The Company selected January 1, 2003 as the transition date for embedded derivatives, as such only contracts or financial instruments entered into or modified after the transition date were examined for embedded derivatives. As at June 30, 2007, the Company does not have any outstanding contracts or financial instruments with embedded derivatives that require bifurcation. The Company has chosen, as a matter of accounting policy, not to account for embedded foreign currency derivatives in host contracts that are not financial instruments separately from the host contracts when the currency that is commonly used in contracts to purchase or sell non-financial items in the economic environment is that currency in which the transaction takes place.

Transaction costs

Transaction costs directly attributable to the issuance of long-term debt are now expensed. Previously, these amounts were deferred and amortized using the straight line method over the term of the debt. During the first quarter, $0.4 million of transaction costs were recognized as an adjustment of the balance of retained earnings at the beginning of the period due to the adoption of this accounting policy.

Determination of fair value

The fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of a financial instrument on initial recognition is the transaction price, which is the fair value of the consideration given or received. Subsequent to initial recognition, the fair values of financial instruments that are quoted in active markets are based on bid prices for financial assets held and offer prices for financial liabilities. When independent prices are not available, fair values are determined by using valuation techniques which refer to observable market data. These include comparisons with similar instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants.

Hedges

Section 3865 of the CICA Handbook specifies the criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies: fair value hedges and cash flow hedges. Hedge accounting is discontinued prospectively when the hedging relationship ceases to be effective, when the hedging item or hedged item ceases to exist and when the entity terminates its designation of the hedging relationship. The Company does not have any forward contracts accounted for as hedges as at June 30, 2007. As at December 31, 2006, the Company accounted for its forward currency contacts using hedge accounting under Accounting Guideline 13 ("AcG 13"). As at January 1, 2007, the Company discontinued accounting for forward contracts under AcG 13, The deferred loss on the hedging item as at January 1, 2007 was transferred to accumulated other comprehensive loss and reclassified to the statement of operations when the hedged item affected the statement of operations in the period. Future changes in fair value (subsequent to January 1, 2007) of the Company's forward contracts will be recorded in foreign exchange gain/loss on the statement of operations and the forward contracts will be recorded at fair value as a prepaid item. As at June 30, 2007, the fair value loss on currency forward contracts was nil.

Transitional adjustment

Adoption of these standards was on a prospective basis without retroactive restatement of prior periods, except for the restatement of equity balances to reflect the reclassification of "Foreign currency translation adjustments" to "Accumulated other comprehensive income".

ACCOUNTING CHANGES

Effective January 1, 2007, the Company has adopted the new recommendations of the CICA Handbook Section 1506, Accounting Changes. Under these new recommendations, voluntary changes in accounting policy are permitted only when they result in the financial statements providing reliable and or relevant information, requires changes in accounting policy to be applied retrospectively unless doing so is impracticable, requires prior period errors to be corrected retrospectively and requires enhanced disclosures about the effects of changes in accounting policies, estimates and errors on the financial statements. These recommendations also require the disclosure of new primary sources of generally accepted accounting principles that have been issued but not yet effective. The impact that the adoption of this section will have on the Company's financial statements will depend on the nature of future accounting changes and the required additional disclosure on Recent Accounting Pronouncements as noted below.

Recent Accounting Pronouncements

Recent accounting pronouncements issued and not yet effective:

Capital Disclosures

CICA Handbook Section 1535, Capital Disclosures, requires disclosure of an entity's objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital and whether the entity has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance. This standard is effective for the Company for interim and annual financial statements beginning on January 1, 2008. The Company has not yet determined the impact of the adoption of this change on the disclosure in its financial statements.

Financial Instruments Disclosures

CICA Handbook Section 3862, Financial Instruments - Disclosures, increases the disclosures currently required that will enable users to evaluate the significance of financial instruments for an entity's financial position and performance, including disclosures about fair value. In addition, disclosure is required of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about liquidity risk and market risk. The quantitative disclosures must also include a sensitivity analysis for each type of market risk to which an entity is exposed, showing how net income and other comprehensive income would have been affected by reasonably possible changes in the relevant risk variable. This standard is effective for the Company for interim and annual financial statements beginning on January 1, 2008. The Company has not yet determined the impact of the adoption of this change on the disclosure in its financial statements.

Financial Instruments Presentation

CICA Handbook Section 3863, Financial Instruments - Presentation, replaces the existing requirements on presentation of financial instruments which have been carried forward unchanged to this new section. This standard is effective for the Company for interim and annual financial statements beginning on January 1, 2008. The Fund does not expect the adoption of this standard to have a material impact on presentation in its financial statements.

General Standards on Financial Statement Presentation

CICA Handbook Section 1400, General Standards on Financial Statement Presentation, has been amended to include requirements to assess and disclose an entity's ability to continue as a going concern. The changes are effective for the Company for interim and annual financial statements beginning January 1, 2008. The Company does not expect the adoption of these changes to have an impact on its financial statements.

International Financial Reporting Standards

The CICA plans to converge Canadian GAAP with International Financial Reporting Standards (IFRS) over a transition period expected to end in 2011. The impact of the transition to IFRS on the Company's financial statements is not yet determinable.

Inventories

The new Section 3031 "Inventories", was issued in June 2007 and replaces existing Section 3030 of the same title. It provides guidance with respect to the determination of cost and requires inventories to be measured at the lower of cost and net realizable value. Reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories is now required. The cost of the inventories should be based on a first-in, first-out or a weighted average cost formula. Techniques used for the measurement of cost of inventories, such as the retail method or standard cost method, may be used for convenience if the results approximate cost. The new standard also requires additional disclosures including the accounting policies used in measuring inventories, the carrying amount of the inventories, amounts recognized as an expense during the period, write-downs and the amount of any reversal of any write-downs recognized as a reduction in expenses. This standard is effective for fiscal years beginning on or after January 1, 2008. The difference in the measurement of opening inventory may be applied to the opening inventory for the period, with an adjustment to opening retained earnings with no prior periods restated, or retrospectively with a restatement to prior periods in accordance with Section 1506 "Accounting Changes". The standard is applicable to the Company for the first quarter of 2008. The Company is currently assessing the implications of this standard to identify differences between the current accounting and the new guidance in the standard.

3. 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 Company 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 Company'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 March 31, 2007, 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 Company 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 Company 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 Company 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 Company's ownership interest increased from 24.4% to 47% of Fundo.

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

In March 2007, the Company acquired an additional 453 shares of Fundo from treasury for $1,823,000. The Community also invested in Fundo such that the Company's ownership interest remained at 47%. The acquisition of the interest did not create any purchase discrepancy.

4. RELATED PARTY TRANSACTION

In March 2007, the Company and Safeguard, through an affiliate, entered into a promissory note pursuant to which Safeguard loaned $4.5 million to the Company 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 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 $0.42 per common share.

On April 26, 2007, Safeguard gave written notice to the Company that it was exercising its right to convert the entire principal amount outstanding under the US$2.0 million convertible promissory note issued March 7, 2006 to an affiliate of Safeguard into 5,601,000 common shares of the Company at a conversion rate of Cdn$0.40 per common share. The Canadian dollar equivalent of the United States dollars comprised in the principal amount of the note was $2.24 million.



5. BANK DEBT

(a) Bank debt at June 30, 2007 and December 31, 2006 was comprised as
follows:

(000's) June 30, 2007 December 31, 2006
--------------------------------------------------------------------------
Bank indebtedness $ 6,382 $ 26,243
Current portion of long term bank debt 3,362 4,355
--------------------------------------------------------------------------
$ 9,744 $ 30,598
--------------------------------------------------------------------------
--------------------------------------------------------------------------


At June 30, 2007, total bank debt denominated in US dollars amounted to US$9.2 million (December 31 2006 - US$27.3 million).

(b) As at March 31, 2006, the Company was in compliance with its banking covenants. As at June 30, 2006, the Bank 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 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 Company was in compliance. The Bank also amended the covenants for fiscal 2007. For the first three quarters of 2007, the Company must meet certain EBITDA levels and submit to limits on capital spending. The revised covenants for 2007 were based on the Company's 2007 budget. As at March 31 and June 30, 2007, the Bank amended the Agreement such that the Company was in compliance with its covenants as at those dates.

Furthermore, the Bank amended the banking agreement in 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 on November 30, 2007.

6. 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 Company.

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
Amount
No. of Shares (000's)
------------------------------------------------------------------------
Balance as at January 1 75,132,614 $ 84,191
Common share offering April 30 (Note 6b) 11,500,000 27,811
Conversion of note (Note 4 and 6b) 5,601,000 2,240
Stock options exercised 217,750 274
------------------------------------------------------------------------
Balance as at June 30, 2007 92,451,364 $ 114,516
------------------------------------------------------------------------
------------------------------------------------------------------------


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

On March 7, 2006, the Company borrowed US$2 million from an affiliate of Safeguard, the Company's controlling shareholder. On April 26, 2007, Safeguard gave written notice to the Company that it was exercising its right to convert the entire principal amount outstanding under this note into 5,601,000 common shares of the Company at a conversion rate of Cdn$0.40 per common share. The Canadian dollar equivalent of the United States dollars comprised in the principal amount of the note was $2.24 million.

On September 5, 2006, the Company borrowed US$3 million from Safeguard, the Company'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 of 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 Equity component of 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 agreement including the optional renewal period, to which the debt is subordinate.

On March 1, 2007, the Company borrowed $4.5 million from an affiliate of Safeguard 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 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 $0.42 per common share. 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 $2.8 million as Due to an affiliate in current liabilities and $1.7 million as Equity component of 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 65%, risk free rate of 3.96% and expected life of 3.2 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.

On April 30, 2007, the Company completed a public offering of 10,000,000 common shares at a price of Cdn$2.60 per common share for gross proceeds of Cdn$26,000,000. The offering was sold on a bought deal basis. The Underwriters also exercised their over-allotment option in full and purchased an additional 1,500,000 common shares at a price of Cdn$2.60 per common share for gross proceeds of Cdn$3,900,000. The total gross proceeds of the Offering was Cdn$29,900,000. Proceeds from the offering will be used primarily to expand the Company's high purity silicon facility at its wholly-owned subsidiary, Becancour Silicon Inc. and for general corporate purposes.

(c) The Company'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 Company subject to various vesting requirements. During 2004, the Company established a Share Option Plan (the "Plan") which supersedes the Stock Option Plan 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. On May 31, 2007 the number of common shares available for issuance of stock options was increased by 1,669,625 common shares. The maximum number of shares available for issuance under the Plan pursuant to stock options is, as at June 30, 2007, 8,230,425 common shares.

On January 31, 2007, 1,200,000 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 76.6%, risk free interest rate of 4.1% and expected option life of 7 years. The share option expense is being amortized, according to the vesting schedule, over a four year period.

A summary of the status of the Company's stock option plan as of June 30, 2007 and 2006, and changes during the periods ending on those dates is presented below:



2007 2006
--------------------------------------------
Weighted Weighted
Shares Average Shares Average
Exercise Exercise
(000's) Price (000's) Price
---------------------------------------------------------------------
Outstanding at January 1 3,844 $0.71 3,650 $0.78
Granted 1,200 $0.40 200 $0.29
Exercised (218) $0.76 - -
Forfeited (137) $0.66 (200) $0.59
---------------------------------------------------------------------
Outstanding at June 30 4,689 $0.63 3,650 $0.77
---------------------------------------------------------------------
---------------------------------------------------------------------


At June 30, 2007, 1,562,250 options were exercisable at a weighted average price of $0.87, with a weighted average remaining life of 3.9 years.

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

7. FINANCIAL INSTRUMENTS

The Company enters into foreign currency contracts to hedge foreign currency risk relating to certain cash flow exposures. The Company's forward exchange contracts reduce the Company'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 a multinational commercial bank and therefore credit risk of counterparty non-performance is remote. As at June 30, 2007, the Company had no outstanding exchange contracts. As at December 31, 2006, the Company had outstanding exchange contracts to sell approximately $26.4 million US dollars and EUR3.4 million over a period of 6 months at a weighted average exchange rate of $1.1213 and $1.4920, respectively. The Company recorded an unrealized loss of $1.1 million on these contracts.

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.

8. COMMITMENTS

The Company has committed to purchase $7.8 million of capital goods over the next six months related to its construction of a solar silicon production facility.



9. ACCUMULATED OTHER COMPREHENSIVE LOSS

The accumulated other comprehensive loss balances are as follows:


For the three For the six
months ended months ended
---------------------------------------------------------------------------
(000's) June 30, June 30, June 30, June 30,
2007 2006 2007 2006
---------------------------------------------------------------------------

Balance at beginning of period (370) (714) (358) (952)

Adjustment for changes in
accounting policies
Deferred unrealized
losses on foreign
exchange forward contracts - - (1,086) -
Other Comprehensive
(loss) income $ (409) $ 50 $ 665 $ 288
---------------------------------------------------------------------------
Balance at end of period $ (779 $ (664) $ (779) $ (664)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


10. INTANGIBLE ASSETS

The Company deferred development costs related to the production of solar grade silicon of $1.2 million during the quarter ended June 30, 2007. The deferred development costs will be amortized over a period of three years on a straight line basis once production commences.

11. REORGANISATION RESERVE

During the three months and six months ended June 30, 2007, cash payments of $0.4 million and $1.1 million were charged against the Reorganization reserve, respectively (2006 - $0.4 million and $1.2 million).

12. SEGMENTED INFORMATION

The Company 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
(000's) Magnesium Silicon Total 2007 Magnesium Silicon Total 2006
---------------------------------------------------------------------------

Canada $ 1,715 $ 3,716 $ 5,431 $ 2,609 $ 2,916 $ 5,525
United States 11,735 10,645 22,380 13,766 9,861 23,627
Mexico 894 11 905 1,129 - 1,129
Europe 706 9,409 10,115 1,115 7,688 8,803
Australia 1,064 - 1,064 1,015 - 1,015
Pacific Rim 448 553 1,001 547 277 824
Other 233 73 306 231 59 290
---------------------------------------------------------------------------
$ 16,795 $ 24,407 $ 41,202 $ 20,412 $ 20,801 $ 41,213
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Six months ended June 30
(000's) Magnesium Silicon Total 2007 Magnesium Silicon Total 2006
---------------------------------------------------------------------------
Canada $ 3,315 $ 7,639 $ 10,954 $ 5,722 $ 5,312 11,034
United States 24,874 22,745 47,619 27,641 19,584 47,225
Mexico 2,184 17 2,201 2,376 - 2,376
Europe 1,598 16,178 17,776 3,124 18,269 21,393
Australia 1,964 - 1,964 1,866 - 1,866
Pacific Rim 572 814 1,386 1,008 606 1,614
Other 870 127 997 531 98 629
---------------------------------------------------------------------------
$ 35,377 $ 47,520 $ 82,897 $ 42,268 $ 43,869 $ 86,137
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(b) Net profit (loss):

Three months ended June 30, 2007
(000's) Magnesium Silicon Other Total
---------------------------------------------------------------------------

Net income (loss) before the following $ 776 $ 1,969 $(1,474) $1,271

Amortization 74 731 4 809
Interest 110 524 - 634
Loss on disposal of capital assets 44 - - 44
Reorganization expense - 26 - 26
Equity earnings in Fundo Wheels AS - - 955 955
Income tax expense (recovery) 85 220 - 305
---------------------------------------------------------------------------
Net profit (loss) $ 463 $ 468 $(2,433) $(1,502)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Three months ended June 30, 2006
(000's) Magnesium Silicon Other Total
---------------------------------------------------------------------------

Net 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 137 (194) - (57)
---------------------------------------------------------------------------
Net profit (loss) $ 3 $ (161) $(2,366) $(2,524)
---------------------------------------------------------------------------
---------------------------------------------------------------------------



Six months ended June 30, 2007
(000's) Magnesium Silicon Other Total
---------------------------------------------------------------------------

Net income (loss) before the
following $ (253) $ 3,145 $ (2,774) $ 118

Amortization 155 1,443 9 1,607
Interest 622 943 - 1,565
Gain on disposal of capital assets (31) - - (31)
Reorganization expense - 34 - 34
Equity earnings of Fundo Wheels AS - - 1,127 1,127
Income tax expense (recovery) 164 273 - 437
---------------------------------------------------------------------------
Net profit (loss) $ (1,163) $ 452 $ (3,910) $(4,621)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Six months ended June 30, 2006
(000's) Magnesium Silicon Other Total
---------------------------------------------------------------------------
Net 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)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(c) Identifiable assets:

(000's) Magnesium Silicon June 30, 2007
--------------------------------------------------------------------------

Canada $ 8,692 $ 83,735 $ 92,427
United States and Other 22,620 - 22,620
---------------------------------------------------------------------------
$ 31,312 $ 83,735 $ 115,047
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(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
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(d) Property, Plant & Equipment:

(000's) June 30, 2007 December 31, 2006
------------------------------------------------------------------

Magnesium $ 3,630 $ 4,033
Silicon 19,817 14,247
------------------------------------------------------------------
$ 23,447 $ 18,280
------------------------------------------------------------------
------------------------------------------------------------------

(e) Additions to Property, Plant & Equipment:

(000's) Three months Three months Six months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------

Magnesium $ 248 $ - $ 453 $ 132
Silicon 5,150 1,842 6,737 2,030
--------------------------------------------------------------------------
$ 5,398 $ 1,842 $ 7,190 $ 2,162
--------------------------------------------------------------------------
--------------------------------------------------------------------------


(f) Major customers:

In 2007, one customer accounted for approximately 27% (25% in 2006) of total sales in the Magnesium Group.

In the Silicon Group four customers accounted for 25%, 22%, 10% and 9% (31%, 24%, 1% and 13% in 2006) of total sales respectively.

13. SUBSEQUENT EVENT

On July 23, 2007 the Company announced that AMG increased its ownership position in Timminco to 50.6% by exercising its call option to acquire 913,500 Timminco common shares from Safeguard. Safeguard received the shares through the conversion of US$350,000 principal amount of its US$3 million Promissory Note dated August 31, 2006.

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