Timminco Limited
TSX : TIM

Timminco Limited

November 14, 2006 16:48 ET

Timminco Announces Third Quarter 2006 Results

HIGHLIGHTS - For the third quarter, the net loss was $3.1 million or $0.04 per share, compared with a net loss of $5.8 million or $0.08 per share in the third quarter of 2005. - Sales for the quarter were $44.1 million compared with $46.0 million in the third quarter of 2005. - The Company announced a restructuring of its Haley, Ontario operations. - On November 13th, 2006 the United States Department of Commerce released a final determination concluding that Timminco's products were not covered by the anti dumping orders on magnesium from China and Russia.

TORONTO, ONTARIO--(CCNMatthews - Nov. 14, 2006) - Timminco Limited (TSX:TIM) announced its financial results for the third quarter ended September 30, 2006.

OVERVIEW

The third quarter results showed some improvement over the comparable period in 2005, but were still unsatisfactory.

"During the third quarter, revenues in the Silicon Group increased and orders show signs of continued strengthening. We are optimistic that the fourth quarter and 2007 should continue with these positive trends. With the furnace maintenance complete, the challenge for the Silicon Group is to maximize production and meet increasing demand," stated Dr. Charles Entrekin, President and Chief Executive Officer of Timminco. "The Magnesium Group continues to struggle and management of that Group has taken significant actions to reduce costs and accordingly increase margins. The Magnesium Group are committed to making whatever changes they deem necessary in order to return to profitability," continued Dr. Entrekin.

"The two Groups have important goals in addition to restoring profitability: cash generation and working capital management. Management of both the Silicon and Magnesium Groups are keenly aware that meeting all of these goals are vital to restoring the Company's financial stability", noted Dr. Entrekin.

Results for the Third Quarter

For the quarter ended September 30, 2006, the net loss was $3.1 million or $0.04 per share, compared with a net loss of $5.8 million or $0.08 per share in the third quarter of 2005. For the nine months ended September 30, 2006, the net loss was $7.5 million or $0.10 per share, compared with a net loss of $9.2 million or $0.13 per share in the first nine months of 2005. Sales for the third quarter of 2006 were $44.1 million compared with $46.0 million in the third quarter of 2005. For the nine months ended September 30, 2006, sales were $130.2 million, compared with $141.6 million during the first nine months of 2005.

Magnesium Group

Sales for the Magnesium Group for the third quarter of 2006 were $16.0 million compared to $19.9 million in the third quarter of 2005. For the nine months ended September 30, 2006, sales were $58.2 million compared to $64.1 million in the first nine months of 2005. The strength of the Canadian dollar had a $1.0 million dollar unfavourable impact on sales in the quarter and $4.8 million for the first nine months of 2006. Actual tonnes sold decreased in the third quarter of 2006 by 14.2% when compared to the third quarter of 2005. For the nine months ended September 30, 2006, actual tonnes sold decreased 2.8% when compared to the first nine months of 2005, primarily related to softness in the specialty metals business.

Gross margin in the Magnesium Group was $2.1 million or 12.9% of sales compared to $2.4 million or 12.3% of sales in the third quarter of 2005. For the nine months ended September 30, 2006, gross margin was $8.1 million or 13.9% of sales compared to $6.3 million or 9.7% of sales during the first nine months of 2005. During 2006, lower manufacturing variances resulted in the improved gross margin. During the quarter, overhead costs decreased $0.6 million compared to the third quarter of 2005, the result of a re-organization which commenced in December 2005.

Silicon Group

In the Silicon Group, sales for the third quarter of 2006 were $28.1 million compared with $26.1 million in the third quarter of 2005, an increase of $2.0 million. For the nine months ended September 30, 2006, sales in the Silicon Group were $72.0 million compared with $77.5 million for the first nine months of 2005. The increase in the quarter was due to strong demand for silicon metal product. For the nine months ended September 30, 2006, sales were down compared to the same period in the prior year due to equipment problems in the second quarter of 2006. These problems have been remedied and the Company believes that the fourth quarter should have improved results. The strong Canadian dollar had an unfavourable impact on sales of $1.2 million during the third quarter of 2006 and $3.3 million for the first nine months of 2006.

For the quarter ended September 30, 2006, the Silicon Group had a gross margin of $1.7 million or 6.1% of sales compared with a gross margin of $1.5 million or 5.9% in the third quarter of 2005. For the nine months ended September 30, 2006, gross margin was $1.7 million or 2.4% of sales compared with $7.3 million or 9.5% of sales in the first nine months of 2005. For the quarter, gross margin increased slightly due to higher pricing while for the nine months ended September 30, 2006, the decrease in gross margin was predominantly caused by lower production yields in the first two quarters. Although 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.

Selling and Administration Expenses of the Company

Selling and administration expenses were $3.1 million for quarter ended September 30, 2006, a decrease of $1.4 million compared with the same quarter in 2005. For the nine months ended September 30, 2006, selling and administration expenses were $10.1 million compared to $10.9 million for the first nine months of 2005. Although legal costs were up compared to the prior year due to the United States Department of Commerce duty matter, selling expenses and administrative salaries decreased.

Restructuring in the Magnesium Business

On November 14, 2006, the Company announced a restructuring of its Haley, Ontario operations. The restructuring involves outsourcing the production of certain of the Company's specialty metals products to China to reduce manufacturing costs. The move will result in the elimination of 45 positions and certain equipment will be idled. The Company will take a charge of $3.0 million in the fourth quarter of 2006 in respect of this decision.

Fundo Wheels AS

Fundo Wheels AS ("Fundo"), a Norwegian automotive wheel company in which Timminco has a 47% stake, continues to struggle with its operations. Operating losses are the result of manufacturing problems which the Company believes it can resolve within the calendar year. During the quarter, a new Managing Director of Fundo was appointed. For the quarter, Timminco recorded an equity loss on its investment in Fundo of $1.3 million, representing Timminco's proportionate share of Fundo's loss. For the nine months ended September 30, 2006, the equity loss was $2.7 million.

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 September 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 which were previously considered ineligible by the Bank. This increase in borrowing base is a temporary relief expiring June 30, 2007.

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. 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

The Company was subject to a United States Department of Commerce ("DOC") scope inquiry to determine whether Timminco's product, exported from Canada into the United States, was covered by anti-dumping orders on magnesium from China and Russia. On September 1, 2006 the DOC released a preliminary finding which indicated that Timminco's products were not covered by the anti dumping orders on magnesium from China and Russia and on November 13 the DOC released a final ruling in this matter which confirmed their preliminary findings that Timminco's exports were not in violation of the anti-dumping ruling. From the commencement of the scope inquiry, the Company has expensed $1.4 million for professional fees related to this matter. The Company believes that the final cost of defending itself will be approximately $1.7 million.



QUARTERLY INFORMATION

(000's except per share data)
----------------------------------------------------------
Three Months ended Nine Months ended
(unaudited) (unaudited)
----------------------------------------------------------
Sept 30, 2006 Sept 30, 2005 Sept 30, 2006 Sept 30, 2005
----------------------------------------------------------

Sales 44,065 46,009 130,202 141,592
Gross profit 4,119 4,158 10,799 14,148
Gross profit
percentage 9.3% 9.0% 8.3% 10.0%
Net income (loss) (3,105) (5,835) (7,500) (9,223)
Earnings (loss)
per common
share, basic
and diluted (0.04) (0.08) (0.10) (0.13)
Working capital
(excluding
cash items) 36,547 38,521 36,547 38,521
Total assets 149,760 155,905 149,760 155,905
Bank debt 33,268 32,283 33,268 32,283
Total long term
liabilities
excluding
bank debt 23,282 23,182 23,282 23,182
Cash flow
from operations (6,219) 2,227 (6,008) 11,531
Weighted average
number of
common shares
outstanding,
basic and diluted 75,133 75,133 75,133 72,079


OUTLOOK

The third quarter demonstrated improvement in the Silicon business and continuing challenges in the Magnesium business.

In the Silicon Group, sales increased and margins strengthened as the demand for silicon appears to be increasing. During the later part of the third quarter, orders and spot pricing in the Silicon Group's business were encouraging. The strong Canadian dollar continues to have a negative impact on results, but strong demand and rising market prices are contributing to an improved outlook for the fourth quarter and for the coming fiscal year.

For the Silicon Group, the first half of the year was marked by capital expenditures required to restore one of their furnaces to proper operating capacity. Having completed this activity, the challenge is to return to consistent profitability and take advantage of the strong market for silicon. We do not expect that the losses in the Silicon Group in the first three quarters of 2006 can be recovered during the balance of 2006.

In the Magnesium Group, the reduction of costs initiated in 2005 has yielded improved margins when compared to the prior year. However revenues have been disappointing, particularly in the third quarter. The Magnesium business has witnessed softness in both its specialty metals and extrusion businesses. Expenses from the duty case are expected to exceed $1.7 million, which represents a meaningful portion of the business unit's poor result. The Magnesium Group will continue with its cost reduction activities, while implementing plans to increase its revenues to restore the unit to profitability.

The Company anticipates it will continue to face a challenging operating environment for the balance of the fiscal year given current exchange and interest rates but is encouraged in the trends that it sees in the Silicon Group's business. The Company continues to focus on making whatever changes are necessary in order to restore profitability and generate positive cash flows. Significant transformation of the Magnesium Group has been required in striving to meet these goals and the costs required to do so have been substantial.

The favourable ruling by the United States DOC was welcome news for the Company. The costs of defending this action have been considerable and it has diverted a significant amount of management's time and energy from pursuing the Company's goals and strategies.

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
September 30 December 31
2006 2005
(unaudited)
---------------------------------------------------------------------------
(in thousands of Canadian dollars)

ASSETS
Current Assets
Cash $ 40 $ 2,480
Accounts receivable 24,850 22,157
Inventories 38,270 38,148
Prepaid expenses and deposits 1,634 1,871
Future income taxes 713 713
------------- ------------
65,507 65,369
------------- ------------

Long term receivables 231 296
Capital assets 47,545 48,590
Investment in Fundo Wheels AS 7,851 10,584
Employee future benefits 1,782 1,837
Deferred financing costs 553 749
Future income taxes 3,584 3,555
Intangible assets 4,399 4,812
Goodwill 18,308 18,396
------------- ------------
$ 149,760 $ 154,188
------------- ------------
------------- ------------

LIABILITIES
Current Liabilities
Bank indebtedness (Note 3) $ 28,560 $ 26,153
Accounts payable and accrued liabilities 23,460 27,470
Due to affiliated companies (Note 2) 4,021 -
Current portion of long term bank debt (Note 3) 1,283 1,341
Future income taxes 144 51
Current portion of long term provisions 1,295 2,715
------------- ------------
58,763 57,730

Long term bank debt (Note 3) 3,425 4,357
Employee future benefits 17,884 16,788
Future income taxes 1,656 1,747
Long term provisions 3,742 3,829
------------- ------------
85,470 84,451
------------- ------------

SHAREHOLDERS' EQUITY
Capital stock (Note 4) 84,191 84,191
Convertible note (Note 4(b)) 1,693 -
Warrants (Note 4(b)) - 1,393
Contributed surplus (Note 4(b)) 3,107 1,362
Deficit (23,757) (16,257)
Foreign currency translation adjustment (944) (952)
------------- ------------
64,290 69,737
------------- ------------
$ 149,760 $ 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 Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
(in thousands of Canadian dollars,
except for earnings per share
information)

Sales $ 44,065 $ 46,009 $ 130,202 $ 141,592

Expenses
Cost of goods sold 39,946 41,851 119,403 127,444
Selling and administrative 3,118 4,474 10,065 10,870
Amortization of capital assets 1,502 1,794 4,678 5,064
Amortization of intangible
assets 138 550 413 550
Amortization of deferred
financing costs 104 133 311 215
Interest 938 626 2,384 2,047
Foreign exchange gain (20) (723) (2,485) (23)
--------- ---------- ---------- ----------

Loss before the undernoted (1,661) (2,696) (4,567) (4,575)

Gain on sale of capital assets 5 - 120 -
Reorganization costs (51) - (79) (839)
Other expenses (43) - (22) -
Equity loss of Fundo Wheels AS (1,263) (298) (2,741) (268)
--------- ---------- ---------- ----------

Loss before income taxes (3,013) (2,994) (7,289) (5,682)
Income taxes
Current 6 157 220 1,647
Future 86 2,684 (9) 1,894
--------- ---------- ---------- ----------
92 2,841 211 3,541
--------- ---------- ---------- ----------

--------- ---------- ---------- ----------
Net loss $ (3,105) $ (5,835) $ (7,500) $ (9,223)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------

Loss per common share
- basic and diluted $ (0.04) $ (0.08) $ (0.10) $ (0.13)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------

Weighted average number
of common shares outstanding
- basic and diluted
(Note 4 (b)) 75,132,614 75,132,614 75,132,614 72,078,585
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------



Consolidated Statements of Deficit
(unaudited)

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
(in thousands of Canadian dollars)

Deficit at beginning of period $ (20,652) $ (3,850) $ (16,257) $ (462)
Net loss (3,105) (5,835) (7,500) (9,223)
--------- ---------- ---------- ----------

Deficit at end of period $ (23,757) $ (9,685) $ (23,757) $ (9,685)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------

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



Timminco Limited

Consolidated Statements of Cash Flows
(unaudited)

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
(in thousands of Canadian dollars)

Cash flows from operating
activities
Net loss $ (3,105) $ (5,835) $ (7,500) $ (9,223)
Adjustments for items not
requiring cash
Amortization of capital assets 1,502 1,794 4,678 5,064
Amortization of intangible
assets 138 550 413 550
Amortization of deferred
financing costs 104 133 311 215
Stock based compensation 117 83 352 251
Reorganization costs 51 - 79 839
Benefits plan expense 803 690 2,297 1,970
(Gain) loss on disposal
of capital assets (5) 29 (120) 40
Future income taxes 86 2,683 61 1,893
Equity loss of Fundo Wheels AS 1,263 298 2,741 268
Defined benefit pension plan
contributions (495) (341) (1,862) (1,033)
Expenditures charged against
provision for reorganization (361) (646) (1,530) (852)
Expenditures charged against
other long term provisions (3) (28) (56) (1)

Change in non-cash working
capital items
Increase in accounts receivable (3,597) (1,775) (2,693) (774)
Decrease (increase) in
inventories 483 4,474 (122) 10,921
Decrease in prepaid expenses
and deposits 307 1,625 237 2,864
Decrease in accounts payable
and accrued liabilities (3,507) (1,507) (3,294) (1,461)
--------- ---------- ---------- ----------
(6,219) 2,227 (6,008) 11,531
--------- ---------- ---------- ----------

Cash flows from investing
activities
Capital expenditures (1,214) (587) (3,376) (2,586)
Investment in Becancour
Silicon Inc. - (242) - (324)
Investment in Fundo Wheels AS - (68) - (70)
Decrease (increase) in long
term receivables 20 (87) 65 (48)
Proceeds on disposal of
capital assets 5 29 120 29
Other (6) (22) (257) (23)
--------- ---------- ---------- ----------
(1,195) (977) (3,448) (3,022)
--------- ---------- ---------- ----------

Cash flows from financing
activities
Increase (decrease) in bank
indebtedness (Note 3) 4,337 (1,201) 2,407 16,795
Decrease in long term bank
debt (Note 3) (337) (772) (990) (21,305)
Decrease in loan from
related party - - - (1,407)
Increase in loans from
affiliated companies (Note 2) 3,422 - 5,714 -
Expenditures charged against
deferred financing costs (56) (19) (115) (854)
Issuance of capital stock - - - (50)
Change in restricted cash - - - (40)
--------- ---------- ---------- ----------
7,366 (1,992) 7,016 (6,861)
--------- ---------- ---------- ----------

(Decrease) increase in cash (48) (742) (2,440) 1,648

Cash at beginning of period 88 2,958 2,480 568

--------- ---------- ---------- ----------
Cash at end of period $ 40 $ 2,216 $ 40 $ 2,216
--------- ---------- ---------- ----------

Supplemental information
Cash paid during the period:
Interest $ 808 $ 892 $ 2,231 $ 2,023
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Income taxes $ 78 $ 201 $ 729 $ 525
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------

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

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



Timminco Limited
Notes to Consolidated Financial Statements
For the quarter ended September 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 Timminco Limited's ("Timminco" or the "Corporation") 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. SUBSEQUENT EVENT REGARDING 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, was 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. On September 1, 2006 the DOC released a preliminary finding which indicated that Timminco's products were not covered by the anti dumping orders on magnesium from China and Russia and on November 13 the DOC released a final ruling in this matter which confirmed their preliminary findings that Timminco's exports were not in violation of the anti-dumping ruling.

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. ("Bank of America" or the "Bank"). 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 September 5, 2006, Safeguard loaned 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. 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 September 30, 2006 and December 31, 2005 was comprised as follows:



(000's) September 30, 2006 December 31, 2005
---------------------------------------------------------------------------
Bank indebtedness $ 28,560 $ 26,153
Current portion of long term
bank debt 1,283 1,341
Long term bank debt 3,425 4,357
---------------------------------------------------------------------------
$ 33,268 $ 31,851
---------------------------------------------------------------------------
---------------------------------------------------------------------------


At September 30, 2006, total bank debt denominated in US dollars amounted to US$29.5 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 was amended such that the Corporation met the requirements of the agreement. As at March 31, 2006, the Corporation was in compliance with its banking covenants. As at June 30, 2006, the Bank further amended the banking agreement requiring the Corporation to maintain minimum levels of earnings before interest, taxes, depreciation and amortization ("EBITDA") as defined by the banking agreement and limiting the amount of capital expenditures. Both the EBITDA and capital expenditure requirements are measured at June 30, September 30 and December 31, 2006 and at March 31, 2007. As at September 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 on 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 September 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.

On September 5, 2006, the Corporation borrowed US$3 million from 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 $2.4 million as Due to an affiliate in Current liabilities and $0.9 million as Convertible note in Shareholders' equity. The following assumptions were used to calculate the fair value of the equity component: expected dividend yield of 0%, expected stock volatility of 63%, risk free rate of 4.0% and expected life of 3.6 years. The expected life of the debt coincides with the maturity of the Bank of America 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 September 30, 2006 and 2005, and changes during the periods ending on those dates is presented below:



2006 Weighted 2005 Weighted
Shares Average Shares Average
(000's) Exercise Price (000's) Exercise Price
---------------------------------------------------------------------------
Outstanding at January 1 3,650 $0.78 2,145 $1.11
Granted 200 $0.29 - -
Forfeited (200) $0.59 (235) $2.30
---------------------------------------------------------------------------
Outstanding at
September 30 3,650 $0.77 1,910 $0.96
---------------------------------------------------------------------------
---------------------------------------------------------------------------


On May 8, 2006, 200,000 stock options were granted under the Corporation's Stock Option Plan. The fair value of the grant, determined using the Black-Scholes option-pricing model, was $0.19 per option. The following assumptions were used to calculate the fair value: expected dividend yield of 0%, expected stock volatility of 62.9%, risk free interest rate of 4.38% and expected option life of 7 years. The share option expense is being amortized, according to the vesting schedule, over a four year period.

At September 30, 2006, 955,000 options were exercisable at a price of $0.96, with a weighted average remaining life of 4.5 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 September 30, 2006, the Corporation had outstanding exchange contracts to sell $31.5 million US dollars over a period of 6 months at a weighted average exchange rate of $1.11 and having a fair value of ($0.1) million. As at September 30, 2006, the Corporation had outstanding exchange contracts to sell EUR 0.9 million Euros over a period of 3 months at a weighted average exchange rate of $1.44 and having a fair value of nil. 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 the production and sale of 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 September 30
(000's) Magnesium Silicon Total 2006 Magnesium Silicon Total 2005
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Canada $ 1,380 $ 6,974 $ 8,354 $ 1,701 $ 5,090 $ 6,791
United
States 10,471 11,886 22,357 12,630 15,706 28,336
Mexico 1,394 - 1,394 965 - 965
Europe 789 9,978 9,767 2,634 4,977 7,611
Australia 1,030 - 1,030 1,266 - 1,266
Pacific
Rim 705 69 774 455 294 749
Other 182 207 389 263 28 291
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$ 15,951 $ 28,114 $ 44,065 $ 19,914 $ 26,095 $ 46,009
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Nine months ended September 30
(000's) Magnesium Silicon Total 2006 Magnesium Silicon Total 2005
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Canada $ 7,102 $ 12,286 $ 19,388 $ 7,674 $ 11,653 $ 19,327
United
States 38,112 31,470 69,582 40,492 46,333 86,825
Mexico 3,770 - 3,770 2,960 6 2,966
Europe 3,913 27,247 31,160 6,866 18,437 25,303
Australia 2,896 - 2,896 3,707 - 3,707
Pacific
Rim 1,713 675 2,388 1,599 943 2,542
Other 713 305 1,018 828 94 922
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$ 58,219 $ 71,983 $ 130,202 $ 64,126 $ 77,466 $ 141,592
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(b) Net profit (loss):

Three months ended September 30, 2006
(000's) Magnesium Silicon Other Total
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Income (loss) before the
following: $ 570 $ 1,280 $ (872) $ 978

Amortization 859 777 4 1,640
Interest 462 476 - 938
Amortization of deferred
financing cost 47 57 - 104
Gain on disposal of
capital assets (5) - - (5)
Reorganization expense - 51 - 51
Equity loss of Fundo Wheels AS - - 1,263 1,263
Income tax expense (recovery) (30) 122 - 92
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Net loss $ (763) $ (203) $(2,139) $ (3,105)
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Three months ended September 30, 2005
(000's) Magnesium Silicon Other Total
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Income (loss) before the
following: $ 1,162 $ 1,188 $ (1,914) $ 436

Amortization 999 1,296 49 2,344
Interest 337 308 - 645
Amortization of deferred
financing cost 91 23 - 114
Loss on disposal of
capital assets 29 - - 29
Equity loss of Fundo Wheels AS - - 298 298
Income tax expense (recovery) 3,019 (178) - 2,841
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Net loss $ (3,313) $ (261) $(2,261) $ (5,835)
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Nine months ended September 30, 2006
(000's) Magnesium Silicon Other Total
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Income (loss) before the
following: $ 4,125 $ 2,176 $ (3,104) $ 3,197

Amortization 2,890 2,188 13 5,091
Interest 1,193 1,191 - 2,384
Amortization of deferred
financing cost 149 162 - 311
Gain on disposal of
capital assets (120) - - (120)
Reorganization expense 28 51 - 79
Equity loss of Fundo Wheels AS - - 2,741 2,741
Income tax expense (recovery) 632 (421) - 211
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Net loss $ (647) $ (995) $(5,858) $ (7,500)
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Nine months ended September 30, 2005
(000's) Magnesium Silicon Other Total
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Income (loss) before the
following: $ 2,173 $ 5,718 $ (4,550) $ 3,341

Amortization 2,820 2,647 147 5,614
Interest 951 1,099 - 2,050
Amortization of deferred
financing cost 169 43 - 212
Loss on disposal of
capital assets 40 - - 40
Reorganization expense 839 - - 839
Equity loss of Fundo Wheels AS - - 268 268
Income tax expense 3,029 512 - 3,541
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Net profit (loss) $ (5,675) $ 1,417 $ (4,965) $ (9,223)
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(c) Identifiable assets:

(000's) Magnesium Silicon September 30,2006
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Canada $ 39,002 $ 79,906 $ 118,908
United States and Other 30,852 - 30,852
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$ 69,854 $ 79,906 $ 149,760
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(000's) Magnesium Silicon December 31, 2005
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Canada $ 44,738 $ 74,994 $ 119,732
United States and Other 34,456 - 34,456
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$ 79,194 $ 74,994 $ 154,188
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(d) Capital assets:

(000's) September 30, 2006 December 31, 2005
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Magnesium $ 33,388 $ 35,801
Silicon 14,157 12,789
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$ 47,545 $ 48,590
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(e) Additions to Capital assets:

(000's) Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
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Magnesium $ 102 $ 419 $ 234 $ 991
Silicon 1,112 168 3,142 1,595
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$ 1,214 $ 587 $ 3,376 $ 2,586
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(f) Major customers:

In 2006, two customers accounted for approximately 26% (25% in 2005) and 10% (8% in 2005) respectively, of total sales in the Magnesium Group.

In 2006, three customers accounted for 26%, 21% and 15% (15%, 31% and 13% in 2005) respectively, of total sales in the Silicon Group.

7. SUBSEQUENT EVENT

On November 14, 2006, the Corporation announced the closure of certain production facilities at its Haley, Ontario plant. The closure will result in the elimination of 45 positions and the idling of certain equipment. The Corporation will take a charge related to this closure of approximately $3.0 million, composed of severance of $2.0 million and the write-off of assets no longer required of $1.0 million. The Corporation will reflect these charges in its Q4 2006 results.

Contact Information

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