5N Plus
Annual Report 2012

Plain-text annual report

2012 Annual Report 1 our vision To grow together in an environmentally responsible way, through the innovation and product excellence made possible by our employees’ know-how and commitment, thereby enabling 5N Plus to become the world’s leading producer of specialty metal and chemical products. 5N Plus2012ANNuAl RePoRt2 2013 is a time for renewal at 5N Plus, as the Company aims to strengthen its position in markets which are rapidly evolving. There are indeed certain periods in life when the situation requires, either at the corporate or collective level, changes in order to address recurring issues, create opportunities, and lead to a better and more promising future in the short, medium and long term. message to shareholders 5N Plus Inc. is not immune to these economic realities and constraints caused by the combined effects of a host of phenomena and external factors over which management has little control. These include a restructuring in the solar industry due to a disproportionate increase in production capacity, the downward pressure on the prices of metals, and the sluggish global economy slowed in part by economic turbulences in the eurozone and even to some extent in Asia. Overall, the sum of these structural changes and the impact of the slowdown has led to a changing business and market environment warranting a redefined vision and a renewed approach to growth. Throughout the Company, this approach is now being deployed through sound and forceful decisions which are expected to enable the Company to renew with market conditions and a financial performance more in line with management and shareholder expectations. MIXED FINANCIAL RESULTS The Company’s financial performance suffered throughout the year amid these important changes that were mostly beyond management’s control and forecasting, leading to lower annualized sales and losses for a second consecutive fiscal year. At the same time, the company saw its market value fall below its book value for most of the year, resulting in a more stringent evaluation of goodwill which was eventually fully written-off. 5N Plus2012ANNuAl RePoRt3 Operating in this challenging environment, the Company has still managed to maintain or increase its sales volumes and market share, while significantly improving its cash position. Indeed, the Company’s debt has been reduced by close to 125 million through strong cash flow resulting mainly from a decrease in working capital. FOCUSED ON GROWTH 2012 was however also a year of many impressive accomplishments in terms of growth. The Company was ranked number 15 among Canada’s 200 fastest growing companies by PROFIT Magazine, Your Guide To Business Success. This prestigious ranking, now in its 24th year, recognizes Canada’s fastest growing companies based on their five-year revenue growth which for 5N Plus came in at 2459%. For the third consecutive year, 5N Plus also won awards in several categories in the renown Deloitte Technology Fast 50™ program for highest percentage revenue growth, over a period of 5 years. The Company also earned the rank of 138th in the Deloitte Technology Fast 500™, among 500 companies with the fastest growth in the areas of technology, media, telecommunications, life sciences and clean technologies in North America. The Company has also executed on its strategic plan which calls for a stronger presence in Asia by opening a new recycling plant in Malaysia’s Kulim High Technology Park, acquiring the outstanding shares in its gallium refinery in Shenzhen China and by operating its new facility in Laos for its first full year. Overall, 5N Plus management remains cautiously optimistic and confident in the face of changing market conditions which will largely determine the Company’s future financial performance. A YEAR OF TRANSITION A leader in most of the markets in which it operates, the Company intends to take advantage of an environment which can only become more favorable especially in terms of commodity prices. We also intend to gradually redeploy capital into higher value opportunities and recycling with a strong focus on increasing commercial dealings in Asia. Combined with our efforts aimed at improving our business practices and operational efficiencies, this should enable us to significantly improve our financial performance in the coming years, recognizing that 2013 will be very much of a transition year. 5N Plus2012ANNuAl RePoRt4 EFFICIENCY Amid the measures made to re-focus our strengths, 5N Plus will be making every effort to improve the efficiency of its business processes. Specifically, we have decided to streamline our production operations to meet the demands of market movements and the new global demand for pure metals, compounds and specialty chemicals that make up the range of our product offering. Thus, the Company has opted to consolidate its North American operations by relocating its Fairfield production facilities in Wisconsin and by closing its facilities in Trail, British Columbia. The Company is also involved in an ambitious program to reduce costs in order to improve its competitiveness. These efforts will in no way negatively impact sales and are aimed at optimizing the Company’s production capabilities in order to become more competitive in the market. We also intend to strengthen our efforts in Asia, by leveraging our existing plants in Malaysia, Laos and China, as well as our efforts to do business in Korea. As with most reorganizations, many employees have been impacted and some negatively following lay-offs in several sites. It is with the utmost respect to our employees that such measures have been taken in accordance with the Company’s values that are based on commitment, respect and integrity. A RETURN TO PROFITABILITY We are aware that the turbulences which have impacted our performance during the last year may have in some minds darkened our future. However, our willingness to act decisively, together with the speed with which we identify sound solutions, have effectively restored a positive outlook for the years to come. We would therefore like to thank you for your continuing support as we believe the best is yet to come! Dennis Wood Chairman of the Board of Directors Jacques L’Ecuyer President and Chief Executive Officer 5N Plus2012ANNuAl RePoRtManagement’s Discussion and Analysis  This Management’s Discussion and Analysis (“MD&A”) of the financial condition and results of operations is intended to  assist  readers  in  understanding  5N  Plus  Inc.  (the  “Company”),  its  business  environment,  strategies,  performance  and  risk  factors.  This  MD&A  should  be  read  in  conjunction  with  the  audited  consolidated  financial  statements  and  the  accompanying notes for the year ended December 31, 2012. The Company’s audited consolidated financial statements  for  the  year  ended  December  31,  2012,  have  been  prepared  in  compliance  with  International  Financial  Reporting  Standards (“IFRS”) as defined in the Handbook of the Canadian Institute of Chartered Accountants and adopted by the  International Accounting Standards Board (“IASB”).   The “Q4 2012” and the “Q4 2011” refer to the three‐month periods ended December 31, 2012 and 2011, respectively.  All amounts in this MD&A are expressed in U.S. dollars, and all amounts in the tables are in thousands of U.S. dollars,  unless otherwise indicated. All quarterly information disclosed in this MD&A is based on unaudited figures.  Information contained herein includes any significant developments to March 28, 2013, the date on which the MD&A  was approved by the Company’s board of directors. Unless otherwise indicated, the terms “we”, “us” and “our” “the  group” as used herein refer to the Company together with its subsidiaries.   Change in Year‐End   On August 24, 2011, the Company changed its financial year‐end date from May 31 to December 31. As a result, the  year ended December 31, 2011 comprises seven months.   Non‐IFRS Measures  This MD&A also includes certain figures that are not performance measures consistent with IFRS. These measures are  defined at the end of this MD&A under the heading Non‐IFRS Measures.   Notice Regarding Forward‐Looking Statements   Certain statements in this MD&A may be forward‐looking within the meaning of applicable securities laws.  Forward‐ looking information and statements are based on the best estimates available to the Company at the time and involve  known and unknown risks, uncertainties or other factors that may cause the Company’s actual results, performance or  achievements to be materially different from any future results, performance or achievements expressed or implied by  such forward‐looking statements. Factors of uncertainty and risk that might result in such differences include the risks  related to the possible failure to realize anticipated benefits of acquisitions, additional indebtedness, inventory pricing,  commodity  pricing,  legal  proceedings,  source  of  supply,  environmental  regulations,  competition,  dependence  on  key  personnel, business interruptions, protection of intellectual property, international operations,  collective agreements  and being a public issuer.  A description of the risks affecting the Company’s business and activities appears under the  heading “Risks and Uncertainties” of this MD&A.  Forward‐looking statements can generally be identified by the use of  terms  such  as  “may”,  “should”,  “would”,  “believe”,  “expect”,  the  negative  of  these  terms,  variations  of  them  or  any  similar terms. No assurance can be given that any events anticipated by the forward‐looking information in this MD&A  will  transpire  or  occur,  or  if  any  of  them  do  so,  what  benefits  that  5N Plus  will  derive  therefrom.   In   particular,  no  assurance can be given as to the future financial performance of 5N Plus. The forward‐looking information contained in  this MD&A is made as of the date hereof and the Company has no obligation to publicly update such forward‐looking  information  to  reflect  new  information,  subsequent  or  otherwise,  unless  required  by  applicable  securities  laws.    The  reader is warned against placing undue reliance on these forward‐looking statements.  5N Plus Inc.                      5                   Management’s Discussion and Analysis  Corporate Overview and Business  5N Plus is the leading producer of specialty metal and chemical products.  Fully integrated with closed‐loop recycling  facilities, the Company is headquartered in Montreal, Quebec, Canada and operates manufacturing facilities and sales  offices  in  several  locations  in  Europe,  Americas  and  Asia.  5N  Plus  deploys  a  range  of  proprietary  and  proven  technologies  to  produce  products  which  are  used  in  a  number  of  advanced  pharmaceutical,  electronic  and  industrial  applications.    Typical  products  include  purified  metals  such  as  bismuth,  gallium,  germanium,  indium,  selenium  and  tellurium, inorganic chemicals based on such metals and compound semiconductor wafers.  Many of these are critical  precursors and key enablers in markets such as solar, light‐emitting diodes and eco‐friendly materials.  Reportable Segments   The  Company  has  two  reportable  segments,  namely  Electronic  Materials  and  Eco‐Friendly  Materials.   Corresponding   operations and activities are managed accordingly by the Company’s key decision makers.  Segmented  operating and  financial information, labelled key performance indicators, are available and used to manage these business segments,  review performance and allocate resources.  Financial performance of any given segment is evaluated primarily in terms  of  revenues  and  segment  adjusted  EBITDA  which  is  reconciled  to  consolidated  numbers  by  taking  into  account  corporate income and expenses.    The  Electronic  Materials  segment  is  headed  by  a  Vice  President  who  oversees  locally  managed  operations  in  the  Americas, Europe and Asia. The Electronic Materials segment manufactures and sells refined metals, compounds and  alloys which are primarily used in a number of electronic applications.  Typical end‐markets include photovoltaics (solar  energy),  light  emitting  diodes  (LED),  displays,  high‐frequency  electronics,  medical  imaging  and  thermoelectrics.  Main  products are associated with the following metals: cadmium, gallium, germanium, indium and tellurium. These are sold  either  in  elemental  or  alloyed  form  as  well  as  in  the  form  of  chemicals  and  compounds.   Revenues   and  earnings  associated  with  recycling  services  and  activities  provided  to  customers  of  the  Electronic  Materials  segment  are  also  included  in  the  Electronic  Materials  segment  and  management  of  such  activities  is  also  the  responsibility  of  the  Electronic Materials Vice President.  The  Eco‐Friendly  Materials  segment  is  so  labelled  because  it  is  mainly  associated  with  bismuth,  one  of  the  very  few  heavy metals which have no detrimental effect on either human health or in the environment.  As a result, bismuth is  being increasingly used in a number of applications as a replacement for more harmful metals and chemicals.  The Eco‐ Friendly  Materials  segment  is  headed  by  a  Vice  President  who  oversees  locally  managed  operations  in  Europe  and  China. The Eco‐Friendly Materials segment manufactures and sells refined bismuth and bismuth chemicals, low melting  point alloys as well as refined selenium and selenium chemicals.  These are used in the pharmaceutical and animal‐feed  industry  as  well  as  in  a  number  of  industrial  applications  including  coatings,  pigments,  metallurgical  alloys  and  electronics.   Corporate  expenses  associated  with  the  head  office  and  unallocated  selling,  general  and  administrative  expenses  together with financing costs, gains and/or losses on foreign exchange and derivatives have been regrouped under the  heading Corporate. The head office is also responsible for managing businesses which are still in the development stage  and corresponding costs are netted of any revenues.  6 5N Plus Inc.                                       Management’s Discussion and Analysis  Highlights of Q4 2012 and Fiscal Year 2012  (cid:127) (cid:127) (cid:127) (cid:127) (cid:127) (cid:127) Generated strong cash flow from operating activities of $101.8 million in 2012. Net debt amounted to $136.6 million  on December 31, 2012 compared to $260.6 million on December 31, 2011 and decreased by $4.0 million in Q4 2012  and  by  $124.0  million  during  2012.   Total  debt  amounted  to  $148.4  million  on  December  31,  2012  compared  to  $341.9 million on December 31, 2011 and decreased by $1.4 million in Q4 2012 and by $193.5 million in 2012.    Adjusted EBITDA for Q4 2012 was $6.4 million, a 10.4% decrease over Adjusted EBITDA of $7.1 million for Q4 2011.  Adjusted EBITDA in 2012 was $37.9 million compared to $37.4 million for the seven‐month period ended December  31, 2011.   The Company recorded in Q4 2012 goodwill and other non‐current asset impairment charges of $204.8 million due  to longer‐than‐anticipated pricing softness in minor metals and a significant reduction in the market capitalization of  the Company.  This resulted in a net loss of $212.0 million in the quarter and a net loss of $227.8 million for 2012.   This  compares  with  net  losses  of  $37.2  million  and  $22.5  million  for  the  quarter  and  seven‐month  period  ended  December 31, 2011.  Excluding impairment charges and reversals, restructuring costs and acquisition costs net of the  related income tax, adjusted net earnings resulted in a loss of $6.9 million in Q4 2012 of $2.9 million in 2012 which  compares to adjusted net earnings (loss) of ($0.1) million and $16.5 million for the quarter and seven‐month period  ended December 31, 2011.     Revenues  for  Q4  2012  were  $128.6  million,  a  13.9%  decrease  over  revenues  of  $149.4  million  for  Q4  2011.   Revenues for 2012 increased to $551.7 million representing a 40.8% increase over revenues of $391.7 million for the  seven‐month period ended December 31, 2011.   As at December 31, 2012, the backlog of orders expected to translate into sales over the following twelve months  stood at $165.8 million compared to $162.3 million as at September 30, 2012 and to $223.2 million a year ago.  On June 6, 2012, the Company issued 6,452,000 stock units for gross proceeds of CA$20.0 million. The offering was  made by way of short form prospectus filed with the securities commissions of each of the provinces of Canada. In a  concurrent private placement, the Company issued and sold a further 6,451,613 units to Investissement Québec for  gross proceeds of CA$20.0 million.   (cid:127) On  November  15,  2012,  the  Company  announced  that  its  new  Malaysian  recycling  facility  was  operational  and  completed  under  budget.  The  facility  is  located  within  the  Kulim  High  Technology  Park,  one  of  Malaysia’s  highest  profile industrial areas for technological firms.  (cid:127) The  Company  amended  its  senior  secured  multi‐currency  revolving  credit  facility  under  which  the  facility  will  be  reduced  to  $100  million  starting  March  31,  2013  and  could,  at  any  time,  be  expanded  to  $140  million  at  the  Company’s  request  through  the  exercise  of  an  additional  $40  million  accordion  feature,  subject  to  review  and  approval by the lenders.  Despite  the  very  challenging  business  environment  in  which  it  operated  throughout  the  quarter  and  the  year,  the  Company managed to maintain market share and generate significant cash flow enabling a sizeable reduction in debt.   The Company also achieved commercial, technical and operational milestones including the completion of its Malaysian  facility,  breakthroughs  at  its  Sylarus  subsidiary,  relocation  of  its  Fairfield  operations  to  Wisconsin  and  further  penetration of the Asian market.  Revenues,  backlog  and  profitability  were  all  negatively  impacted  in  the  quarter  and  the  year  by  low  underlying  commodity  prices  which  caused  the  Company  to  record  significant  write‐downs  in  the  value  of  its  inventories,  non‐ current  assets  and  goodwill,  the  latter  having  now  been  completely  written  off.    Headwinds  related  to  continuing  concerns over European demand, the slowdown in the global economy and the structural changes in the solar industry  continued to weigh on the Company's performance.  This was further exacerbated by the difficulties encountered with  the  integration  of  the  former  MCP  activities  leading  to  the  departure  of  some  senior  executives  from  the  former  management team and the dispute which followed related to some of the seller's representations and warranties made  at the time of the purchase.  5N Plus Inc.                      7                           Management’s Discussion and Analysis  On the positive side, the amendment of its credit facility provides the Company with the required financing flexibility for  2013 and better fits its current financing needs. The Company is now better aligned and intends to gradually redeploy  capital into higher value opportunities and recycling with a strong focus on increasing commercial dealings in Asia.  The  Company  also  intends  to  leverage  its  dominant  market  share  and  take  advantage  of  what  it  believes  will  be  a  more  favorable underlying commodity pricing environment in the coming year.  Recognising that 2013 will be a year of transition, the Company has established a plan for improving efficiency which  includes  the  closure  of  the  Trail  operations  and  the  relocation  of  all  corresponding  activities  and  more  generally  significant cost reduction efforts throughout the group.  At the same time the Company also intends to further develop  its Asian footprint in Korea as previously announced.  These  measures together with the continuing support from the  Company's financial institutions should enable it to be very well positioned to take advantage of growth opportunities  beyond the current year.   The Company therefore continues to remain cautiously optimistic and is confident on its ability to weather the current  challenges.  5N Plus would also like to thank its employees which have unfortunately been negatively impacted by the  current cost  reduction  measures  and  efficiency  improvement  plan  for  their  past  contribution, and all  others  for  their  commitment  and  confidence  as  the  Company  strives  to  become  a  better  and  stronger  organization  in  a  changing  business environment to which it must adapt.  Selected Yearly Financial Information  Consolidated Results    Revenues    EBITDA1    Adjusted EBITDA1    Net earnings (loss) attributable to equity holders of 5N Plus    Basic earnings (loss) per share attributable to equity holders of 5N Plus    Net earnings (loss)    Basic earnings (loss) per share    Diluted earnings (loss) per share    Funds from operations1  Statement of Financial Position Data    Total assets    Net debt1    Shareholders’ equity  Selected Quarterly Financial Information  12 months  December 31, 2012  $  7 months ended   December 31, 2011  $  12 months ended   May 31, 2011  $  551,675  (12,729)  37,856  (227,738)  ($2.91)  (227,849)  ($2.91)  ($2.91)  25,393  383,978  136,547  148,470  391,712  2,625  37,415  (21,641)  ($0.31)  (22,464)  ($0.32)  ($0.32)  27,338  782,344  260,575  339,710  179,995  28,723  28,723  22,928  $0.45  21,948   $0.45   $0.44  26,477   807,557  241,210  363,990  Revenues  Gross profit1  Adjusted gross profit1  EBITDA1  Adjusted EBITDA1  Net earnings (loss)  Basic earnings (loss) per share  Diluted earnings (loss) per share  Net earnings (loss) attributable to equity holders of 5N Plus  Basic earnings (loss) per share attributable to equity holders   of 5N Plus  Adjusted net earnings (loss)1  Basic adjusted net earnings (loss) per share1  Backlog1  Q4  $  128,620  (5,599)  18,918  (18,121)  6,395  (211,953)  ($2.70)  ($2.70)  (212,006)  ($2.71)  (6,880)  ($0.08)  165,790  Q3  $  120,744  17,898  17,898  9,001  9,001  1,275  $0.02  $0.02  1,218  $0.02  648  $0.01  162,323  2012  Q2  $  140,076  (10,859)  15,209  (20,474)  5,594  (22,062)  ($0.30)  ($0.30)  (21,922)  ($0.29)  (1,911)  ($0.03)  188,982  December 31, 2011  Q1   (4 months)   $  242,289  42,857  44,233  28,904  30,281  14,933  $0.21  $0.21  15,565  Q2 $ 149,423 (8,674) 24,739 (26,278) 7,135 (37,397) ($0.53) ($0.53) (37,206) ($0.52) (92) ($0.01) 223,177 $0.22  15,965  $0.23  212,264  May 31, 2011  Q4 $ 121,976 25,001 25,001 19,995 19,995 8,174 $0.14 $0.14 8,549 $0.14 14,128 $0.24 263,702 Q3 $ 20,663 8,104 8,104 6,001 6,001 5,551 $0.12 $0.12 5,526 $0.12 5,551 $0.12 73,154 Q1  $  162,235  29,988  29,988  16,867  16,867  4,891  $0.07  $0.07  4,972  $0.07  5,250  $0.07  215,588  1 See Non IFRS Measures  8 5N Plus Inc.                                                                                                                            Management’s Discussion and Analysis  Revenues, Gross Profit, Net Earnings (loss) and Earnings (loss) per Share  Revenues  Gross profit1  Adjusted gross profit1  Adjusted gross profit ratio1  Impairment charges  Adjusted net earnings (loss)  Basic adjusted net (loss) per share1   Net loss  Basic loss per share  Q4 2012  $  128,620  (5,599)  18,918  14.7%  229,263  (6,880)  ($0.08)  (211,953)  ($2.70)  Q4 2011  $  149,423  (8,674)   24,739  16.6%  45,573  (92)  ($0.01)  (37,397)  ($0.53)   Seven‐month period  ended December 31,  2011  $  391,712  34,182  68,972  17.6%  46,950  16,505  $0.23  (22,464)  ($0.32)  2012  $  551,675  31,428  82,013  14.9%  255,331  (2,893)  ($0.04)  (227,849)  ($2.91)  Revenues  Revenues  for  Q4  2012  were  $128.6  million  compared  to  revenues  of  $149.4  million  for  Q4  2011.  Revenues  for  2012  reached  $551.7  million  representing  a  40.8%  increase  over  revenues  of  $391.7  million  for  the  seven‐month  period  ended December 31, 2011. The decrease in sales for Q4 2012 is mainly due to lower underlying commodity pricing and  the increase for 2012 to the difference in the length of the reporting period.    Impairment charges  The  Company  recorded  a  total  impairment  charge  of  $229.3  million  in  Q4  2012  due  to  the  impairment  of  goodwill  related to the MCP acquisition and non‐current assets for a total of $204.8 million and to inventory write‐down of $24.5  million  in  response  to  adverse  commodity  pricing  mainly  in  bismuth,  gallium  and  selenium.  In  2012,  the  Company  recorded  an  inventory  write‐down  of  $50.6  million  for  a  total  impairment  charge  of  $255.3  million.  The  impairment  charges allocated to the Electronic and Eco‐Friendly business units were $153.6 million and $101.7 million respectively.  The plant closure in Trail was also responsible for an impairment of $11.0 million of the Property, plant and equipment  (“PPE”).    Impairment of inventories  Impairment of PPE  Impairment of intangible assets  Impairment of goodwill  Impairment charges  Q4 2012  $  24,517  39,239  40,597  124,910  229,263  Q4 2011  $  33,413  11,460  ‐  ‐  44,873  Seven‐month period  ended December 31,  2011  $  34,790  11,460  ‐  ‐  46,250  2012  $  50,585  39,239  40,597  124,910  255,331  Gross profit and adjusted gross profit  For Q4 2012, gross profit was ($5.6) million and adjusted gross profit was $18.9 million compared to ($8.7) million and  $24.7  million  for  Q4  2011.  For  Q4  2012,  adjusted  gross  profit  ratio  was  14.7%  compared  to  16.6%  for  Q4  2011.   For   2012, gross profit and adjusted gross profit were $31.4 million and $82.0 million compared to $34.2 million and $69.0  million  for  the  seven‐month  period  ended  December  31,  2011.  For  2012,  adjusted  gross  profit  ratio  was  14.9%  compared  to  17.6%  in  the  seven‐month  period  of  last  year.  The  decrease  in  gross  profit  ratio  is  mainly  due  to  inventories remaining fully valued as a result of the decreasing trend in underlying commodity pricing.   Adjusted net earnings (loss) and net earnings (loss)  Adjusted net loss for Q4 2012 was $6.9 million or $0.08 per share and $2.9 million or $0.04 per share for 2012. Adjusted  net earnings (loss) for Q4 2011 were ($0.1) million or ($0.01) per share and $16.5 million or $0.23 for the seven‐month  period  ended  December  31, 2011.  Net  loss  for  Q4  2012 was  $212.0  million  or  $2.70  per  share  and  $227.8  million  or  $2.91 per share for 2012 resulting from impairment charges of $255.3 million mostly booked in Q4 2012. Net loss was  $37.4 million or $0.53 per share and $22.5 million or $0.32 per share for the seven‐month period ended December 31,  2011 respectively. These decreases are mainly attributable to lower average selling prices and the fully valued price of  inventories following a continuing decreasing trend of commodity prices and impairment charges related to the MCP  acquisition.   1 See Non‐IFRS Measures  5N Plus Inc.                      9                                                  Management’s Discussion and Analysis  Reconciliation of EBITDA and Adjusted EBITDA  Net loss   Interest on long‐term debt and other interest expense   (Gain) loss on foreign exchange and derivative  Depreciation and amortization  Income tax recovery  Restructuring costs  Impairment of goodwill, PPE and intangible assets  Reversal of impairment of PPE  EBITDA1  Impairment of inventory  Adjusted EBITDA1   Q4 2012  $  (211,953)  1,463  (360)  5,628  (18,578)  932  204,746  ‐  (18,122)  24,517  6,395  Q4 2011  $  (37,397)  2,048  1,118  5,463  (9,670)  ‐  12,160  ‐  (26,278)  33,413  7,135   Increase  (Decrease)  467%   (29%)  (132%)  3%  92%  ‐  1,584%  ‐  (31%)  (10%)    Seven‐month period  ended December  31, 2011  $  (22,464)  5,487  (642)  12,797  (4,713)  ‐  12,160  ‐  2,625  34,790  37,415  2012  $  (227,849)  8,828  2,759  21,159  (24,221)  2,781  204,746  (932)  (12,729)  50,585  37,856  Increase  (Decrease)  914%  61%  (530%)  65%  414%  ‐  1,584%  ‐  (585%)  1%  EBITDA and Adjusted EBITDA  In  Q4  2012,  EBITDA  amounted  to  ($18.1)  million  and  Adjusted  EBITDA  to  $6.4  million.  EBITDA  for  2012  was  ($12.7)  million and is primarily attributable to impairment charges recorded in Q2 2012 and Q4 2012 and, Adjusted EBITDA was  $37.9  million  in  2012.   This   compares  to  adjusted  EBITDA  of  $7.1  million  and  $37.4  million  for  the  three  and  seven‐ month  periods  ended  December  31,  2011  respectively.   Adjusted   EBITDA  remains  relatively  stable  in  Q4  2012  but  continues to reflect low average selling prices due to the lower price of the underlying commodities.   Reversal of previously impaired property, plant and equipment  In  2012,  the  Company  partially  reversed  asset  impairment  charges  of  $0.9  million  previously  booked  in  the  quarter  ended December 31, 2011 related to its PPE located in DeForest, Wisconsin.   Bookings and Backlog  Bookings in Q4 2012 were $132.0 million and $494.3 million for 2012.  This compares with bookings of $160.5 million  and $351.2 million for the three and seven‐month periods ended December 31, 2011.  Backlog as at December 31, 2012  stood  at  $165.8  million  which  corresponds  to  a  25.8%  decrease  over  the  $223.2  million  backlog  as  at  December  31,  2011. Decreases in bookings and backlog in 2012 compared to 2011 are primarily associated with decreases in expected  average selling prices given the current decreasing trend of underlying commodity prices as well as a more conservative  treatment  of  our  contract  with  our  main  customer  in  the  solar  market  which  no  longer  has  take  or  pay  provisions.   Backlog increased by $3.5 million compared to the backlog of September 30, 2012.  Segment Information  Revenues, EBITDA and bookings for the Company’s reportable segments, namely Electronic Materials business unit and  Eco‐Friendly  Materials  business  unit  are  discussed  below.  Former  MCP  activities  were  carried  out  in  both  business  segments and are accordingly split between the two. 5N Plus activities prior to MCP acquisition are entirely included in  the Electronic Materials business segment.    EBITDA and Adjusted EBITDA per Business Unit  Electronic Materials  Eco‐Friendly Materials  Corporate  EBITDA1   Impairment of inventory  Adjusted EBITDA1  1 See Non‐IFRS Measures  10 Q4 2012  $  (1,733)  (11,700)  (4,689)  (18,122)  24,517  6,395   Q4 2011  $  (19,607)  1,773  (8,444)  (26,278)  33,413  7,135  2012  $  10,909  (8,209)  (15,429)  (12,729)  50,585  37,856  Seven‐month  period ended  December 31,  2011  $  (333)  14,600  (11,642)  2,625  34,790  37,415  5N Plus Inc.                                                                          Management’s Discussion and Analysis  Electronic Materials Business Unit   Revenues   Cost of goods & expenses, before amortization  EBITDA1  Impairment of inventory  Adjusted EBITDA1  Bookings  Q4 2012  $  55,254  (56,987)  (1,733)  8,226  6,493  59,342  Q4 2011  $  69,761  (89,368)  (19,607)  30,658  11,051  76,073  2012  $  232,013  (221,110)  10,903  23,750  34,653  178,615  Seven‐month  period ended  December 31,  2011  $  186,015  (186,348)  (333)  30,964  30,631  179,145  Revenues for Q4 2012 for the Electronic Materials business unit decreased by 20.8% and reached $55.2 million down  from  $69.8  million  in  Q4  2011.    Revenues  for  2012  increased  by  24.7%  and  reached  $232.0  million,  up  from  $186.0  million  for  the  seven‐month  period  ended  December  31,  2011.   The   increase  in  2012  is  due  to  the  difference  in  the  length of the reporting periods, and the decrease in Q4 2012 from lower average selling prices following a reduced price  for underlying commodities.   Adjusted  EBITDA  for  Q4  2012  for  the  Electronic  Materials  business  unit  decreased  to  $6.5  million  down  by  41.2%  compared to $11.1 million in Q4 2011.  Adjusted EBITDA for 2012 was $34.7 million which represents a 13.1% increase  over Adjusted EBITDA of $30.6 million for the seven‐month period ended December 31, 2011.  The increase in 2012 is  due to the difference in the length of the reporting periods. The decrease for Q4 2012 compared to Q4 2011 is primarily  associated with lower average selling prices.    Bookings in Q4 2012 for the Electronic Materials business unit were $59.3 million, up from $30.0 million for the quarter  ended September 30, 2012. An increase in bookings in Q4 2012 was expected as yearly contracts are normally signed at  the  end  or  beginning  of  calendar  year.   The   backlog  for  the  Electronic  Materials  business  unit  now  stands  at  $100.7  million, a decrease of $49.3 million compared to December 31, 2011 due to the lower expected average selling prices  given  the  current  decreasing  trend  of  underlying  commodity  prices,  as  well  as  the  ongoing  restructuring  in  the  solar  market.    Eco‐Friendly Materials Business Unit  Revenues   Cost of goods & expenses, before amortization  EBITDA1    Impairment of inventory  Adjusted EBITDA1  Bookings  Q4 2012  $  73,366  (85,066)  (11,700)  16,291  4,591  72,744  Q4 2011  $  79,663  (77,890)  1,773  2,755  4,528  84,444  Seven‐month  period ended  December 31,  2011  $  205,697  (191,097)  14,600  3,826  18,426  172,043  2012  $  319,662  (327,865)  (8,203)  26,835  18,632  311,584  Revenues  decreased  by  $6.3  million  and  reached  $73.4  million  in  Q4  2012  compared  to  $79.7  million  in  Q4  2011.   Revenues  for  2012  increased  by  55.4%  and  were  $319.7  million,  up  from  $205.7  million  for  the  seven‐month  period  ended December 31, 2011. The decrease in revenues for the quarter is due to lower selling prices associated with the  reduced prices of underlying commodities. The increase for 2012 is due to the difference in the length of the reporting  periods.  Adjusted  EBITDA  in  Q4  2012  for  the  Eco‐Friendly  Materials  business  unit  remains  stable  compared  to  Q4  2011  and  totalled $4.6 million compared to $4.5 million in Q4 2011.  Adjusted EBITDA for 2012 reached $18.6 million compared to  $18.4 million for the seven‐month ended December 31, 2011.  Bookings  in  Q4  2012  for  the  Eco‐Friendly  Materials  business  unit  reached  $72.7  million,  up  from  $64.1  million  in  the  quarter ended September 30, 2012. An increase in bookings in Q4 2012 was expected as yearly contracts are normally  signed at the end or beginning of calendar years. The backlog for the Eco‐Friendly Materials business unit now stands at  $65.1 million, a decrease of $8.1 million over the backlog as at December 31, 2011. This decrease is mainly associated  with lower selling prices.  1 See Non‐IFRS Measures  5N Plus Inc.                      11                                       Management’s Discussion and Analysis  Expenses  Depreciation and amortization  SG&A excluding amortization  Restructuring costs  Financial expenses   Income tax recovery  Q4 2012  $  5,628  12,561  932  1,103  (18,578)  1,646  Q4 2011  $  5,463  17,446  ‐  3,169  (9,670)  16,408  Increase  (Decrease)  3%  (28%)  ‐  (65%)  92%  (88%)    Seven‐month period  ended December  31, 2011  $  12,797  33,500  ‐  4,845  (4,713)  46,429  2012  $  21,159  45,742  2,781  11,587  (24,221)  57,048  Increase  (Decrease)  65%  37%  ‐  139%  414%  17%  Depreciation and Amortization  Depreciation and amortization expenses for Q4 2012 were $5.6 million compared to $5.5 million for Q4 2011. For 2012,  depreciation  and  amortization  expenses  were  $21.2  million  compared  to  $12.8  million  for  the  seven‐month  period  ended  December  31,  2011.  The  increase  in  depreciation  and  amortization  for  2012  relates  to  the  difference  in  the  length of the reporting periods and are otherwise in line with the 2011 run rates.  SG&A     Selling,  General  and  Administrative  expenses  were  $12.6  million  and  $45.7  million  in  Q4  2012  and  2012  respectively  compared  to  $17.4  million  and  $33.5  million  for  Q4  2011  and  the  seven‐month  period  ended  December  31,  2011,  respectively. The increase in 2012 is due to the difference in the length of the periods and is otherwise approximately  28% lower than Q4 2011 and 20% lower than the 2011 run rates reflecting the cost reduction efforts.   Restructuring costs  The  Company  incurred  expenses  of  $0.9  and  $2.8  million  during  Q4  2012  and  2012  resulting  from  an  incident  which  occurred at one of its sites in the US, and some severance payments.   Financial Expenses   Financial expenses decreased to $1.1 million for Q4 2012 compared to $3.2 million for Q4 2011 due the lower level of  debt.  Financial  expenses  for  2012  were  $11,6  million  compared  to  $4.8  million  for  the  seven‐month  period  ended  December 31, 2011 due to the difference in the length of the periods.     Income Taxes  For Q4 2012, recovery of income tax was $18.6 million compared to $9.7 million for Q4 2011. Recovery of income tax  for  2012  was  $24.2  million  compared  to  $4.7  million  for  the  seven‐month  period  ended  December  31,  2011,  representing  effective  tax  rates  of  9.6%  and  17.3%  respectively.  The  lower  effective  tax  rate  is  due  mainly  to  the  goodwill impairment charge which is not deductible for tax purposes.  Liquidity and Capital Resources   Cash Flows  Funds from operations1  Net changes in non‐cash working capital items related to operations  Operating activities  Investing activities   Financing activities   Effect of foreign exchange rate changes on cash and cash equivalents  related to operations  Net increase (decrease) in cash and cash equivalents   Q4 2012  $  4,244  2,685  6,929  (4,346)  (100)  (276)  2,207  Q4 2011  $  10,349  (9,284)  1,065  (9,027)  7,791  592  421  2012  $  25,393  76,419  101,812  33,637  (154,964)  (399)   (19,914)  Seven‐month  period ended  December 31,  2011  $  27,338  (38,253)  (10,915)  (12,321)  24,043  592  1,399  Cash generated by operating activities was $6.9 million in Q4 2012 and $101.8 million in 2012.  This compares with cash  generated  of  $1.1  million  and  ($10.9)  million  for  Q4  2011  and  the  seven‐month  period  ended  December  31,  2011  respectively.    This  increase  in  cash  is  essentially  related  to  a  decrease  in  working  capital  requirements  primarily  associated with a reduction in inventory levels of $145 million.   1 See Non‐IFRS Measures  12 5N Plus Inc.                                                                            Management’s Discussion and Analysis  Investing activities consumed $4.3 million in Q4 2012 and generated $33.6 million in 2012 compared to consumption of  $9.0 million and $12.3 million for Q4 2011 and the seven‐month period ended December 31, 2011 respectively.  For Q4  2012,  cash  consumed  from  investing  activities  was  mainly  due  to  the  acquisition  of  PPE  and  cash  generated  from  investing activities in 2012 were mainly related to temporary investments partially netted by the acquisition of PPE.    Cash  consumed  by  financing  activities  amounted  to  $0.1  million  in  Q4  2012  and  $155.0  million  in  2012  and  resulted  mainly from reduction of indebtedness by $192.2 million partially netted by the proceeds of the issuance of common  shares  and  warrants  that  occurred  in  June  2012  for  an  amount  of  $37.1  million.  For  the  seven‐month  period  ended  December 31, 2011, financing activities provided $24.0 million as the Company refinanced its revolving credit facility.  Working Capital  Inventories  Other current assets   Current liabilities  Working capital1  Working capital current ratio1  As at December 31, 2012  $  170,293  121,144  (104,789)  186,648  2.78  As at December 31, 2011  $  315,333  171,756  (151,384)  335,705  3.22  Working capital decreased to $186.6 million as at December 31, 2012 compared to $335.7 million as at December 31,  2011, reflecting the reduction of $145.0 million in inventory levels and $69.4 million in cash and cash equivalents and  temporary investments which was partially offset by a decrease of $65.4 million in bank indebtedness and short‐term  debt.   Net Debt   Bank indebtedness and short‐term debt  Long‐term debt including current portion  Total Debt  Cash and cash equivalents and temporary investments (restricted)  Net Debt1  As at December 31, 2012  $  8,014  140,425  148,439  (11,892)  136,547  As at December 31, 2011  $  73,430  268,476  341,906  (81,331)  260,575  Net debt after taking into account cash and cash equivalents and restricted temporary investments amounted to $136.5  million as at December 31, 2012 compared to $260.6 million as at December 31, 2011 corresponding to a decrease of  $124.0 million, reflecting strong cash generated from operations which is mainly used to reimburse the debt.  Funds from Operations   Funds from operations1  Acquisition of PPE and intangible assets  Working capital changes  Issuance of common shares  Others  Total movement in net debt1  Net debt1, beginning of period  Net debt1, end of period  Q4 2012  $  4,243  (3,926)  2,686  ‐  678  (562)  3,681  (140,228)  (136,547)  Q4 2011  $  10,349  (5,668)  (9,284)  134  (3,766)  (18,584)  (8,235)  (252,340)  (260,575)  2012  $  25,393   (15,888)  76,419  38,636  (532)  98,635  124,028  (260,575)  (136,547)  Seven‐month period  ended December 31,  2011  $  27,338  (10,785)  (38,253)  346  1,989  (46,703)  (19,365)  (241,210)  (260,575)  Funds  from  operations  were  $4.2  million  in  Q4  2012  compared  to  $10.3  million  in  Q4  2011.   For   2012,  funds  from  operations were $25.4 million compared to $27.3 million for the seven‐month period ended December 31, 2011.    Net debt to adjusted EBITDA ratio for 2012 was 3.6. Funds from operations generated in the same period represented  18.6% of net debt.   1 See Non‐IFRS Measures  5N Plus Inc.                      13                                       Management’s Discussion and Analysis  Net debt1 to annualized adjusted EBITDA ratio  Annualised funds from operations1 to net debt (%)  Q4 2012  5.34  12.4  Q4 2011  9.13  15.9  Seven‐month period  ended December 31,  2011  4.0  18.0  2012  3.6  18.6  Share Capital  Authorized   The Company has an unlimited number of common shares, participating, with no par value, entitling the holder to one  vote per share.   The Company has an unlimited number of preferred shares that may be issued in one or more series with specific terms,  privileges and restrictions to be determined for each class by the Board of Directors.   Issued and fully paid   Common shares  Outstanding   Number 83,908,269 As at December 31, 2012 $ 343,272 Number  70,961,125  As at December 31, 2011 $ 305,928 As at March 28, 2013 a total of 83,908,269 common shares were issued and outstanding, and no preferred shares were  issued or outstanding.  Stock Option Plan   On  April  11,  2011,  the  Company  adopted  a  new  stock  option  plan  (the  “Plan”)  replacing  the  previous  plan  (the  “Old  Plan”) in place since October 2007, with the same features as the Old Plan with the exception of a maximum number of  options  granted  which  cannot  exceed  five  million.  The  aggregate  number  of  shares  which  could  be  issued  upon  the  exercise of options granted under the Old Plan could not exceed 10% of the issued shares of the Company at the time of  granting  the  options.  Options  granted  under  the  Old  Plan  may  be  exercised  during  a  period  not  exceeding  ten  years  from the date of grant. The stock options outstanding as at December 31, 2012 may be exercised during a period not  exceeding six years from their date of grant. Options vest at a rate of 25% (100% for directors) per year, beginning one  year following the grant date of the options. Any unexercised options will expire one month after the date a beneficiary  ceases to be an employee, director or officer.   The number of stock options and the weighted average exercise price for each share‐based compensation plan are as  follows:  Outstanding, beginning of period  Granted  Cancelled  Exercised  Outstanding, end of period  Exercisable, end of period  Number of  options  1,543,211  325,840  (240,072)  (43,531)  1,585,448  1,024,656  2012  Weighted average exercise price  CA$  5.28  2.22  5.60  3.36  4.67  4.94  Seven‐month period ended December 31, 2011  Weighted average Number of  exercise price  options  CA$  4.52  8.60  5.40  3.17  5.28  4.28  1,384,025  275,249  (47,565)  (68,498)  1,543,211  908,657  Off‐Balance Sheet Arrangements  The Company has certain off‐balance sheet arrangements, consisting of leasing certain premises and equipment under  the terms of operating leases and contractual obligations in the normal course of business.    The Company is exposed to currency risk on sales in Euro and other currencies and therefore periodically enters into  foreign  currency  forward  contracts  to  protect  itself  against  currency  fluctuation.  The  reader  will  find  more  details  related to these contracts in Note 24 and Note 26 in the 2012 consolidated financial statements of the Company.  1 See Non‐IFRS Measures 14 5N Plus Inc.                                                               Management’s Discussion and Analysis  The contractual maturities of the Company’s financial liabilities as at December 31, 2012 are as follows:  Bank indebtedness and short‐term debt  Trade and accrued liabilities  Derivative financial instruments  Long‐term debt  Leases  Total   Carrying  amount  $  8,014  62,214  6,354  140,425  4,760  221,767  1 year  $  8,531  62,214  2,817  31,236  2,148  106,946  2‐3  years  $  ‐  ‐  3,537  116,552  1,415  121,504  4‐5  years  $  ‐  ‐  ‐  421  597  1,018  Beyond  5 years  $  ‐  ‐  ‐  21  600  621  Total  $  8,531  62,214  6,354  148,230  4,760  230,089  Contingencies   In the normal course of operations, the Company is exposed to events that could give rise to contingent liabilities or  assets. As at March 28, 2013, the Company was not aware of any significant events that would have a material effect on  its consolidated financial statements, except for the legal proceedings and related matters described on page 17 of this  MD&A under section “Risks and Uncertainties”.  Governance  As  required  by  Multilateral  Instrument  52‐109  of  the  Canadian  Securities  Administrators  («MI  52‐109  »),  5N  Plus  has  filed certificates signed by the Chief Executive Officer and the Chief Financial Officer that, among others, attest to the  design  of  the  disclosure  controls  and  procedures  and  the  design  and  effectiveness  of  internal  control  over  financial  reporting.   Disclosure Controls and Procedures  The Chief Executive Officer and the Chief Financial Officer have designed disclosure controls and procedures, or have  caused them to be designed under their supervision, in order to provide reasonable assurance that:   material information relating to the Company has been made known to them; and   information required to be disclosed in the Company’s filings is recorded, processed, summarized and reported  within the time periods specified in securities legislation.  An evaluation was carried out, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the  effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer  and the Chief Financial Officer concluded that the disclosure controls and procedures are effective.  Internal Control over Financial Reporting  The Chief Executive Officer and the Chief Financial Officer have also designed internal controls over financial reporting,  or have caused them to be designed under their supervision, in order to provide reasonable assurance regarding the  reliability  of  financial  reporting  and  the  preparation  of  financial  statements  for  external  purposes  in  accordance  with  IFRS.  An evaluation was carried out under the supervision of the Chief Executive Officer and the Chief Financial Officer, of the  design of the Company’s internal controls over financial reporting. Based on this evaluation, the Chief Executive Officer  and  the  Chief  Financial  Officer  concluded  that  the  internal  controls  over  financial  reporting  are  effective,  using  the  criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Changes in Internal Control over Financial Reporting  No changes were made to our internal controls over financial reporting during the fiscal year ended December 31, 2012  that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.  Accounting Policies and Changes  The  Company  established  its  accounting  policies  and  methods  used  in  the  preparation  of  its  audited  consolidated  financial statements for the fiscal year 2012 in accordance with IFRS.  The Company’s significant accounting policies are  described  in  Note  2  to  the  December  31,  2012  audited  consolidated  financial  statements.  The  key  assumptions  and  basis  for  estimates  that  management  has  made  under  IFRS,  and  their  impact  on  the  amounts  reported  in  the  5N Plus Inc.                      15                       Management’s Discussion and Analysis  consolidated  financial  statements  and notes,  remain  substantially  unchanged  from  those  described  in  the  Company’s  audited consolidated financial statements for the fiscal year ended December 31, 2011.  Significant Management Estimation and Judgment in Applying Accounting Policies The following are significant management judgments used in applying the accounting policies of the Company that have  the most significant effect on the consolidated financial statements.  Estimation uncertainty  When preparing the consolidated financial statements, management undertakes a number of judgments, estimates and  assumptions about recognition and measurement of assets, liabilities, revenues and expenses. Estimates and underlying  assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which  the estimates are revised and in any future periods affected.  Information  about  the  significant  judgments,  estimates  and  assumptions  that  have  the  most  significant  effect  on  the  recognition and measurement of assets, liabilities, revenues and expenses are discussed below.  Impairment of non‐financial assets  An impairment loss is recognized for the amount by which an asset’s or CGUs carrying amount exceeds its recoverable  amount, which is the higher of fair value less cost to sell and value in use.  To determine value in use, management estimates expected future cash flows from each asset or CGU and determines a  suitable interest rate in order to calculate the present value of those cash flows. In the process of measuring expected  future cash flows, management makes assumptions about future operating results. These assumptions relate to future  events and circumstances. The actual results may vary, and may cause significant adjustments to the Company’s assets  in  future  periods.  In  most  cases,  determining  the  applicable  discount  rate  involves  estimating  the  appropriate  adjustment to market risk and to asset‐specific risk factors.    Useful lives of depreciable assets  Management  reviews  the  useful  lives  of  depreciable  assets  at  each  reporting  date  whenever  events  or  changes  in  circumstances indicate that their carrying value amounts may not be recoverable.  Inventories  Inventories  are  measured  at  the  lower  of  cost  and  net  realizable  value,  with  cost  determined  on  the  average  cost  method. In estimating net realizable values, management takes into account the most reliable evidence available at the  time the estimates are made. The Company’s core business is subject to changes in foreign policies and internationally  accepted metal prices which may cause selling prices to change rapidly. The Company evaluates its inventory using a  group of similar items basis and considered events that have occurred between the financial position date and the date  of the completion of the financial statements. Net realizable value held to satisfy a specific sales contract is measured at  the contract price.  Income taxes  The Company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the  worldwide  provision  for  income  taxes.  There  are  many  transactions  and  calculations  for  which  the  ultimate  tax  determination  is  uncertain.  The  Company  recognizes  liabilities  for  anticipated  tax  audit  issues  based  on  estimates  of  whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that  were  initially  recorded,  such  differences  will  impact  the  current  and  deferred  income  tax  assets  and  liabilities  in  the  period in which such determination is made.  The Company has deferred income tax assets that are subject to periodic recoverability assessments. Realization of the  Company’s deferred income tax assets is largely dependent upon its achievement of projected future taxable income  and  the  continued  applicability  of  ongoing  tax  planning  strategies.  The  Company’s  judgments  regarding  future  profitability  may  change  due  to  future  market  conditions,  changes  in  tax  legislation  and  other  factors  that  could  adversely affect the ongoing value of the deferred income tax assets. These changes, if any, may require the material  adjustment  of  these  deferred  income  tax  asset  balances  through  an  adjustment  to  the  carrying  value  thereon  in  the  16 5N Plus Inc.                                        Management’s Discussion and Analysis  future. This adjustment would reduce the deferred income tax asset to the amount that is considered to be more likely  than not to be realized and would be recorded in the period such a determination was to be made.  Future Accounting Standards   A number of new standards, amendments to standards and interpretations are effective for annual periods beginning  after  January 1,  2013,  and  have  not  been  applied  in  preparing  the  2012  consolidated  financial  statements.  None  of  these is expected to have a significant effect on the Company’s consolidated financial statements, except the following  set out below.  IFRS  9,  “Financial  Instruments”,  addresses  the  classification,  measurement  and  recognition  of  financial  assets  and  financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to  the  classification  and  measurement  of  financial  instruments.  IFRS 9  requires  financial  assets  to  be  classified  into  two  measurement categories: those measured as at fair value and those measured at amortized cost. The determination is  made  at  initial  recognition.  The  classification  depends  on  the  entity’s  business  model  for  managing  its  financial  instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains  most  of  the  IAS 39  requirements.  The  main  change  is  that,  in  cases  where  the  fair  value  option  is  taken  for  financial  liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income  rather  than  the  consolidated  statement of  earnings  (loss),  unless  this  creates  an  accounting  mismatch.  The  Company  has yet to assess IFRS 9’s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or  after January 1, 2015. The Company will also consider the impact of the remaining phases of IFRS 9 when completed by  the Board.  IFRS 10, “Consolidated Financial Statements”, builds on existing principles by identifying the concept of control as the  determining factor in whether an entity should be included within the consolidated financial statements of the parent  company. The standard provides additional guidance to assist in the determination of control where this is difficult to  assess. The Company has yet to assess IFRS 10’s full impact and intends to adopt IFRS 10 no later than the accounting  period beginning on or after January 1, 2013.  IFRS  12,  “Disclosures  of  Interests  in  Other  Entities”,  includes  the  disclosure  requirements  for  all  forms  of  interests  in  other entities, including joint arrangements, associates, special‐purpose vehicles and other off‐balance sheet vehicles.  The Company has yet to assess IFRS 12’s full impact and intends to adopt IFRS 12 no later than the accounting period  beginning on or after January 1, 2013.  IFRS  13,  “Fair  Value  Measurement”,  aims  to  improve  consistency  and  reduce  complexity  by  providing  a  precise  definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs.  The requirements, which are largely aligned between IFRS and US GAAP, do not extend the use of fair value accounting  but  provide  guidance  on  how  it  should  be  applied  where  its  use  is  already  required  or  permitted  by  other  standards  within IFRS.  IAS 19, “Employee Benefits”, was amended in June 2011. The impact on the Company will be as follows: to immediately  recognize  all  past  service  costs;  and  to  replace  interest  cost  and  expected  return  on  plan  assets  with  a  net  interest  amount that is calculated by applying the discount rate to the net defined benefit liability (asset). The Company has yet  to assess the full impact of the amendments.  Amendment  to  IAS  1,  “Financial  Statement  Presentation”.  The  main  change  resulting  from  this  amendment  is  a  requirement for entities to group items presented in “other comprehensive income” (OCI) on the basis of whether they  are  potentially  reclassifiable  to  profit  or  loss  subsequently  (reclassification  adjustments).  The  amendment  does  not  address which items are presented in OCI.  There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material  impact on the Company.  Related Party Transactions  The Company’s related parties are its joint ventures, directors and executive members. Transactions with these related  parties are described in Note 25 and Note 28 in the 2012 consolidated financial statements of the Company.  5N Plus Inc.                      17           Management’s Discussion and Analysis  Financial Instruments  Fair Value of financial instruments  The Company has determined that the carrying value of its short‐term financial assets and financial liabilities, including  cash and cash equivalents, temporary investments, accounts receivable, bank indebtedness and short‐term debt, and  trade and accrued liabilities approximates their carrying value due to the short‐term maturities of these instruments.  A  detailed  description  of  the  methods  and  assumptions  used  to  measure  the  fair  value  of  the  Company’s  financial  instruments and their fair value are discussed in Note 17 – Categories of Financial Assets and Financial Liabilities in the  2012 consolidated financial statements of the Company.  The fair value of the derivative financial instruments was as follows:  Liability  Interest rate swap  Foreign exchange forward contracts  Options  Warrants   Total   December 31, 2012  $  3,870  1,080  239  1,165  6,354  December 31, 2011  $  2,326  517  2,873  ‐  5,716  Interest rate risk  Interest rate risk refers to the risk that future cash flows will fluctuate as a result of changes in market interest rates.  The Company is exposed to interest rate fluctuations on its revolving credit facility, which bears a floating interest rate.  As at December 31, 2012, the Company had an outstanding interest rate swap contract to hedge part of its interest rate  risk on the revolving credit facility. The nominal value is $100 million beginning in January 2013 and ending in August  2015. This interest rate swap fixed the LIBOR interest rate at 1.82%. The Company received $1.7 million when entering  into this interest rate swap in September 2011, which was the fair value of the instrument on signing. The fair value of  the contract is ($3.9) million as at December 31, 2012 and was recorded as part of derivative financial liabilities in the  consolidated statement of financial position.  Currency Risk  The Company’s sales are primarily denominated in U.S. dollars whereas a portion of our operating costs are realized in  local currencies, such as Euros, Canadian dollars and Pounds Sterling. Even though the purchases of raw materials are  denominated in U.S. dollars, which reduce to some extent the impact of exchange rate fluctuations, we are subject to  currency translation risk which can negatively impact our results.  Management has implemented a policy for managing  foreign  exchange  risk  against  the  relevant  functional  currency.   The   Company  manages  the  foreign  exchange  risk  by  entering into various foreign exchange forward contracts.   The Company had the following currency exposures on December 31, 2012:  Cash and cash equivalents  Temporary investments (restricted)  Accounts receivable  Bank indebtedness and short‐term debt  Trade and accrued liabilities  Long‐term debt  Net financial (liabilities) assets   CA$  101  ‐  444  ‐  (2,568)  (1,052)  (3,075)  EUR  2,771  2,357  12,574  ‐  (11,379)  (65,928)  (59,605)  GBP  85  ‐  2,203  ‐  (870)  ‐  1,418  RMB  3,913  ‐  3,893  (8,014)  (4,733)  ‐  (4,941)  HK$  11  ‐  ‐  ‐  (232)  ‐  (221)  18 5N Plus Inc.                                                                                Management’s Discussion and Analysis  The  following  table  shows  the  impact  on  earnings  before  income  tax  of  a  one‐percentage  point  strengthening  or  weakening of foreign currencies against the US dollar as at December 31, 2012 for the Company’s financial instruments  denominated in non‐functional currencies:  1% Strengthening  Earnings (loss) before tax  1% Weakening  Earnings (loss) before tax  CA$  (31)  31  EUR  (596)  596  GBP  RMB  HK$  14  (14)  (49)  49  (2)  2  Options  The Company sold options to a financial institution, giving it the right to sell Euros to the Company on specific dates. The  options  have  a  nominal  value  of  €21.5  with  €/US$  exchange  of  1.3283,  and  they  mature  in  January  2013  without  renewal. The fair value was ($0.2) million as at December 31, 2012.  The  market  value  of  those  financial  instruments  depends  on  several  factors,  such  as  foreign  market  volatility,  the  remaining  duration  of  the  instruments  and  other  market  conditions.  For  these  reasons,  it  is  very  difficult  for  the  Company to evaluate market risk. The Company believes that a sensitivity analysis would be unrepresentative.  Warrants In June 2012, the Company issued 12,903,613 units at a price of CA$3.10 per unit. Each unit comprises one common  share and one‐half of a common share purchase warrant. The Company issued 6,451,807 warrants, which are recorded  as  part  of  derivative  financial  liabilities  at  fair  value  based  on  the  stock  exchange  market.  The  fair  value  was  ($1.2)  million as at December 31, 2012 and nil as at December 31, 2011. Fair value depends on several factors, such as market  volatility,  foreign  exchange  rate  volatility,  interest  rate  fluctuations,  the  Company’s  market  activity  and  other  market  conditions. For these reasons, it is very difficult for the Company to evaluate market risk. The Company believes that a  sensitivity analysis would be unrepresentative.  Credit risk  Credit risk corresponds to the risk of loss due to the client’s inability to fulfill its obligations with respect to trade and  other  receivables  as  well  as  contracts.  The  Company  has  a  large  number  of  clients  and  is  no  longer  dependent  on  a  specific client. The Company has a credit policy that defines standard credit practices. This policy dictates that all new  customer  accounts  be  reviewed  prior  to  approval  and  establishes  the  maximum  amount  of  credit  exposure  per  customer. The creditworthiness and financial well‐being of the customer are monitored on an ongoing basis.  The Company establishes an allowance for doubtful accounts as determined by management based on its assessment of  collection; therefore, the carrying amount of accounts receivable generally represents the maximum credit exposure. As  at December 31, 2012 and 2011, the Company has an allowance for doubtful accounts of $168 and $482 respectively.  The  provision  for  doubtful  accounts,  if  any,  will  be  included  in  SG&A  expenses  in  the  consolidated  statements  of  earnings (loss), and will be net of any recoveries that were provided for in prior periods.  Liquidity risk  Liquidity  risk  is  the  risk  that  the  Company  will  not  be  able  to  meet  its  financial  obligations  as  they  come  due.  The  Company  manages  liquidity  risk  through  the  management  of  its  capital  structure.  It  also  manages  liquidity  risk  by  continually  monitoring  actual  and  projected  cash  flows,  taking  into  account  the  Company’s  sales  and  receipts  and  matching the maturity profile of financial assets and financial liabilities. The Board of Directors reviews and approves  the Company’s annual operating and capital budgets, as well as any material transactions out of the ordinary course of  business, including proposals on acquisitions and other major investments.  Risks and Uncertainties  The Company is subject to a number of risk factors which may limit its ability to execute its strategy and achieve its long‐ term growth objectives. Management analyses these risks and implements strategies in order to minimize their impact  on the Company's performance.   5N Plus Inc.                      19                                       Management’s Discussion and Analysis  Possible Failure to Realize Anticipated Benefits of Acquisitions  There  is  a  risk  that  some  of  the  expected  benefits  will  fail  to  materialize,  or  may  not  occur  within  the  time  periods  anticipated by our management. The realization of such benefits may be affected by a number of factors, many of which  are beyond our control. These factors include achieving the benefits of the acquisition and any future acquisitions that  we may complete and will depend in part on successfully consolidating functions and integrating operations, procedures  and personnel in a timely and efficient manner, as well as our ability to realize the anticipated growth opportunities and  synergies  from  combining  the  acquired  businesses  and  operations  with  ours.   The   integration  of  acquired  businesses  requires the dedication of substantial management effort, time and resources which may divert management’s focus  and  resources  from  other  strategic  opportunities  and  from  operational  matters  during  this  process.   The   integration  process may result in the loss of key employees, significant expenses and the disruption of ongoing business, customer  and  employee  relationships  that  may  adversely  affect  our  ability  to  achieve  the  anticipated  benefits  of  these  acquisitions.  Additional Indebtedness  We assumed the indebtedness of former MCP upon the completion of the acquisition.  The additional indebtedness has  increased the interest payable by us from time to time until such amounts are repaid.  In addition, we are required to  pay to the selling shareholders the amounts set out in the promissory notes as well as the cash “holdback” described  under “Acquisition Agreement and Related Agreements”, in the short form prospectus dated April 1, 2011. Although we  have  signed  a  $200 million  senior  secured  multi‐currency  revolving  credit  facility,  we  may  need  to  find  additional  sources of financing to pay the foregoing indebtedness when it becomes due.  There can be no guarantee that we will  be able to obtain financing on terms acceptable to us or at all at such time or times.  International Operations  We  operate  in  a  number  of countries,  including  China,  and,  as  such,  face  risks  associated  with  international  business  activities.   We   could  be  significantly  affected  by  such  risks,  which  include  the  integration  of  international  operations,  challenges  associated  with  dealing  with  numerous  legal  systems,  the  potential  for  volatile  economic  and  labor  conditions,  political  instability,  expropriation,  and  changes  in  taxes,  tariffs  and  other  regulatory  costs.  Although  we  operate primarily in countries with relatively stable economic and political climates, there can be no assurance that our  business will not be adversely affected by the risks inherent in international operations.  Environmental Regulations  Our  operations  involve  the  use,  handling,  generation,  processing,  storage,  transportation,  recycling  and  disposal  of  hazardous materials and are subject to extensive environmental laws and regulations at the national, provincial, local  and international level.  These  environmental laws and regulations include those governing the discharge of pollutants  into  the  air  and  water,  the  use,  management  and  disposal  of  hazardous  materials  and  wastes,  the  clean‐up  of  contaminated  sites  and  occupational  health  and  safety.    We  have  incurred  and  will  continue  to  incur  capital  expenditures  in  order  to  comply  with  these  laws  and  regulations.   In   addition,  violations  of,  or  liabilities  under,  environmental  laws  or  permits  may  result  in  restrictions  being  imposed  on  our  operating  activities  or  in  our  being  subject  to  substantial  fines,  penalties,  criminal  proceedings,  third  party  property  damage  or  personal  injury  claims,  clean‐up  costs  or  other  costs.   While   we  believe  that  we  are  currently  in  compliance  with  applicable  environmental  requirements, future developments such as more aggressive enforcement policies, the implementation of new, more  stringent  laws  and  regulations,  or  the  discovery  of  currently  unknown  environmental  conditions  may  require  expenditures that could have a material adverse effect on our business, results of operations and financial condition.  Former MCP’s facility in Tilly, Belgium is currently undergoing corrective measures under a remediation plan as a result  of industrial legacy at this site, which has been in industrial use for more than 100 years, and in order to comply with  more  stringent  environmental  regulations.  The  remediation  plan  has  been  approved  by  the  local  authorities  and  estimated resulting costs have been properly accounted for by the Company.   Legal Proceedings  On November 6, 2012, Florinvest S.A., Heresford Ltd., Metals Corp S.C.R.L. and S.R.I.W. S.A. (the “Vendors”) which are  all former shareholders of MCP filed a request for arbitration (the “Arbitration”) against the Company, claiming that it  misinterpreted the terms of the Acquisition Agreement entered into with them on February 26, 2011 with respect to  the calculation of interests owed on the sums payable after closing. The Company opposes the position taken by the  Vendors with respect to the method of calculating interest.  20 5N Plus Inc.                            Management’s Discussion and Analysis  Together with the answer to the request for Arbitration, the Company also filed a counterclaim in the Arbitration, as it  has  discovered  that  the  Vendors  have  breached  the  terms  of  the  Acquisition  Agreement,  and  certain  other  related  agreements, including breaches with respect to representations and warranties made by the Vendors and breaches of  closing conditions. The Company and MCP have also filed lawsuits against the former directors of MCP holding them  personally liable for any and all damages caused by any faults or tortuous acts committed by them acting as directors of  MCP or in any other capacity. The total amount of damages which the Company has incurred to date is provisionally  estimated at an amount which is significantly higher than the balance of the sums allegedly owed under the terms of  the Acquisition Agreement and other related documents. Furthermore, the Company intends to be fully indemnified by  the  Vendors  and  the  former  directors  of  MCP  for  any  damage  in  excess  of  the  balance  of  the  sums  owed  under  the  terms of the Acquisition Agreement and other related documents.  The Company is confident that its claims against the Vendors and eventually the former directors of MCP have merit,  however, there are no guarantees as to the outcome of such litigation.   The Company is threatened from time to time with, or may become subject to various legal proceedings in the ordinary  course of conducting its business. Being implicated in such legal proceedings could require substantial amounts of its  management's attention, necessitate financial resources to defend such claims or result in significant attorney fees and  damage  awards  for  which  the  Company  may  not  be  fully  insured  and  which  could  harm  its  reputation.  A  significant  judgment against the Company or the imposition of a significant fine or penalty could have a material adverse effect on  its business, prospects, financial condition and results of operations.  Competition risk  We are the leading producer of specialty metal and chemical products and have a limited number of competitors, none  of which are as fully integrated as we are or have a similar range of products. Accordingly, they are not in a position to  provide the same comprehensive set of services and products as we do. However, there can be no guarantee that this  situation will continue in the future and competition could arise from new low‐cost metal refiners or from certain of our  customers  who  could  decide  to  backward  integrate.  The  forecasted  growth  in  demand  for  our  main  products  may  attract more metal refiners into this industry and increase competition. Although we believe that our operations and  our commercial network are important competitive advantages, greater competition could have an adverse effect on  our  revenues  and  operating  margins  if  our  competitors  gain  market  share  and  we  are  unable  to  compensate  for  the  volume lost to our competition.  Commodity price risk  The price we pay for, and availability of, various inputs fluctuates due to numerous factors beyond our control, including  economic conditions, currency exchange rates, global demand for metal products, trade sanctions, tariffs, labor costs,  competition,  over  capacity  of  producers  and  price  surcharges.  Fluctuations  in  availability  and  cost  of  inputs  may  materially adversely affect our business, financial condition, results of operations and cash flows. To the extent that we  are  not  able  to  pass  on  any  increases,  our  business,  financial  condition,  results  of  operations  and  cash  flows  may  be  materially adversely affected.  Sources of Supply  We may not be able to secure the critical raw material feedstock on which we depend for our operations.  We currently  procure  our  raw  materials  from  a  number  of  suppliers  with  whom  we  have  had  long‐term  commercial  relationships.   The loss of any one of these suppliers or a reduction in the level of deliveries to us may reduce our production capacity  and impact our deliveries to customers.  This would in turn negatively impact our sales, net margins and may lead to  liabilities with respect to some of our sales contracts.  Protection of Intellectual Property   Protection of our proprietary processes, methods and other technologies is important to our business.  We rely almost  exclusively  on  a  combination  of  trade  secrets  and  employee  confidentiality  agreements  to  safeguard  our  intellectual  property.  We have deliberately chosen to limit our patent position to avoid disclosing valuable information.  Failure to  protect and monitor the use of our existing intellectual property rights could result in the loss of valuable technologies  and processes.  5N Plus Inc.                      21               Management’s Discussion and Analysis  Inventory price risk  The  Company  monitors  its  risk  associated  with  the  value  of  its  inventories in  relation  to  the  market  price  of  such  inventories.  Because of the highly illiquid nature of many of its inventories, we rely on a combination of standard risk  measurement  techniques,  such  as  value  at  risk  as  well  as  a  more  empirical  assessment  of  the  market  conditions.  Decisions on appropriate physical stock levels are taken by considering both the value at risk calculations  and the market conditions.  Business Interruptions  We may incur losses resulting from business interruptions.  In many instances, especially those related to our long‐term  contracts, we have contractual obligations to deliver product in a timely manner.  Any disruption in our activities which  leads  to  a  business  interruption  could  harm  our  customers’  confidence  level  and  lead  to  the  cancellation  of  our  contracts and legal recourse against us.  Although we believe that we have taken the necessary precautions to avoid  business  interruptions  and  carry  business  interruption  insurance,  we could  still  experience  interruptions  which would  adversely impact our financial results.  Dependence on Key Personnel   The Company relies on the expertise and know‐how of its personnel to conduct its operations.   The loss of any member  of our senior management team could have a material adverse effect on us.  Our future success also depends on our  ability to retain and attract our key employees, train, retain and successfully integrate new talent into our management  and  technical  teams.   Recruiting  and  retaining  talented  personnel,  particularly  those  with  expertise  in  the  specialty  metals  industry  and  refining  technology  is  vital  to  our  success  and  may  prove  difficult. We  cannot  provide  assurance  that we will be able to attract and retain qualified personnel when needed.  Collective Agreements  A  portion  of  our  workforce  is  unionized  and  we  are  party  to  collective  agreements  that  are  due  to  expire  at  various  times in the future.  If we are unable to renew these collective agreements on similar terms as they become subject to  renegotiation from time to time, this could result in work stoppages or other labour disturbances, such as strikes, walk‐ outs or lock‐outs, potentially affecting our performance.  Risks Associated with Public Issuer Status  The  Company’s  shares  are  publicly  traded  and,  as  such,  it  is  subject  to  all  of  the  obligations  imposed  on  "reporting  issuers" under applicable securities laws in Canada and all of the obligations applicable to a listed company under stock  exchange  rules.  Direct  and  indirect  costs  associated  with  public  company  status  have  escalated  in  recent  years  and  regulatory initiatives under consideration may further increase the costs of being public in Canada. Those costs could  have an adverse effect on the Company’s financial condition.  Non‐IFRS Measures   In  this  Management’s  Report,  the  Company’s  management  uses  certain  measures  which  are  not  in  accordance  with  IFRS. Non‐IFRS measures are useful supplemental information but may not have a standardized meaning according to  IFRS.   Backlog represents the expected value of orders we have received but have not yet executed and that are expected to  translate  into  sales  within  the  next  12  months.  Bookings  represents  the  value  of  orders  received  during  the  period  considered and is calculated by adding revenues to the increase or decrease in backlog for the period considered.  We  use backlog to provide an indication of expected future revenues, and bookings to determine our ability to sustain and  increase our revenues.   EBITDA  means  net  earnings  (loss)  before  financial  expenses  (income),  income  taxes,  depreciation  and  amortization,  impairment  or  reversal  of  impairment  of  PPE  and  intangible  assets,  impairment  of  goodwill,  restructuring  costs  and  acquisition‐related costs. We use EBITDA because we believe it is a meaningful measure of the operating performance  of our ongoing business without the effects of certain expenses. The definition of this non‐IFRS measure used by the  Company may differ from that used by other companies.    22 5N Plus Inc.                                          Management’s Discussion and Analysis  Adjusted EBITDA means EBITDA as defined above before impairment of inventories. We use adjusted EBITDA because  we  believe  it  is  a  meaningful  measure  of  the  operating  performance  of  our  ongoing  business  without  the  effects  of  inventory  write‐downs.  The  definition  of  this  non‐IFRS  measure  used  by  the  Company  may  differ  from  that  used  by  other companies.   Adjusted net earnings means the net earnings (loss) before the effect of charge and reversal of impairment related to  inventory,  PPE  and  intangible  assets,  impairment  of  goodwill,  restructuring  charges  and  acquisitions  costs  net  of  the  related income tax. We use adjusted net earnings (loss) because we believe it is a meaningful measure of the operating  performance  of  our  ongoing  business  without  the  effects  of  unusual  inventory  write‐downs  and  property  plant  and  equipment and intangible asset impairment charges, restructuring charges and acquisition costs. The definition of this  non‐IFRS measure used by the Company may differ from that used by other companies.     Basic adjusted net earnings (loss) per share means Adjusted net earnings (loss) divided by the weighted average number  of  outstanding  shares.  We  use  basic  adjusted  net  earnings  (loss)  per  share  because  we  believe  it  is  a  meaningful  measure of the operating performance of our ongoing business without the effects of unusual inventory write‐downs  and property plant and equipment and intangible asset impairment charges, restructuring charges and acquisition costs  per share. The definition of this non‐IFRS measure used by the Company may differ from that used by other companies.     Funds  from  operations  means  the  amount  of  cash  generated  from  operating  activities  before  changes  in  non‐cash  working capital balances related to operations. This amount appears directly in the audited consolidated statements of  cash flows of the Company. We consider funds from operations to be a key measure as it demonstrates the Company’s  ability to generate cash necessary for future growth and debt repayment.   Gross  profit  is  a  financial  measure  equivalent  to  the  sales  less  cost  of  sales.  The  gross  profit  ratio  is  displayed  as  a  percentage  of  sales.  We  use  gross  profit  and  gross  profit  ratio  as  measures  of  our  ability  to  operate  effectively  and  generate value.  Adjusted gross profit is a financial measure equivalent to the sales less cost of sales excluding write‐down of inventories.  The adjusted gross profit ratio is displayed as a percentage of sales. We use adjusted gross profit and adjusted gross  profit ratio as measures of our ability to operate effectively and generate value.  Net debt or net cash is a measure we use to monitor how much debt we have after taking into account cash and cash  equivalents and temporary investments. We use it as an indicator of our overall financial position, and calculate it by  taking  our  total  debt,  including  the  current  portion,  and  subtracting  cash  and  cash  equivalents  and  temporary  investments.    Working capital is a measure that shows us how much cash we have available for the growth of our Company.  We use it  as an indicator of our financial strength and liquidity.  We calculate it by taking current assets and subtracting current  liabilities.  Additional Information  Our common shares trade on the Toronto Stock Exchange (TSX) under the ticker symbol VNP. Additional  information  relating to the Company, including the Company’s annual information form is available under the Company’s profile on  SEDAR at www.sedar.com.  Subsequent Event  In March 2013, the Company signed an amendment to its senior secured multi‑currency revolving credit facility under  which  the  facility  will  be  reduced  to $100 million  starting  March  31, 2013.  The amendment  establishes  new  financial  covenants for 2013 and maintains the original maturity (August 2015). The interest rate has been changed and is linked  to the Debt/EBITDA ratio, and can vary from LIBOR, banker’s acceptance rate or EURIBOR plus 3.00% to 4.50% or US  base rate or prime rate plus 2.00% to 3.5%.  Standby fees from 0.75% to 1.125% are paid on the unused portion. At any  time, 5N Plus has the option to request that the credit facility be expanded to $140 million through the exercise of an  additional $40 million accordion feature, subject to review and approval by the lenders.  5N Plus Inc.                      23                   5N PLUS INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE SEVEN- MONTH PERIOD ENDED DECEMBER 31, 2011 (Figures in thousands of United States dollars) 24 Management’s Report To the Shareholders of 5N Plus Inc. The accompanying consolidated financial statements are the responsibility of the management of 5N Plus Inc. and have been reviewed by the Audit Committee and approved by the Board of Directors. These consolidated financial statements and related notes have been prepared by management in conformity with International Financial Reporting Standards and necessarily include amounts based on management’s informed judgments and estimates. Management is also responsible for all other information included in this Annual Report and for ensuring that this information is consistent with the Company’s consolidated financial statements and business activities. Management is responsible for the design, establishment and maintenance of appropriate internal controls and procedures for financial reporting, to ensure that financial statements for external purposes are fairly presented in conformity with International Financial Reporting Standards. Such internal control systems are designed to provide reasonable assurance on the reliability of the financial information and the safeguarding of assets. The Company’s external auditors have free and independent access to the Audit Committee, which is comprised of independent directors. The Audit Committee, which meets regularly throughout the year with members of management, reviews the consolidated financial statements and recommends their approval to the Board of Directors. The consolidated financial statements have been audited by PricewaterhouseCoopers LLP. SIGNED Jacques L’Ecuyer President and Chief Executive Officer SIGNED David Langlois, CA Chief Financial Officer Montreal, Canada March 28, 2013 25 26 27 5N PLUS INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Figures in thousands of United States dollars) ASSETS Current Cash and cash equivalents Temporary investments (restricted) Accounts receivable (Note 5) Inventories (Note 6) Income tax receivable Other current assets Total current assets Property, plant and equipment (Note 7) Intangible assets (Note 8) Deferred tax asset (Note 16) Goodwill (Note 9) Investments accounted for using the equity method (Note 10) Other assets (Note 11) Total non-current assets Total assets LIABILITIES AND EQUITY Current Bank indebtedness and short-term debt (Note 13) Trade and accrued liabilities (Note 12) Income tax payable Derivative financial liabilities (Note 17) Long-term debt due within one year (Note 13) Total current liabilities Long-term debt (Note 13) Deferred tax liability (Note 16) Retirement benefit obligation (Note 14) Derivative financial liabilities (Note 17) Other liabilities (Note 15) Total non-current liabilities Total liabilities Shareholders’ equity Non-controlling interest Total equity Total liabilities and equity Commitments and contingencies (Note 24) The accompanying notes are an integral part of these consolidated financial statements. As at December 31, 2012 $ As At December 31, 2011 $ 9,535 2,357 87,807 170,293 18,931 2,514 291,437 55,548 16,010 11,232 - 503 9,248 92,541 383,978 8,014 62,214 2,217 2,817 29,527 104,789 110,898 2,632 12,092 3,537 1,560 130,719 235,508 148,112 358 148,470 383,978 29,449 51,882 76,641 315,333 11,022 2,762 487,089 86,483 68,148 2,706 124,910 1,513 11,495 295,255 782,344 73,430 59,029 354 3,814 14,757 151,384 253,719 19,143 12,315 1,902 4,171 291,250 442,634 339,241 469 339,710 782,344 28 5N PLUS INC. CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (Figures in thousands of United States dollars, except per share information) Revenues Cost of sales (Note 28) Selling, general and administrative expenses (Note 28) Other expenses, net (Note 28) Share of (profit) loss from joint ventures Operating loss Financial expenses Interest on long-term debt Other interest expense Foreign exchange and derivative (gain) and loss Loss before income tax Income tax recovery (Note 16) Net loss for the period Attributable to: Equity holders of 5N Plus Inc. Non-controlling interest Loss per share attributable to equity holders of 5N Plus Inc. (Note 22) Basic loss per share Diluted loss per share The accompanying notes are an integral part of these consolidated financial statements. For the year ended December 31, 2012 $ For the seven-month period ended December 31, 2011 $ 551,675 520,247 45,742 225,836 333 792,158 (240,483) 8,012 816 2,759 11,587 (252,070) (24,221) (227,849) (227,738) (111) (227,849) (2.91) (2.91) (2.91) 391,712 357,530 33,500 23,443 (429) 414,044 (22,332) 5,179 308 (642) 4,845 (27,177) (4,713) (22,464) (21,641) (823) (22,464) (0.31) (0.32) (0.32) 29   5N PLUS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Figures in thousands of United States dollars) Net loss for the period Other comprehensive income (loss) Cash flow hedges, net of income tax of $406 (2011 – $188) De-designation of cash flow hedges (net of income tax of $(312)) for 2012 Currency translation adjustment Comprehensive loss for the period Attributable to equity holders of 5N Plus Inc. Attributable to non-controlling interest The accompanying notes are an integral part of these consolidated financial statements. For the year ended December 31, 2012 $ For the seven-month period ended December 31, 2011 $ (227,849) (22,464) (1,102) 848 215 (227,888) (227,777) (111) (474) - 246 (22,692) (21,869) (823) 30   5N PLUS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Figures in thousands of United States dollars) Operating activities Net loss for the period Adjustments to reconcile net loss to cash flows Depreciation of property, plant and equipment and amortization of intangible assets Amortization of other assets Share-based compensation expense Deferred income tax Share of (profit) loss from joint ventures Impairment of inventories (Note 6) Impairment of property, plant and equipment (Note 7) Impairment of intangible assets (Note 8) Impairment of goodwill (Note 9) Reversal of impairment of property, plant and equipment (Note 7) Unrealized loss (gain) on non-hedge financial instruments Unrealized foreign exchange loss (gain) on assets and liabilities Funds from operations before the following Net change in non-cash working capital balances related to operations (Note 20) Cash flows from (used in) operating activities Investing activities Acquisition of a 40% interest in a subsidiary (Note 4) Acquisition of property, plant and equipment Acquisition of intangible assets Temporary investments (restricted) Cash flows from (used in) investing activities Financing activities Repayment of long-term debt Proceeds from issuance of long-term debt Net decrease in bank indebtedness and short-term debt Issuance of common shares and warrants (Note 18) Share issuance expense Financial instruments Others Cash flows from (used in) financing activities Effect of foreign exchange rate changes on cash and cash equivalents related to operations Net increase (decrease) in cash and cash equivalents during the period Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental information(a) Income tax paid Interest paid For the year ended December 31, 2012 $ For the seven-month period ended December 31, 2011 $ (227,849) (22,464) 21,159 1,040 563 (25,037) 333 50,585 39,239 40,597 124,910 (932) (1,338) 2,123 25,393 76,419 101,812 - (15,541) (347) 49,525 33,637 (126,826) - (65,416) 38,636 (1,621) 263 - (154,964) (399) (19,914) 29,449 9,535 7,520 8,434 12,797 485 443 (1,357) (429) 34,790 11,460 700 - - 1,946 (11,033) 27,338 (38,253) (10,915) (1,007) (9,964) (821) (529) (12,321) (53,736) 185,426 (101,273) 346 (162) 2,653 (9,211) 24,043 592 1,399 28,050 29,449 9,937 6,786 (a) Amounts paid for interest and income tax were reflected as cash flows from operating activities in the consolidated statements of cash flows. The accompanying notes are an integral part of these consolidated financial statements. 31   5N PLUS INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Figures in thousands of United States dollars, except number of shares) For the year ended December 31, 2012 For the seven-month period ended December 31, 2011 Total Equity Shareholders’ Equity Share capital Balance at beginning of period Common shares issued on exercise of stock options Common shares issued for cash (Note 18) Balance at end of period Contributed surplus Balance at beginning of period Share-based compensation expense Exercise of stock options Balance at end of period Retained earnings (deficit) Balance at beginning of period Net loss attributable to equity holders of 5N Plus Inc. for the period Acquisition of a 40% interest in a subsidiary (Note 4) Share issue expense (net of income tax of $436; December 31, 2011 – $36) (Note 18) Balance at end of period Accumulated other comprehensive loss Balance at beginning of period Cash flow hedges (net of income tax of $406; 2011 – $188) De-designation of cash flow hedges (net of income tax of $(312)) for 2012 Currency translation adjustment Balance at end of period Total shareholders’ equity at end of period Non-controlling Interest Balance at beginning of period Share of profit Balance at end of period Total Equity Number of shares 70,961,125 43,531 12,903,613 83,908,269 Amount $ 305,928 225 37,119 343,272 2,691 563 (74) 3,180 30,850 (227,738) - (1,185) (198,073) (228) (1,102) 848 215 (267) 148,112 469 (111) 358 148,470 Number of shares Amount $ 70,892,627 68,498 - 70,961,125 305,464 464 - 305,928 2,366 443 (118) 2,691 54,868 (21,641) (2,251) (126) 30,850 - (474) - 246 (228) 339,241 1,292 (823) 469 339,710 The accompanying notes are an integral part of these consolidated financial statements. 32   5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 1 – GENERAL INFORMATION Nature of operations 5N Plus Inc. (“5N Plus” or the “Company”) is a Canadian-based international company. 5N Plus is a producer of specialty metal and chemical products. Fully integrated with closed-loop recycling facilities, the Company’s head office is located at 4385 Garand Street, Saint-Laurent, Quebec (Canada) H4R 2B4. The Company operates manufacturing facilities and sales offices in several locations in Europe, the Americas and Asia. The Company’s shares are listed on the Toronto Stock Exchange (“TSX”). 5N Plus and its subsidiaries represent the “Company” mentioned throughout these consolidated financial statements. The Company has two reportable business segments, namely Electronic Materials and Eco-Friendly Materials. Corporate expenses associated with the head office and unallocated selling, general and administrative expenses together with financing costs, gains and/or losses on foreign exchange and derivative and the amortization of intangible assets have been regrouped under the heading Corporate and unallocated (Note 19). Corresponding operations and activities are managed accordingly by the Company’s key decision-makers. The Electronic Materials segment is headed by a vice president who oversees locally managed operations in North America, Europe and Asia. Its main products are associated with the following metals: cadmium, gallium, germanium, indium and tellurium. These metals are sold as elements, alloys, chemicals and compounds. The Eco-Friendly Materials segment is associated mainly with bismuth. This segment is headed by a vice president who oversees locally managed operations in Europe and China. The segment manufactures and sells refined bismuth and bismuth chemicals, low melting-point alloys as well as refined selenium and selenium chemicals. The Company’s operations are not subject to seasonal fluctuations. In 2011, the Company changed its financial year-end from May 31 to December 31. These consolidated financial statements are for the year ended December 31, 2012 with comparative figures for the seven-month period ended December 31, 2011. These consolidated financial statements were authorized for issuance by the Company’s Board of Directors on March 28, 2013. NOTE 2 – SUMMARY OF PRINCIPAL ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated. Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations. The consolidated financial statements have been prepared under the historical cost convention, except for derivative financial instruments. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are also disclosed in Note 2. Certain comparative figures have been reclassified to conform to the current year’s presentation. 33     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Consolidation a) Subsidiaries All the subsidiaries are entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. The Company also assesses the existence of control where it does not have more than 50% of the voting power but is able to govern the financial and operating policies by virtue of de facto control. De facto control may arise in circumstances where the size of the Company’s voting rights relative to the size and dispersion of holdings of other shareholders gives the Company the power to govern the financial and operating policies. The subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. The Company applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary corresponds to the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. The Company recognizes any non-controlling interest in the acquiree on an acquisition- by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognized amounts of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date; any gains or losses arising from such remeasurement are recognized in profit or loss. Any contingent consideration to be transferred by the Company is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in accordance with IAS 39, “Financial Instruments: Recognition and Measurement”, either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for in equity. Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non- controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss. Intercompany transactions, balances, income and expenses on transactions between group companies are eliminated. Profits and losses resulting from intercompany transactions that are recognized in assets are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company. 34     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) b) Associates All associates are entities over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under this method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition. The Company’s investment in associates includes goodwill identified on acquisition. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss where appropriate. The Company’s share of post-acquisition profit or loss is recognized in the consolidated statement of earnings (loss), and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. When the Company’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. The Company determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount adjacent to share of profits (loss) of associates in the consolidated statement of earnings (loss). Profits and losses resulting from upstream and downstream transactions between the Company and its associate are recognized in the Company’s consolidated financial statements only to the extent of unrelated investor’s interests in the associates. Unrealized losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Company. Dilution gains and losses arising in investments in associates are recognized in the consolidated statement of earnings (loss). Foreign currency translation a) Functional and presentation currency The Company’s functional and presentation currency is the US dollar. Functional currency is determined for each of the Company’s entities, and items included in the financial statements of each entity are measured using that functional currency. b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of earnings (loss), except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange gains and losses are presented in the consolidated statement of earnings (loss) within “foreign exchange and derivative (gain) and loss”. Changes in the fair value of monetary securities denominated in foreign currencies classified as available for sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes 35     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) in the carrying amount of the security. Translation differences related to changes in amortized cost are recognized in profit or loss, and other changes in the carrying amount are recognized in other comprehensive income. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss. Translation differences on non-monetary financial assets, such as equities classified as available for sale, are included in other comprehensive income. c) Group companies The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: i) ii) assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; income and expenses for each statement of earnings are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and iii) all resulting exchange differences are recognized in other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognized in other comprehensive income. Segment reporting In identifying its operating segments, management generally follows the Company’s service lines, which represent the main products provided by the Company. The Company operates two principal segments: Electronic Materials and Eco-Friendly Materials. Discrete operating and financial information is available for these segments and is used to determine the operating performance of each segment and to allocate resources. The Electronic Materials segment is associated with the following metals: cadmium, gallium, germanium, indium and tellurium. These are sold as elements, alloys, chemicals and compounds. Typical end-markets include photovoltaics (solar energy), medical imaging, light emitting diodes (LED), displays, high-frequency electronics and thermoelectrics. The Eco-Friendly Materials segment manufactures and sells refined bismuth and bismuth chemicals, low melting-point alloys as well as refined selenium and selenium chemicals. These are used in the pharmaceutical and animal-feed industries as well as in a number of industrial applications including coatings, pigments, metallurgical alloys and electronics. Each operating segment is managed separately as each of these service lines requires different technologies, resources and marketing approaches. All intersegment transactions between the Electronic Materials and the Eco-Friendly Materials segment have been eliminated on consolidation. Revenue recognition Revenue comprises the sale of manufactured products and the rendering of services and is measured at the fair value of the sale of manufactured products, net of intercompany sales, value-added tax, and estimated customer returns and allowances at the time of recognition. The estimates of fair value are based on the Company’s historical experience with each customer and the specifics of each arrangement. 36     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Revenue from the sale of manufactured products and custom refining activities is recognized when the risks and rewards of ownership have been transferred to the buyer (which generally occurs upon shipment) and collectibility of the related receivables is reasonably assured. Revenue is recognized when (i) it can be measured reliably; (ii) it is probable that the economic benefits associated with the transaction will flow to the entity; and (iii) the costs incurred or to be incurred can be measured reliably. Management uses its best estimate to record revenue when measurement of the revenue is not yet determined and the criteria above are met. Property, plant and equipment Property, plant and equipment are recorded at cost and depreciated over their estimated useful lives on a straight-line basis over 25 years for buildings, 10 years for production equipment, ranging from 3 to 10 years for furniture, office equipment and rolling stock, and over the term of the lease for leasehold improvements. As no finite useful life for land can be determined, related carrying amounts are not depreciated. Consistent with IAS 16, Property, Plant and Equipment, “significant components” with different useful lives from the original asset purchased or constructed are identified and depreciated using a representative useful life. Maintenance and repairs are charged to expense as incurred. However, “major overhauls and replacements” are capitalized to the consolidated statements of financial position as a separate component, with the replaced part or previous overhaul derecognized from the statement. Construction in progress is not depreciated until the assets are put into use. Costs are only capitalized if they are directly attributable to the construction or development of the assets. Residual values, method of depreciation and useful life of the assets are reviewed annually and adjusted if appropriate. The carrying values of property, plant and equipment which exceed their recoverable amounts are written down to their recoverable amount and are recognized in the consolidated statements of earnings (loss) (see impairment section below). Gains or losses arising on the disposal of property, plant and equipment are determined as the difference between the disposal proceeds and the carrying amount of the assets and are recognized in the consolidated statements of earnings (loss) in other expenses, net. Leases Leases are classified as finance leases if the Company bears substantially all risks and rewards of ownership of the leased asset. At inception of the lease, the related asset is recognized at the lower of fair value and the present value of the minimum lease payments, and a corresponding amount is recognized as a finance lease obligation. Lease payments are split between finance charges and the reduction of the finance lease obligation to achieve a constant proportion of the capital balance outstanding. Finance charges are charged to net earnings (loss) over the lease term. All other leases are classified as operating leases. Operating lease payments are recognized as an expense on a straight-line basis over the lease term. 37     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Goodwill and intangible assets Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed. Goodwill is tested for impairment on an annual basis or whenever facts or circumstances indicate that the carrying amount may exceed its recoverable amount. Intangible assets other than goodwill are amortized on a straight-line basis over the periods stated below. Customer relationships Technology Trade name and non-compete agreements Software Intellectual property Development costs Impairment of non-financial assets Impairment of goodwill Periods 10 years 5 years 2 to 5 years 5 years 10 years Not exceeding 10 years For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows. As a result, some assets are tested individually for impairment and some are tested at the cash-generating unit (“CGU”) level. Goodwill is allocated to CGUs or groups of CGUs for impairment testing purposes based on the level at which management monitors it, which is not higher than an operating segment. The allocation is made to those CGUs or group of CGUs that are expected to benefit from synergies of the related business combination in which the goodwill arises. Corporate head office assets and expenses are not allocated to CGUs or groups of CGUs. If there is an indication that a corporate asset may be impaired, the recoverable amount is determined for the CGU to which the corporate asset belongs. CGUs to which goodwill has been allocated are tested for impairment at least annually and whenever there is an indication that the unit may be impaired. This testing is done by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. To determine value in use, management estimates expected future cash flows from each CGU and determines a suitable discount rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Company’s latest approved budget, adjusted as necessary to exclude the effects of future reorganizations and asset enhancements. Discount factors are determined individually for each CGU and reflect their respective risk profiles as assessed by management. Impairment losses for a CGU are first allocated to reduce the carrying amount of goodwill allocated to that CGU, and the remainder is allocated to other assets of the unit on a pro rata basis. Goodwill impairment losses cannot be reversed. Impairment of other non-financial assets Non-financial assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. In addition, non-financial assets that are not amortized are subject to an annual impairment assessment. Any impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs). The Company evaluates impairment losses for potential reversals, other than goodwill impairment, when events or changes in circumstances warrant such consideration. 38     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Non-current assets (or disposal groups) held for sale Non-current assets (or disposal groups) are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell. Financial assets Classification The Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months; otherwise, they are classified as non-current. b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Company’s loans and receivables comprise “trade and other receivables”, “cash and cash equivalents” and “temporary investments (restricted)” in the consolidated statements of financial position. c) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period. Recognition and measurement Regular purchases and sales of financial assets are recognized on the trade date, the date on which the Company commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the consolidated statements of earnings (loss). Financial assets are derecognized when the rights to receive cash flows from the investments have expired or been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest method. Gains or losses arising from changes in the fair value of the “financial assets at fair value through profit or loss” category are presented in the consolidated statements of earnings (loss) within foreign exchange gain (loss) and derivatives in the period in which they arise. 39     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Impairment of financial assets Assets carried at amortized cost The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization, and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the consolidated statements of earnings (loss). If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Company may measure impairment on the basis of an instrument’s fair value, using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the reversal of the previously recognized impairment loss is recognized in the consolidated statements of earnings (loss). Financial liabilities The Company’s financial liabilities include borrowings, trade and accrued liabilities and derivative financial instruments. Financial liabilities are measured at amortized cost using the effective interest method, except for financial liabilities held for trading or designated at fair value through profit or loss, which are carried subsequently at fair value with gains or losses recognized in net earnings (loss). All derivative financial instruments that are not designated and effective as hedging instruments are accounted for at fair value through the consolidated statements of earnings (loss). All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in the consolidated statements of earnings (loss) are included in foreign exchange (gain) loss and derivatives. Derivative financial instruments and hedging activities Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Company designates certain derivatives as either: a) hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedge); b) hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge); or c) hedges of a net investment in a foreign operation (net investment hedge). 40     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) The Company documents at the inception of a transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative instruments used for hedging purposes are disclosed in Note 17. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. a) Fair value hedge The Company generally applies fair value hedge accounting to certain interest-rate derivatives to hedge the exposures to changes in the fair value of recognized financial assets and financial liabilities. In a fair value hedge relationship, gains or losses from the measurement of derivative hedging instruments at fair value are recorded in net earnings (loss), while gains or losses on hedged items attributable to the hedged risks are accounted for as an adjustment to the carrying amount of hedged items and are recorded in net earnings (loss). b) Cash flow hedge The Company generally applies cash flow hedge accounting to forward foreign exchange contracts and interest-rate derivatives entered into to hedge foreign exchange risks on forecasted transactions and recognized assets and liabilities. In a cash flow hedge relationship, the portion of gains or losses on the hedging item that is determined to be an effective hedge is recognized in other comprehensive income (loss), while the ineffective portion is recorded in net earnings (loss). The amounts recognized in other comprehensive income (loss) are reclassified in net earnings (loss) as a reclassification adjustment when the hedged item affects net earnings (loss). c) Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in other comprehensive income (loss). The gain or loss relating to the ineffective portion is recognized in the consolidated statements of earnings (loss). Gains and losses accumulated in equity are included in the consolidated statements of earnings (loss) when the foreign operation is partially disposed of or sold. Inventories Inventories are stated at the lower of cost and net realizable value. Cost includes all expenditures directly attributable to the manufacturing process as well as suitable portions of related production overheads based on normal operating capacity. Costs of ordinarily interchangeable items are assigned using a weighted average formula. Net realizable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. When the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of the impairment is reversed (i.e. the reversal is limited to the amount of the original impairment) so that the new carrying amount is the lower of the cost and the revised net realizable value. 41     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) From time to time, when substantially all required raw materials are in inventories, the Company may choose to enter into long-term sales contracts at fixed prices. The quantity of raw materials required to fulfill these contracts is specifically assigned, and the average cost of these raw materials of this inventory are accounted for throughout the duration of the contract. Trade receivables Trade receivables are amounts due from customers for the sale of manufactured products and the rendering of services performed in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits. Cash equivalents may also include bank notes, as well as short-term money market instruments with maturities of three months or less at the date of acquisition, which can be immediately converted into cash upon acquisition. Temporary investments (restricted) Temporary investments represent restricted deposits held to secure certain liabilities of the Company. Trade and accrued liabilities Trade and accrued liabilities are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade and accrued liabilities are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade and accrued liabilities are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. Borrowings Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortized cost: any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the consolidated statements of earnings (loss) over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the drawdown occurs. To the extent there is no evidence that it is probable that same or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity services and amortized over the term of the facility to which it relates. Borrowing costs General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. 42     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) All other borrowing costs are recognized in profit or loss in the period in which they are incurred. Income taxes The tax expense for the period comprises current and deferred tax. Tax is recognized in the consolidated statements of earnings (loss), except to the extent that it relates to items recognized in other comprehensive income (loss) or directly in equity. In which case, the tax is also recognized in other comprehensive income (loss) or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of the consolidated statements of financial position in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that are enacted or substantively enacted at the date of the consolidated statements of financial position and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be used. Deferred income tax is provided for on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Employee future benefits The Company contributes to a defined benefit pension plan. The significant policies related to employee future benefits are as follows:    The cost of pension and other post-retirement benefits earned by employees is actuarially determined using the projected benefit method pro-rated on service, market interest rates and management’s best estimate of expected plan investment performance, retirement ages of employees and expected health care costs. Fair value is used to value the plan assets for the purpose of calculating the expected return on plan assets. Cumulative unrecognized net actuarial gains and losses in excess of 10% of the greater of the accrued benefit obligation or market-related value of plan assets at the beginning of the year are amortized over the estimated average remaining service life of plan participants. Share-based payments The fair value of the equity-settled share-based payment plan is determined using the Black-Scholes model on the grant date. Measurement inputs include the share price on the measurement date, the exercise price of the instrument, expected volatility, weighted average expected life of the instrument, expected dividends, expected forfeiture rate, and the risk-free 43     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) interest rate. The impact of service and non-market vesting conditions is not taken into account in determining fair value. The compensation expense of the equity-settled awards is recognized in the consolidated statements of earnings (loss) over the graded vesting period, where the fair value of each tranche is recognized over its respective vesting period. For cash-settled share-based payment plans, the compensation expense is determined based on the fair value of the liability incurred at each reporting date until the award is settled. The fair value of the liability is measured using the Black-Scholes model, taking into consideration the terms and conditions attached to each grant and the extent to which the employees have rendered service to date. Earnings (loss) per share Basic earnings (loss) per share is calculated by dividing net earnings (loss) for the period attributable to equity owners of the Company by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated using the treasury stock method. Under this method, earnings (loss) per share data is computed as if the options were exercised at the beginning of the year (or at the time of issuance, if later) and as if the funds obtained from the exercise were used to purchase common shares of the Company at the average market price during the period. Provisions Provisions for environmental restoration, restructuring costs and legal claims are recognized when: the group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre- tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. Significant management estimation and judgment in applying accounting policies The following are significant management judgments used in applying the accounting policies of the Company that have the most significant effect on the consolidated financial statements. Estimation uncertainty When preparing the consolidated financial statements, management undertakes a number of judgments, estimates and assumptions about recognition and measurement of assets, liabilities, revenues and expenses. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about the significant judgments, estimates and assumptions that have the most significant effect on the recognition and measurement of assets, liabilities, revenues and expenses are discussed below. 44     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Impairment of non-financial assets An impairment loss is recognized for the amount by which an asset’s or CGUs carrying amount exceeds its recoverable amount, which is the higher of fair value less cost to sell and value in use. To determine value in use, management estimates expected future cash flows from each asset or CGU and determines a suitable interest rate in order to calculate the present value of those cash flows. In the process of measuring expected future cash flows, management makes assumptions about future operating results. These assumptions relate to future events and circumstances. The actual results may vary, and may cause significant adjustments to the Company’s assets in future periods. In most cases, determining the applicable discount rate involves estimating the appropriate adjustment to market risk and to asset-specific risk factors (Notes 8 and 9). Useful lives of depreciable assets Management reviews the useful lives of depreciable assets at each reporting date whenever events or changes in circumstances indicate that their carrying value amounts may not be recoverable. Inventories Inventories are measured at the lower of cost and net realizable value, with cost determined using the average cost method. In estimating net realizable values, management takes into account the most reliable evidence available at the time the estimates are made. The Company’s core business is subject to changes in foreign policies and internationally accepted metal prices which may cause selling prices to change rapidly. The Company evaluates its inventories using a group of similar items basis and considers events that have occurred between the balance sheet date and the date of the completion of the financial statements. Net realizable value held to satisfy a specific sales contract is measured at the contract price. Income taxes The Company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. The Company has deferred income tax assets that are subject to periodic recoverability assessments. Realization of the Company’s deferred income tax assets is largely dependent on its achievement of projected future taxable income and the continued applicability of ongoing tax planning strategies. The Company’s judgments regarding future profitability may change due to future market conditions, changes in tax legislation and other factors that could adversely affect the ongoing value of the deferred income tax assets. These changes, if any, may require the material adjustment of these deferred income tax asset balances through an adjustment to the carrying value thereon in the future. This adjustment would reduce the deferred income tax asset to the amount that is considered to be more likely than not to be realized and would be recorded in the period such a determination was to be made. NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2013, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the Company’s consolidated financial statements, except the following set out below. 45     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Amendment to IAS 1, “Financial Statement Presentation”, regarding other comprehensive income (“OCI”). The main change resulting from this amendment is a requirement for entities to group items presented in OCI on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendment does not address which items are presented in OCI. IAS 19, “Employee Benefits”, was amended in June 2011. The impact on the Company will be as follows: to immediately recognize all past service costs; and to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). The Company has yet to assess the full impact of the amendments. IFRS 9, “Financial Instruments”, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in OCI rather than the consolidated statement of earnings (loss), unless this creates an accounting mismatch. The Company has yet to assess IFRS 9’s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after January 1, 2015. The Company will also consider the impact of the remaining phases of IFRS 9 when completed by the Board. IFRS 10, “Consolidated Financial Statements”, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Company has yet to assess IFRS 10’s full impact and intends to adopt IFRS 10 no later than the accounting period beginning on or after January 1, 2013. IFRS 12, “Disclosures of interests in other entities”, includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special-purpose vehicles and other off-balance sheet vehicles. The Company has yet to assess IFRS 12’s full impact and intends to adopt IFRS 12 no later than the accounting period beginning on or after January 1, 2013. IFRS 13, “Fair Value Measurement”, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRS and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. NOTE 4 – ACQUISITION OF A 40% INTEREST IN A SUBSIDIARY On October 31, 2011, the Company acquired the remaining 40% ownership interest in one of its subsidiaries, LAOS Industrial Resources Co. Ltd., a metal refinery, for an amount of $2,014. This amount and the non-controlling interest balance in the consolidated statement of financial position as at October 31, 2011 of $(237) has been recognized directly to retained earnings for a total of $2,251. 46     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 5 – ACCOUNTS RECEIVABLE Gross trade receivables Allowance for doubtful accounts Trade receivables Sales taxes receivable Other receivables Total accounts receivable December 31, 2012 $ 78,948 (168) 78,780 4,604 4,423 87,807 December 31, 2011 $ 71,322 (482) 70,840 4,706 1,095 76,641 All of the Company’s accounts receivable are short term. The net carrying value of accounts receivable is considered a reasonable approximation of fair value. The Company reviews all amounts periodically for indications of impairment and the amounts impaired have been provided for as an allowance for doubtful accounts. The Company’s exposure to credit risks and impairment losses related to accounts receivable is disclosed in Note 26. Most of the accounts receivable are pledged as security for the revolving credit facility (Note 13). NOTE 6 – INVENTORIES Raw materials Work-in-progress and finished goods Total inventories December 31, 2012 $ 60,410 109,883 170,293 December 31, 2011 $ 75,511 239,822 315,333 For the year ended December 31, 2012, a total of $467,019 of inventories was included as an expense in cost of sales (seven-month period ended December 31, 2011 – $313,855). This includes $50,585 of impairment of inventories ($23,750 for the Electronic Materials segment and $26,835 for the Eco-Friendly Materials segment) (seven-month period ended December 31, 2011 – $34,790 ($30,964 for the Electronic Materials segment and $3,826 for the Eco-Friendly Materials segment)). For the year ended December 31, 2012, a total of $56,137 previously written down was recognized as a reduction of expenses in cost of sales ($36,490 for the Electronic Materials segment and $19,647 for the Eco-Friendly Materials segment). No amounts previously written down were recognized as a reduction of expenses during the seven-month period ended December 31, 2011. The majority of inventories are pledged as security for the revolving credit facility (Note 13). 47     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 7 – PROPERTY, PLANT AND EQUIPMENT Land and buildings $ Production equipment $ Furniture, office equipment and rolling stock $ Leasehold improvements $ Seven-month period ended December 31, 2011 As at June 1, 2011 Additions Disposals Impairment losses Depreciation Effect of foreign exchange As at December 31, 2011 As at December 31, 2011 Cost Accumulated depreciation Net book value Year ended December 31, 2012 As at December 31, 2011 Additions Disposals Impairment losses(a)(b) Reversal of impairment(c) Depreciation Effect of foreign exchange and adjustment As at December 31, 2012 As at December 31, 2012 Cost Accumulated depreciation Net book value 36,864 1,870 (22) - (983) (127) 37,602 40,119 (2,517) 37,602 37,602 5,653 - (18,899) - (1,784) 90 22,662 26,058 (3,396) 22,662 54,795 4,034 (147) (8,848) (4,431) (36) 45,367 51,705 (6,338) 45,367 45,367 9,762 (705) (19,225) 932 (5,885) (163) 30,083 35,772 (5,689) 30,083 2,188 815 - (181) (374) (3) 2,445 2,836 (391) 2,445 2,445 1,635 (192) (878) - (1,494) (19) 1,497 2,752 (1,255) 1,497 3,177 434 - (2,431) (111) - 1,069 1,588 (519) 1,069 1,069 614 (22) (237) - (118) - 1,306 1,952 (646) 1,306 Total $ 97,024 7,153 (169) (11,460) (5,899) (166) 86,483 96,248 (9,765) 86,483 86,483 17,664 (919) (39,239) 932 (9,281) (92) 55,548 66,534 (10,986) 55,548 (a) As at December 31, 2012, the Company recognized an impairment of $28,235 in other expenses, due to the longer than anticipated pricing softness in minor metals, and a significant reduction in market capitalization. The impairment expense relates to the Eco-Friendly Materials segment (Note 9). (b) Following the announcement of the closure of a site, the Company has recognized an impairment of $11,004 in the Electronic Materials segment. The impairment represents the excess of the recoverable amount of the carrying value of the related asset. (c) For the 12-month period ended December 31, 2012, a total of $932 previously written down in the Electronic Materials segment was reversed due mainly to the activation of some activities. 48     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 8 – INTANGIBLE ASSETS Customer relationships Technology $ $ Trade name and non-compete agreements $ Software, intellectual property and development costs $ 42,966 - - (32,508) 10,458 3,131 4,380 - (5,683) 1,828 23,108 - - (17,483) 5,625 3,029 4,620 - (5,787) 1,862 7,781 - (21) (4,698) 3,062 1,886 2,159 (6) (2,622) 1,417 3,369 347 (10) - 3,706 1,030 719 (15) - 1,734 Total $ 77,224 347 (31) (54,689) 22,851 9,076 11,878 (21) (14,092) 6,841 8,630 3,763 1,645 1,972 16,010 Customer relationships Technology $ $ Trade name and non-compete agreements $ Software, intellectual property and development costs $ 42,966 - - - 42,966 578 2,553 - - 3,131 23,108 - - - 23,108 333 2,696 - - 3,029 7,724 57 - - 7,781 586 1,347 (47) - 1,886 3,404 696 (700) (31) 3,369 843 302 (47) (68) 1,030 Total $ 77,202 753 (700) (31) 77,224 2,340 6,898 (94) (68) 9,076 39,835 20,079 5,895 2,339 68,148 Cost As at December 31, 2011 Additions Adjustment Impairment losses(a) As at December 31, 2012 Amortization As at December 31, 2011 Amortization Adjustment Impairment losses(a) As at December 31, 2012 Net book value as at December 31, 2012 Cost As at June 1, 2011 Additions Impairment losses(b) Effect of foreign exchange As at December 31, 2011 Amortization As at June 1, 2011 Amortization Effect of foreign exchange Adjustment As at December 31, 2011 Net book value as at December 31, 2011 (a) As at December 31, 2012, the Company recognized an impairment of $40,597 in other expenses, due to the longer than anticipated pricing softness in minor metals, and a significant reduction in market capitalization. The impairment expense was split $8,403 and $32,194 between the Electronic Materials and Eco- Friendly Materials segments respectively (Note 9). (b) As at December 31, 2011, the Company recognized an impairment of $700 in other expenses in respect of development costs due to the significant decline in the solar market. The impairment expense is related to the Electronic Materials segment. 49     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 9 – GOODWILL As at June 1, 2011 Other As at December 31, 2011 Impairment losses As at December 31, 2012 $ 123,916 994 124,910 (124,910) - The impairment was split $14,450 and $110,460 between the Eco-Friendly Materials and Electronic Materials segments respectively. Goodwill is allocated to the following CGUs for the purpose of annual impairment testing: Electronic Materials segment Eco-Friendly Materials segment Total goodwill allocated December 31, 2012 $ December 31, 2011 $ - - - 110,460 14,450 124,910 Impairment of goodwill, intangible assets and property, plant and equipment For purposes of the annual assessment of impairment testing of property, plant and equipment and finite useful lives intangible assets the Company has determined that it has four cash-generating units: (i) the solar sector; (ii) the germanium and related business; (iii) the remaining Electronic Materials segment; (iv) the Eco-Friendly Materials segment (which represent the same level used to test goodwill). The Company concluded that there were no trigger events which would require an impairment calculation for the solar sector and germanium and related businesses. However, the Company has determined that an impairment calculation was necessary on the remaining Electronic Materials segment, due mainly to lower than anticipated growth in the light-emitting diode (LED) sector related to gallium metal and the lower than expected growth in the indium metal-related sector. For the year ended December 31, 2012, the Company has recorded an impairment of $8,403 related to its other Electronic Materials cash-generating unit, which was all attributed to intangible assets. Also, the Company completed the required annual impairment testing for goodwill at the CGU level of the Eco-Friendly Materials and Electronic Materials segments, which represent the lowest level at which management monitors goodwill. It was concluded there was impairment of goodwill in both the Eco-Friendly Materials and Electronic Materials segments, following longer than anticipated pricing softness in minor metals, and a significant reduction in the market capitalization of the Company. As a result, the year ended December 31, 2012 includes $124,910 of goodwill impairment, of which $14,450 relates to the Eco-Friendly Materials segment and $110,460 relates to the Electronic Materials segment. In addition, the year ended December 31, 2012 includes $60,429 of impairment charges related to the excess of the carrying value of the Eco-Friendly Materials CGU over its recoverable amount, of which $32,194 was attributed to intangible assets and $28,235 to property, plant and equipment. The fair value less costs to sell was used to determine the recoverable amount of these CGUs by applying discounted projections of future cash flows based on financial forecast approved by management. Average growth rates of 4.5% were used for extrapolating the budget estimates over the years, in addition to a discount rate of 11.4%, working capital requirements of 37.5% of sales and a weighted average income tax rate of 23.0%. 50     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the long-lived assets and annual goodwill impairment test will prove to be an accurate prediction of the future. Events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the Eco-Friendly Materials and Electronic Materials segments are, to name a few, lower than expected anticipated growth and change in the industry related to the Company’s metals. NOTE 10 – INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Beginning of year Reversal due to acquisition of remaining 50% interest(a) Share of profit (loss) from joint ventures End of year December 31, 2012 $ December 31, 2011 $ 1,513 (677) (333) 503 1,084 - 429 1,513 (a) The Company acquired the remaining 50% interest of MCP Crystal and MCP Shenzhen for the total price of $0.6 million. The following summarizes financial information of the Company’s share of assets, liabilities, revenue and expenses of Ingal Stade GmbH (“Ingal”), in which the Company holds a 50% interest, and MCP Crystal and MCP Shenzhen, in which the Company held a 50% interest until their acquisition in 2012. Share of: Assets Liabilities Revenue Profit (loss) NOTE 11 – OTHER ASSETS Deferred costs Deposit Loan receivable from a related party (Note 25) Other Total other assets December 31, 2012 $ December 31, 2011 $ 5,057 4,575 4,127 (333) 6,606 4,831 6,615 429 December 31, 2012 $ December 31, 2011 $ 2,676 1,500 3,958 1,114 9,248 3,606 1,727 3,688 2,474 11,495 51     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 12 – TRADE AND ACCRUED LIABILITIES Trade payables Accrued liabilities Total trade and accrued liabilities Trade payables are non-interest bearing. December 31, 2012 $ December 31, 2011 $ 49,500 12,714 62,214 35,763 23,266 59,029 NOTE 13 – BANK INDEBTEDNESS, SHORT- AND LONG-TERM DEBT a) Bank indebtedness and short-term debt The Company has credit lines with financial institutions in China. These credit lines are guaranteed by other group companies. As at December 31, 2012 Contractual currency Facility available Amount drawn As at December 31, 2012 Reporting currency Facility available Amount drawn As at December 31, 2011 Contractual currency Facility available Amount drawn As at December 31, 2011 Reporting currency Facility available Amount drawn HK$ RMB Total - - 217,000 50,500 217,000 50,500 US$ US$ - - 34,438 8,014 Total 34,438 8,014 HK$ RMB Total 390,000 390,000 194,000 146,440 n/a n/a US$ US$ 50,205 50,205 30,826 23,225 Total 81,031 73,430 The Chinese renminbi (“RMB”) credit line bears interest at 105% to 110% of the RMB base rate. 52     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) b) Long-term debt Unsecured balance of purchase price and holdback to the former shareholders of MCP for an amount of €51,899 (€36,928 as a promissory note and €14,971 as holdback), bearing interest at interest rate swap three-year rate plus 3.00%(b). The promissory note is repayable in two annual instalments beginning April 2013 and the holdback is repayable in April 2014(a) and (b). Senior secured revolving facility of $200,000 with a syndicate of banks, maturing in August 2015(c) Term loan, non-interest bearing, repayable under certain conditions, maturing in 2023. If the loan has not been repaid in full by the end of 2023, the balance will be forgiven(d) Debt, bearing interest at a rate of three-month LIBOR plus 3.00%, repayable in April 2013 Other loans Less: Current portion of long-term debt December 31, 2012 $ December 31, 2011 $ 65,928 80,066 72,213 185,000 797 824 769 718 140,425 29,527 110,898 1,836 750 268,476 14,757 253,719 (a) Under agreements entered into with two executives who left the Company in 2012, the Company made payments of HK$10 million and €0.9 million (approximately $2,600 in aggregate) in October 2012. These payments could be applied as a reduction of the unsecured balance of purchase price above of $65,928 if certain conditions are eventually met. (b) Refer to Note 24. (c) This revolving credit facility can be drawn in US dollars, Canadian dollars or euros. The interest rate depends on a debt/EBITDA ratio and can vary from LIBOR, banker’s acceptance or EURIBOR plus 1.25% to 2.75% or US base rate or prime rate plus 0.25% to 1.75%. Also, standby fees from 0.31% to 0.69% are paid on the unused portion of the credit facility. The revolving credit facility can be increased to $300,000 subject to acceptance by the lenders, and it is guaranteed by a pledge on almost all of the assets of certain entities of the Company. The amount drawn as at December 31, 2012 comprised $1,052 in Canadian dollar advances and $71,161 in US dollar advances. The total amount drawn was in US dollars as at December 31, 2011. The facility is subject to covenants. As at December 31, 2012, the Company met all covenants (Note 29). (d) The term loan has been reclassified as short term debt since these amounts could become payable on demand. Under the terms of its credit facility, the Company is required to satisfy certain restrictive covenants as to financial ratios. In order to comply with these covenants, the Company has prepared and will need to execute on its budgeted EBITDA and cash flow estimates. Management believes that the assumptions used by the Company in preparing its budgets are reasonable and that it is not likely that the financial covenants will be violated in the next 13 months. However, the risk remains. Successful achievement of these budgeted results is dependent on stability in the price of metals and other raw materials, reduction of debt through optimization of the Company’s working capital and the continued viability and support of the Company’s bank. 53     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 14 – RETIREMENT BENEFIT OBLIGATION The Company operates a defined pension plan in Germany based on employee pensionable earnings and length of service. Former general and senior managers had been provided with direct benefit commitments. Employees had been provided with indirect benefit commitments via the Unterstützungseinrichtung der HEK GmbH e.V. Such promises had been made for employees with entry date of December 31, 1993 or earlier. Present value of unfunded obligations Movement in the defined benefit obligation is as follows: Beginning of period Current service cost Interest cost Effect of foreign exchange Benefits paid Actuarial gains End of period December 31, 2012 $ December 31, 2011 $ 12,092 12,315 For the year ended December 31, 2012 $ For the seven-month period ended December 31, 2011 $ 12,315 73 627 150 (398) (675) 12,092 13,481 39 355 (1,285) (226) (49) 12,315 Amounts recognized in the consolidated statements of earnings (loss) are as follows: For the year ended December 31, 2012 $ For the seven-month period ended December 31, 2011 $ 73 627 700 39 355 394 December 31, 2012 December 31, 2011 3.1% 5% Current service cost Interest cost Total included in wages and salaries (Note 28) The principal actuarial assumptions as at period-ends were as follows: Discount rate 54     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 15 – OTHER LIABILITIES As at June 1, 2011 Additional provisions Unused amounts reversed Utilized Reclassification to current liabilities As at December 31, 2011 Utilized As at December 31, 2012 – non-current liabilities NOTE 16 – INCOME TAX Current tax: Current tax (recovery) on profits for the period Adjustment in respect of prior years Total current tax (recovery) Deferred tax: Origination and reversal of temporary differences Total deferred tax Income tax recovery Site provision $ Deferred revenues 3,463 1,107 - (1,098) (2,588) 884 (884) - 789 467 (5) (191) - 1,060 (1,050) 10 Other $ 4,036 677 - (2,486) - 2,227 (677) 1,550 Total $ 8,288 2,251 (5) (3,775) (2,588) 4,171 (2,611) 1,560 For the year ended December 31, 2012 $ For the seven-month period ended December 31, 2011 $ 1,167 (924) 243 (24,464) (24,464) (24,221) (4,483) 903 (3,580) (1,133) (1,133) (4,713) 55       5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) The tax on the Company’s profit before tax differs from the amount that would arise using the applicable federal and provincial statutory tax rate applicable to profits of the consolidated entities as follows: For the year ended December 31, 2012 % $ For the seven-month period ended December 31, 2011 % $ Tax on loss at local statutory rate (67,807) 26.9 (7,719) 28.4 Increase (decrease) resulting from: Unrecorded losses carried forward Non-deductible expenses for tax purposes Non-deductible impairment of goodwill Benefits arising from a financing structure Non-taxable foreign exchange Effect of difference of foreign tax rates compared to Canadian tax rates Prior year adjustments Other Total income tax recovery 7,319 1,718 33,600 (1,030) (178) 530 1,344 283 (24,221) (2.9) (0.7) (13.4) 0.4 0.1 (0.2) (0.5) (0.1) 9.6 4,391 400 - (996) (358) (823) 903 (511) (4,713) (16.2) (1.5) - 3.7 1.3 3.0 (3.3) 1.9 17.3 The variation in the statutory rate between December 2011 (28.4%) and December 2012 (26.9%) is explained mainly by the reduction of the statutory federal rate from 16.5% to 15.0%. The analysis of deferred tax assets and deferred tax liabilities is as follows: Deferred tax assets: To be recovered within 12 months To be recovered after 12 months Deferred tax liabilities: To be recovered within 12 months To be recovered after 12 months Deferred tax assets (liabilities) – (net) Movement in the deferred income tax amounts is as follows: Beginning of period Tax charge relating to components of other comprehensive income (loss) Charged to consolidated statements of earnings (loss) Tax charged directly to equity End of period 56 December 31, 2012 $ December 31, 2011 $ 1,685 9,547 - (2,632) 8,600 642 2,064 - (19,143) (16,437) For the year ended December 31, 2012 $ For the seven-month period ended December 31, 2011 $ (16,437) (17,794) 137 24,464 436 8,600 188 1,133 36 (16,437)     e m a s e h t n i h t i w s e c n a l a b f o g n i t t e s f f o e h t n o i t a r e d i s n o c o t n i g n i k a t t u o h t i w r a e y e h t g n i r u d s e i t i l i b a i l d n a s t e s s a x a t e m o c n i d e r r e f e d n i t n e m e v o m e h     T ) d e t a c i d n i e s i w r e h t o s s e l n u , s r a l l o d s e t a t S d e t i n U f o s d n a s u o h t n i s e r u g i F ( S T N E M E T A T S L A I C N A N I F D E T A D I L O S N O C O T S E T O N 1 1 0 2 d n a 2 1 0 2 , 1 3 r e b m e c e D . C N I S U L P N 5 $ l a t o T $ y b t e s f f O n o i t c i d s i r u j 6 0 7 , 2 ) 0 4 9 , 3 ( 2 3 2 , 1 1 ) 9 8 8 , 6 ( 3 4 1 , 9 1 ) 0 4 9 , 3 ( 2 3 6 , 2 ) 9 8 8 , 6 ( $ l a t o T $ y b t e s f f O n o i t c i d s i r u j $ l a t o T 6 3 4 3 4 8 8 1 8 8 9 , 5 6 4 6 , 6 2 0 9 , 0 1 6 3 4 7 3 1 1 2 1 , 8 1 $ l a t o T ) 9 9 6 ( 2 8 7 , 3 2 3 8 0 , 3 2 ) 2 6 5 , 3 1 ( 1 2 5 , 9 $ s r e h t O $ s e e f - 1 1 1 7 4 4 , 1 8 8 1 4 9 1 6 4 7 , 1 - 7 3 1 7 7 0 , 2 - 6 3 ) 1 8 3 ( 7 6 9 , 1 ) 9 0 6 ( 2 2 6 , 1 6 3 4 - 9 4 4 , 1 e u s s i e r a h S l a n o i s s e f o r p d n a s e s n e p x e $ - - - - - - - 3 4 2 , 8 3 4 2 , 8 s s o L y r r a c d r a w r o f - - 9 8 8 9 8 3 , 2 8 7 2 , 3 ) 5 3 5 , 1 ( - - - - 5 8 1 ) 5 8 1 ( - 9 0 6 , 4 - - 3 4 7 , 1 9 0 6 , 4 $ s e i r o t n e v n I $ , y t r e p o r P d n a t n a l p t n e m p i u q e $ 3 3 7 2 4 2 5 7 9 1 2 3 6 9 2 , 1 s r e h t O - 0 1 9 , 6 1 0 1 9 , 6 1 ) 0 3 4 , 2 1 ( 0 8 4 , 4 $ s t e s s a e l b i g n a t n I $ - 6 1 2 6 1 2 ) 8 5 1 ( 8 5 s e i r o t n e v n I ) 1 4 9 ( 3 2 9 , 5 2 8 9 , 4 ) 5 9 2 , 1 ( 7 8 6 , 3 $ , y t r e p o r P d n a t n a l p t n e m p i u q e s s o l f o t n e m e t a t s d e t a d i l o s n o c o t s s o l e v i s n e h e r p m o c o t y t i u q e o t 1 1 0 2 , 1 e n u J t a s A ) d e t i d e r c ( ) d e t i d e r c ( ) d e t i d e r c ( d e g r a h C d e g r a h C d e g r a h C : w o l l o f s a s i , n o i t c i d s i r u j s t e s s a x a t d e r r e f e D s s o l f o t n e m e t a t s d e t a d i l o s n o c o t ) d e t i d e r c ( d e g r a h C 1 1 0 2 , 1 3 r e b m e c e D t a s A s s o l f o t n e m e t a t s d e t a d i l o s n o c o t ) d e t i d e r c ( d e g r a h C s s o l f o t n e m e t a t s d e t a d i l o s n o c o t ) d e t i d e r c ( d e g r a h C 1 1 0 2 , 1 3 r e b m e c e D t a s A 2 1 0 2 , 1 3 r e b m e c e D t a s A 1 1 0 2 , 1 e n u J t a s A s e i t i l i b a i l x a t d e r r e f e D s s o l e v i s n e h e r p m o c o t y t i u q e o t ) d e t i d e r c ( ) d e t i d e r c ( d e g r a h C d e g r a h C 2 1 0 2 , 1 3 r e b m e c e D t a s A 57 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Deferred income tax assets are recognized to the extent that the realization of the related tax benefit is probable. The Company has unrecognized tax losses carryforwards of $47,500 as at December 31, 2012 (December 31, 2011 – $26,118) for which no deferred income tax assets have been recognized. The deferred tax assets of $11,232, as reported on the consolidated statements of financial position, are dependent on projection of future taxable profits for entities that have suffered a loss in the current period. Deferred income tax liabilities have not been recognized for the withholding tax and taxes that would be payable on the unremitted earnings of certain subsidiaries. Such amounts are permanently reinvested. Unremitted earnings totalled $43,364 as at December 31, 2012 (December 31, 2011 – $272,195). As at December 31, 2012, the Company had the following operating tax losses available for carryforward for which no deferred tax benefit has been recorded in the account. Country United Kingdom Belgium United States Malaysia Peru Total Carryforward period No limit No limit 2031–2032 No limit 2015–2016 $ 20,978 17,068 7,697 1,077 680 47,500 NOTE 17 – CATEGORIES OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES Fair value All financial assets classified as loans and receivables, as well as financial liabilities classified as other liabilities are initially measured at their fair values and subsequently at their amortized cost using the effective interest method. All financial assets and financial liabilities classified as held for trading are measured at their fair values. Gains and losses related to periodic revaluations are recorded in net earnings (loss). The Company has determined that the carrying value of its short-term financial assets and financial liabilities, including cash and cash equivalents, temporary investments (restricted), accounts receivable, bank indebtedness and short-term debt, and trade and accrued liabilities approximates their carrying value due to the short-term maturities of these instruments. As at December 31, 2012, the fair value of long-term debt approximates its carrying value and is calculated using the present value of future cash flows at the year-end rate for similar debt with the same terms and maturities. The following table presents financial assets and financial liabilities measured at fair value in the consolidated statements of financial position in accordance with the fair value hierarchy. This hierarchy groups financial assets and financial liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and financial liabilities. The fair value hierarchy has the following levels:   Level 1: unadjusted quoted prices in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and 58     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated)  Level 3: inputs for (unobservable inputs). the asset or liability that are not based on observable market data The level in which the financial asset or financial liability is classified is determined based on the lowest level of significant input to the fair value measurement. The financial assets and financial liabilities measured at fair value in the consolidated statements of financial position are grouped into the fair value hierarchy as follows as at December 31: December 31, 2012 Financial liabilities Interest rate swap Foreign exchange forward contracts Options Warrants Total December 31, 2011 Financial liabilities Interest rate swap Foreign exchange forward contracts Options Total Derivative assets and liabilities Level 1 $ Level 2 $ Level 3 $ - - 1,165 1,165 3,870 1,080 239 - 5,189 - - - - Level 1 $ Level 2 $ Level 3 $ - - - - 2,326 517 2,873 5,716 - - - - The Company currently has derivative financial instruments which relate to the following:   Interest rate swap to fix the interest rate on part of its revolving credit facility; Foreign exchange forward contracts to sell US dollars in exchange for euros related to hedge strategies;  Options sold to a financial institution related to hedge strategies; and  Warrants. 59     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) The derivatives are measured at fair value as follows: Liability Interest rate swap(a) Foreign exchange forward contracts(b) Options(c) Warrants (d) Total December 31, 2012 $ December 31, 2011 $ 3,870 1,080 239 1,165 6,354 2,326 517 2,873 - 5,716 (a) The interest rate swap has a nominal value of $100,000 commencing in January 2013 and ending in August 2015. Under this swap, the Company will pay a fixed interest rate of 1.82%. The Company received $1,700 when entering into this forward starting interest rate swap in September 2011. This amount forms part of the fair value that is recorded as a long-term liability. The Company initially designated this contract as a cash flow hedge of anticipated variable payments of interest on a nominal amount of $100,000 of the revolving line of credit, and the change in its fair value was recorded in the consolidated statements of comprehensive income (loss). On September 4, 2012, the Company repaid part of its credit facility and de-designated $30,000 of the nominal amount of the swap. The Company reclassified the estimated fair value of this portion of the swap from accumulated other comprehensive income (loss) to unrealized loss on de-designation within the consolidated statement of earnings. Prior to the de-designation of the cash flow hedge related to a forecasted transaction on September 3, 2012, the Company assessed the effectiveness of the cash flow hedge as well as at December 31, 2012. (b) The foreign exchange forward contracts are to sell US dollars in exchange for euros. The nominal value of the euro forwards was €30,000 until April 11, 2013 and April 11, 2014 at US$/euros rates of 1.3546 and 1.3641 respectively. (c) The Company sold options to a financial institution, giving it the right to sell euros to the Company on specific dates. The options have a nominal value of €21,500 with a euro/US$ rate of 1.3283 and will mature in January 2013 without renewal. (d) On June 6, 2012, the Company issued 6,451,807 warrants (Note 18), which expire on June 6, 2014. The following methods were used to estimate fair value:    Interest rate swap: Estimated by discounting expected future cash flows using period-end interest rate yield curves; Foreign exchange forward contracts: Estimated by discounting expected future cash flows using period-end currency rate; Options: Standard Black-Scholes model using end of period market data as input; and  Warrants: Fair value based on the Toronto stock exchange (“TSX”) closing price. The ticker symbol of the publicly traded warrants is VNP.WT. 60     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 18 – ISSUANCE OF UNITS On June 6, 2012, the Company closed a placement for total gross proceeds of CA$40,001 (US$38,485). The financing consisted of the issuance of 12,903,613 units at a price of CA$3.10 per unit. Each unit consisted of one common share and one–half common share purchase warrant, with each such whole warrant entitling the holder to subscribe for one additional common share at a price of CA$5.00 until June 6, 2014. The initial fair value of the 6,451,807 warrants was estimated using the Black-Scholes option pricing model based on the following assumptions: risk-free interest rate of 1.25%, average expected volatility of 40%, expected dividend per share of nil and expected life of warrants of two years. As a result, the fair value of the common share purchase warrants was estimated at CA$1,419 (US$1,366) after a pro rata allocation of the fair value of the units’ components. This amount was allocated to warrants, and the balance of CA$38,582 (US$37,119) to share capital. The warrants were recorded as a derivative liability. In accordance with IFRS, an obligation to issue shares for a price that is not fixed in the Company’s functional currency and that does not qualify as a rights offering to all shareholders of that class must be classified as a derivative liability and measured at fair value, with changes recognized in the consolidated statements of earnings (loss) as they arise. The fair value of the warrants as at December 31, 2012 was $(1,165) (Note 17). The total issuance costs of the units amounting to $1,185 (net of income tax of $436) was attributed to retained earnings. Units issued for cash Less: Warrants Net amount attributable to share capital Number Amount CA$ 12,903,613 40,001 (1,419) 38,582 Amount US$ 38,485 (1,366) 37,119 61     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 19 – OPERATING SEGMENTS The following tables summarize the information reviewed by the Company’s managements when measuring performance: Eco-Friendly Materials $ Electronic Materials $ Corporate and unallocated $ For the year ended December 31, 2012 Segment revenues Adjusted EBITDA(1) Interest on long-term debt and other interest expense Restructuring costs Impairment of inventories (Note 6) Impairment of properties, plant and equipment (Note 7) Impairment of intangible assets (Note 8) Impairment of goodwill (Note 9) Foreign exchange loss and derivative Depreciation and amortization Reversal of impairment of property, plant and equipment (Note 7) Loss before income tax Capital expenditures 319,662 18,632 - 1,325 26,835 28,235 32,194 14,450 - 11,470 - (95,877) 7,445 232,013 34,653 - 1,456 23,750 11,004 8,403 110,460 - 9,563 (932) (129,051) 8,830 Total $ 551,675 37,856 8,828 2,781 50,585 39,239 40,597 124,910 2,759 21,159 - (15,429) 8,828 - - - - - 2,759 126 - (27,142) 1,389 (932) (252,070) 17,664 For the seven-month period ended December 31, 2011 Eco-Friendly Materials $ Electronic Materials $ Corporate and unallocated $ Segment revenues Adjusted EBITDA(1) Interest on long-term debt and other interest expense Impairment of inventories Impairment of properties, plant and equipment Foreign exchange gain and derivative Depreciation and amortization Other Earnings (loss) before income tax Capital expenditures 205,697 18,426 - 3,826 - - 6,910 - 7,690 2,742 186,015 30,631 - 30,964 4,525 - 5,807 - (10,665) 4,313 - (11,644) 5,487 - 6,935 (642) 80 698 (24,202) 98 As at December 31, 2012 Eco-Friendly Materials $ Electronic Materials $ Corporate and unallocated $ Total assets excluding the following: Investment accounted for using equity method Deferred tax asset 162,073 - 3,873 204,578 503 5,996 5,592 - 1,363 Total $ 391,712 37,413 5,487 34,790 11,460 (642) 12,797 698 (27,177) 7,153 Total $ 372,243 503 11,232 62     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) As at December 31, 2011 Eco-Friendly Materials $ Electronic Materials $ Corporate and unallocated $ Total assets excluding the following: Goodwill Investment accounted for using equity method Deferred tax asset 317,297 14,450 - 2,170 332,224 110,460 1,513 503 3,694 - - 33 Total $ 653,215 124,910 1,513 2,706 (1) Earnings (loss) before income tax, depreciation and amortization and the following: interest on long-term debt and other interest expense, restructuring costs, impairment of inventories, reversal of impairment of property, plant and equipment, impairment of property, plant and equipment, of intangibles assets and goodwill, acquisition-related costs, and foreign exchange (gain) loss and derivative. The geographic distribution of the Company’s revenues based on the location of the customers for the periods ended December 31, 2012 and 2011, and the identifiable non-current assets as at December 31, 2012 and 2011 are summarized as follows: Revenues Asia China Japan Others America United States Others Europe France Germany United Kingdom Others Other Total Non-current assets as at Asia Hong Kong Other United States Europe Belgium Germany Other Canada Total December 31, 2012 (12 months) $ December 31, 2011 (7 months) $ 72,672 10,425 106,575 102,344 21,231 33,067 90,455 27,021 84,097 3,788 551,675 39,298 18,276 39,671 90,493 13,065 16,256 64,232 55,537 51,805 3,079 391,712 December 31, 2012 $ December 31, 2011 $ 10,801 9,543 6,058 23,755 9,164 6,087 27,133 92,541 95,067 13,429 15,751 42,264 74,222 16,845 37,677 295,255 For the year ended December 31, 2012, one customer represented approximately 13.3% (12.5% for the 7 month period ended December 31, 2011) of the revenues, and is included in the Electronic Materials revenues. 63     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 20 – SUPPLEMENTAL CASH FLOW INFORMATION Net change in non-cash working capital balances related to operations consists of the following: Decrease (increase) in assets: Accounts receivable Inventories Income tax receivable Other current assets Increase (decrease) in liabilities: Trade and accrued liabilities Income tax payable Net change For the year ended December 31, 2012 $ For the seven-month period ended December 31, 2011 $ (10,549) 95,615 (7,816) 1,221 (3,915) 1,863 76,419 36,231 (49,822) (8,355) (1,094) (8,146) (7,067) (38,253) The consolidated statements of cash flows exclude or include the following transactions: For the year ended December 31, 2012 For the seven-month period ended December 31, 2011 $ 1,394 $ 190 $ 190 $ 2,176 a) Exclude additions unpaid at end of period: Additions to property, plant and equipment b) Include additions unpaid at beginning of period: Additions to property, plant and equipment NOTE 21 – SHARE CAPITAL Authorized:  An unlimited number of common shares, participating, with no par value, entitling the holder to one vote per share  An unlimited number of preferred shares, issuable in one or more series with specific terms, privileges and restrictions to be determined for each class by the Board of Directors. As at December 31, 2012, no preferred shares were issued None of the Company’s shares is held by any subsidiary or joint venture. 64     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 22 –LOSS PER SHARE The following table reconciles the numerators and denominators used for the computation of basic and diluted loss per share: Numerators Net loss attributable to equity holders of 5N Plus Inc. Net loss for the period For the year ended December 31, 2012 $ (227,738) (227,849) For the seven-month period ended December 31, 2011 $ (21,641) (22,464) Given the Company’s stock price for the year ended December 31, 2012 and given the consolidated net loss incurred by the Company for that period, stock options and warrants were excluded from the computation of diluted loss per share due to their anti-dilutive effect. For the year ended December 31, 2012 For the seven-month period ended December 31, 2011 Weighted average number of shares outstanding – Basic and diluted 78,352,364 70,939,901 NOTE 23 – SHARE-BASED COMPENSATION As at December 31, 2012, the Company had the following share-based compensation plans. Stock option plan On April 11, 2011, the Company adopted a new stock option plan (the “Plan”) replacing the previous plan (the “Old Plan”) in place since October 2007, with the same features as the Old Plan with the exception of a maximum number of options granted which cannot exceed 5,000,000. The aggregate number of shares which could be issued upon the exercise of options granted under the Old Plan could not exceed 10% of the issued shares of the Company at the time of granting the options. Options granted under the Old Plan may be exercised during a period not exceeding ten years from the date of grant. The stock options outstanding as at December 31, 2012 may be exercised during a period not exceeding six years from their date of grant. Options vest at a rate of 25% (100% for directors) per year, beginning one year following the grant date of the options. Any unexercised options will expire one month after the date a beneficiary ceases to be an employee, director or officer. 65     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Restricted share unit incentive plan On June 7, 2010, the Company adopted a Restricted Share Unit (“RSU”) Plan to complement the stock option plan. The RSU Plan enables the Company to award to eligible participants phantom share units that vest after a three-year period. The RSU is settled in cash and is recorded as a liability. The measurement of the compensation expense and corresponding liability for these awards is based on the fair value of the award, and is recorded as a charge to selling, general and administrative (“SG&A”) expenses over the vesting period of the award. At the end of each financial period, changes in the Company’s payment obligation due to changes in the market value of the common shares on the TSX are recorded as a charge to SG&A expenses. For the year ended December 31, 2012, the Company granted 33,978 RSUs and, cancelled 12,385 RSUs. As at December 31, 2012, 79,480 RSUs were outstanding (2011 – 57,887). Restricted share unit incentive plan for foreign employees On June 7, 2010, the Company adopted a Restricted Share Unit for Foreign Employees (“RSUFE”) Plan. Under this Plan, the RSUFE granted may be exercised during a period not exceeding ten years from the date of grant. The RSUFE outstanding as at December 31, 2012 may be exercised during a period not exceeding six years from their date of grant. RSUFE vest at a rate of 25% per year beginning one year following the grant date of the award. For the 12-month period ended December 31, 2012, the Company granted 14,995 RSUFE and, paid 1,981 RSUFE. As at December 31, 2012, 54,364 RSUFE were outstanding (2011 – 41,350). Stock Appreciation Rights On November 1, 2011, the Company granted 247,000 Stock Appreciation Rights (“SARs”) to most of its employees except senior management. The SARs are vested and paid over a period of three years. The SARs are exercisable automatically for cash at each anniversary date and the Company is obligated to pay the holders. The amount of cash payout is calculated based on the number of SARs multiplied by the average price of the Company’s shares for the month immediately before vesting. At the end of each financial period, changes in the Company’s payment obligations due to changes in the market value of the common shares on the TSX are recorded as an expense. For the year ended December 31, 2012, 59,383 SARs were cancelled and, 61,250 SARs were paid. As at December 31, 2012 123,167 SARs were outstanding (2011 – 243,800). The following table presents information concerning all outstanding stock options: For the year ended December 31, 2012 Weighted average exercise price CA$ For the seven-month period ended December 31, 2011 Weighted average exercise price CA$ Number of options 5.28 2.22 5.60 3.36 4.67 4.94 1,384,025 275,249 (47,565) (68,498) 1,543,211 908,657 4.52 8.60 5.40 3.17 5.28 4.28 Number of options 1,543,211 325,840 (240,072) (43,531) 1,585,448 1,024,656 Outstanding, beginning of period Granted Cancelled Exercised Outstanding, end of period Exercisable, end of period 66     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) The outstanding stock options as at December 31, 2012 are as follows: Maturity December 2013 June and August 2014 October 2014 January 2015 to October 2016 June and September 2017 December 2017 November 2018 Exercise price High CA$ 3.00 10.32 3.81 6.16 8.64 6.16 2.22 Low CA$ 3.00 9.13 3.81 4.87 8.50 6.16 2.22 Number of options 357,650 7,500 2,500 646,920 245,038 7,500 318,340 1,585,448 The fair value of stock options at the grant date was measured using the Black-Scholes option pricing model. The historical share price of the Company’s common shares is used to estimate expected volatility, and government bond rates are used to estimate the risk-free interest rate. The following table illustrates the inputs used in the measurement of the fair values of the stock options at the grant date granted during the year ended December 31, 2012 and for the seven-month period ended December 31, 2011: Expected stock price volatility Dividend Risk-free interest rate Expected option life Fair value – weighted average of options issued For the year ended December 31, 2012 53% None 1.07% 4 years $0.93 For the seven-month period ended December 31, 2011 39% None 1.475% 4 years $3.22 The following table shows the share-based compensation expense recorded in the consolidated statements of earnings (loss) for the year ended December 31, 2012 and for the seven-month period ended December 31, 2011: Expense Stock options RSUFE SARs Total For the year ended December 31, 2012 $ 563 - 92 655 For the seven-month period ended December 31, 2011 $ 443 10 114 567 67     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) The following table shows the carrying amount and the intrinsic value of the share-based compensation liabilities: Liability RSUs RSUFE SARs Total December 31, 2012 $ December 31, 2011 $ 92 10 189 291 92 10 114 216 NOTE 24 – COMMITMENTS AND CONTINGENCIES Commitments The Company rents certain premises and equipment under the terms of operating leases. Future minimum payments excluding operating costs for the next years are as follows: Within one year After one year but not more than five years Total commitments Contingencies December 31, 2012 $ December 31, 2011 $ 2,148 2,612 4,760 1,511 3,426 4,937 In the normal course of operations, the Company is exposed to events that could give rise to contingent liabilities or assets. As at the date of issue of the consolidated financial statements, the Company was not aware of any significant events that would have a material effect on its consolidated financial statements, except for the following. The Company has filed a request for arbitration against Florinvest S.A., Heresford Ltd., Metals Corp. S.C.R.L. and S.R.I.W. S.A. (the “Vendors”), which are all former shareholders of MCP Group S.A. (“MCP”), as it believes that the Vendors have breached the terms of the Acquisition Agreement and certain other related agreements, including breaches with respect to representations and warranties made by the Vendors and breaches of closing conditions. Furthermore, the Company and MCP have also filed lawsuits against the former directors of MCP, holding them personally liable for any and all damages caused by any faults or tortuous acts committed by them acting as directors of MCP or in any other capacity. Accordingly, the Company does not intend to pay any amounts due under the balance of purchase price payable until resolution of the arbitration proceedings. The Company is investigating the potential impact that any such breaches may have had on the pre- and post- acquisition business practices of MCP. As of the date hereof, the Company has not received any claims related to these events for fines, penalties or other monetary compensation from any third party. Due to the nature of the investigation including the possibility that the scope maybe broadened, the Company cannot predict at this time the final outcome with respect to any investigation nor can it reasonably estimate the range of loss, if any, which could result from any such investigations and could have a material adverse impact on its future results of operations. 68     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) NOTE 25 – RELATED PARTY TRANSACTIONS The Company’s related parties are its joint ventures, associates, directors and executive members. Unless otherwise stated, none of the transactions incorporates special terms and conditions and no guarantees were given or received. Outstanding balances are usually settled in cash. Ingal Stade (“Ingal”) supplies gallium metal to other companies of the group. At the time MCP Shenzhen was a joint venture (Note 10), the Company supplied gallium to MCP Shenzhen. During the year ended December 31, 2012, the Company purchased $5,994 worth of gallium from Ingal and did not sell any gallium to MCP Shenzhen (the Company purchased $3,945 worth of gallium from Ingal and sold $63 worth of gallium to MCP Shenzhen for the seven-month period ended December 31, 2011). As at December 31, 2012, the Company has no balance payable to Ingal (2011 – $25) and a loan receivable from Ingal of $3,958 (€3,000) (2011 – $3,688 (€2,850)) (Note 11). NOTE 26 – FINANCIAL RISK MANAGEMENT In the normal course of operations, the Company is exposed to various financial risks. These risk factors include market risk (currency risk, interest rate risk and other price risk), credit risk and liquidity risk. Market risk Market risk is the risk that changes in market price, such as foreign exchange rates, equity prices and interest rates, will affect the Company’s net (loss) or the value of financial instruments. The objective of market risk management is to mitigate exposures within acceptable limits, while maximizing returns. (i) Currency risk Currency risk refers to the fluctuation of financial commitments, assets, liabilities, income or cash flows due to changes in foreign exchange rates. The Company conducts business transactions and owns assets in several countries and is therefore subject to fluctuations in the currencies in which it operates. The Company’s revenues and expenses are exposed to currency risk largely in the following ways: (cid:127) Translation of foreign currency-denominated revenues and expenses into US dollars, the Company’s functional currency – When the foreign currency changes in relation to the US dollar, earnings reported in US dollars will change. The impact of a weakening foreign currency in relation to the US dollar for foreign currency-denominated revenues and expenses will result in lower net earnings (higher net loss) because the Company has more foreign currency-denominated revenues than expenses. (cid:127) Translation of foreign currency-denominated debt and other monetary items – A weakening foreign currency in respect of the Company’s foreign currency-denominated debt will decrease the debt in US dollar terms and generate foreign exchange gain on bank advances and other short-term debt, which is recorded in earnings. The Company calculates the foreign exchange on short-term debt using the difference in foreign exchange rates at the beginning and end of each reporting period. Other foreign currency-denominated monetary items will also be affected by changes in foreign exchange rates. 69     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) The following table summarizes in US dollar equivalents the Company’s major currency exposures as at December 31, 2012: Cash and cash equivalents Temporary investments (restricted) Accounts receivable Bank indebtedness and short-term debt Trade and accrued liabilities Long-term debt Net financial assets (liabilities) CA$ $ 101 - 444 - (2,568) (1,052) (3,075) EUR $ 2,771 2,357 12,574 - (11,379) (65,928) (59,605) GBP $ 85 - 2,203 - (870) - 1,418 RMB $ 3,913 - 3,893 (8,014) (4,733) - (4,941) HK$ $ 11 - - - (232) - (221) The following table shows the impact on loss before income tax of a one-percentage point strengthening or weakening of foreign currencies against the US dollar as at December 31, 2012 for the Company’s financial instruments denominated in non-functional currencies: 1% Strengthening Earnings (loss) before tax 1% Weakening Earnings (loss) before tax CA$ $ (31) 31 EUR $ (596) 596 GBP $ 14 (14) RMB $ HK$ $ (49) 49 (2) 2 Occasionally, the Company will enter into short-term foreign exchange forward contracts to sell US dollars in exchange for Canadian dollars, euros, Hong Kong dollars and British pounds sterling. These contracts would hedge a portion of ongoing foreign exchange risk on the Company’s cash flows since much of its non-US dollar expenses outside China are incurred in Canadian dollars, euros, Hong Kong dollars and British pounds sterling. (ii) Market risk – Interest rate risk Interest rate risk refers to the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company is exposed to interest rate fluctuations on its revolving credit facility, which bears a floating interest rate. As at December 31, 2012, the Company has an outstanding interest rate swap contract to hedge part of its interest rate risk on the revolving credit facility. The nominal value is $100,000 commencing in January 2013 and ending in August 2015. This interest rate swap fixed the LIBOR interest rate at 1.82%. The Company received $1,700 when entering into this interest rate swap in September 2011, which was the fair value of the instrument on signing. The fair value of the contract is $(3,870) as at December 31, 2012 and is recorded as part of derivative financial liabilities in the consolidated statement of financial position. (iii) Market risk – Other price risk Other price risk is the risk that fair value or future cash flows will fluctuate because of changes in market prices, other than those arising from interest rate risk or currency risk. The Company is exposed to other price risk with respect to the underlying risks of the held-for-trading financial instruments included in the consolidated statements of financial position. 70     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Warrants In June 2012, the Company issued 12,903,613 units at a price of CA$3.10 per unit. Each unit comprises one common share and one-half of a common share purchase warrant. The Company issued 6,451,807 warrants, which are recorded as part of derivative financial liabilities at fair value based on the stock exchange market. The fair value is $(1,165) as at December 31, 2012 and nil as at December 31, 2011. Fair value depends on several factors, such as market volatility, foreign exchange rate volatility, interest rate fluctuations, the Company’s market activity and other market conditions. Options The Company sold options to a financial institution, giving it the right to sell euros to the Company on specific dates. The options have a nominal value of €21,500 with €/US$ exchange of 1.3283, and they mature in January 2013 without renewal. The fair value is $(239) as at December 31, 2012. The market value of those financial instruments depends on several factors, such as foreign market volatility, the remaining duration of the instruments and other market conditions. Because of the above, it is very difficult for the Company to evaluate market risk. The Company believes that a sensitivity analysis would be unrepresentative. Credit risk Credit risk refers to the possibility that a customer or counterparty will fail to fulfill its obligations under a contract and, as a result, create a financial loss for the Company. The Company has a credit policy that defines standard credit practice. This policy dictates that all new customer accounts be reviewed prior to approval and establishes the maximum amount of credit exposure per customer. The creditworthiness and financial well-being of the customer are monitored on an ongoing basis. The Company establishes an allowance for doubtful accounts as determined by management based on its assessment of collection; therefore, the carrying amount of accounts receivable generally represents the maximum credit exposure. As at December 31, 2012 and 2011, the Company has an allowance for doubtful accounts of $168 and $482 respectively. The provision for doubtful accounts, if any, is included in selling, general and administrative expenses in the consolidated statements of earnings (loss), and is net of any recoveries that were provided for in prior periods. Counterparties to financial instruments may expose the Company to credit losses in the event of non-performance. Counterparties for derivative and cash transactions are limited to high credit quality financial institutions, which are monitored on an ongoing basis. Counterparty credit assessments are based on the financial health of the institutions and their credit ratings from external agencies. As at December 31, 2012, the Company does not anticipate non- performance that would materially impact its consolidated financial statements. No financial assets are past due except for trade receivables. The aging analysis of the latter two categories of receivables is as follows: Up to 3 months More than 3 months December 31, 2012 $ December 31, 2011 $ 22,966 1,395 24,361 24,235 1,381 25,616 71     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) The following table summarizes the changes in the allowance for doubtful accounts for trade receivables: Beginning of period Provision for impairment Trade receivables written off during the year as uncollectible(a) Unused amounts reversed End of period For the year ended December 31, 2012 $ For the seven-month period ended December 31, 2011 $ 482 1,333 (1,647) - 168 190 298 - (6) 482 (a) For the year ended December 31, 2012, a client from the Eco-Friendly Materials segment had significant difficulties and the Company wrote off the account receivable of $1.4 million (€1.1 million). Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due (Note 13(b)). The Company manages liquidity risk through the management of its capital structure. It also manages liquidity risk by continually monitoring actual and projected cash flows, taking into account the Company’s sales and receipts and matching the maturity profile of financial assets and financial liabilities. The Board of Directors reviews and approves the Company’s annual operating and capital budgets, as well as any material transactions out of the ordinary course of business, including proposals on acquisitions and other major investments. The following table reflects the contractual maturity of the Company’s financial liabilities as at December 31, 2012: Bank indebtedness and short-term debt Trade and accrued liabilities Derivative financial instruments Long-term debt Total Carrying amount $ 8,014 62,214 6,354 140,425 217,007 1 year $ 8,531 62,214 2,817 31,236 104,798 2-3 years $ 4-5 years $ Beyond 5 years $ - - 3,537 116,552 120,089 - - - 421 421 - - - 21 21 Total $ 8,531 62,214 6,354 148,230 225,329 NOTE 27 – CAPITAL MANAGEMENT The Company’s objective when managing capital is to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may amend the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. 72     5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) The Company requires the approval of its lenders on some of the capital transactions such as the payment of dividends and capital expenditures over a certain level. The Company monitors capital on the basis of the debt-to-equity ratio. This ratio is calculated as net debt divided by total equity. Net debt is calculated as total borrowings (comprising bank indebtedness and short-term debt and long-term debt in the consolidated statements of financial position) less cash and cash equivalents and temporary investments (restricted). Total equity is the equity attributable to equity holders of 5N Plus Inc. in the consolidated statements of financial position. Debt-to-equity ratios as at period-ends are as follows: Total borrowings Less: Cash and cash equivalents and temporary investments (restricted) Net debt Shareholders’ equity Debt-to-equity ratio December 31, 2012 $ December 31, 2011 $ 148,439 (11,892) 136,547 148,112 92% 341,906 (81,331) 260,575 339,241 77% NOTE 28 – KEY MANAGEMENT COMPENSATION AND EXPENSE BY NATURE Key management compensation Key management includes directors (executive and non-executive) and certain senior management. The compensation expense paid or payable to key management for employee services is as follows: Key management compensation Wage and salaries Share-based compensation Total For the year ended December 31, 2012 $ 4,731 219 4,950 For the seven-month period ended December 31, 2011 $ 3,085 301 3,386 73         5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 (Figures in thousands of United States dollars, unless otherwise indicated) Expense by nature Wages and salaries Share-based compensation Depreciation of property, plant and equipment and amortization of intangible assets Research and development (net of tax credit) Impairment of goodwill Impairment of inventories Impairment of property, plant and equipment Impairment of intangible assets Reversal of impairment of property, plant and equipment Restructuring costs NOTE 29 – SUBSEQUENT EVENT For the year ended December 31, 2012 $ For the seven-month period ended December 31, 2011 $ 39,653 655 21,159 4,763 124,910 50,585 39,239 40,597 (932) 2,781 31,677 567 12,797 3,027 - 34,790 11,460 700 - - In March 2013, the Company signed an amendment to its senior secured multi‑currency revolving credit facility under which the facility will be reduced to $100 million starting March 31, 2013. The amendment establishes new financial covenants for the year 2013 and maintains the original maturity (August 2015). The interest rate has been changed and is linked to the Debt/EBITDA ratio, and can vary from LIBOR, banker’s acceptance rate or EURIBOR plus 3.00% to 4.50% or US base rate or prime rate plus 2.00% to 3.5%. Standby fees from 0.75% to 1.125% are paid on the unused portion. At any time, 5N Plus has the option to request that the credit facility be expanded to $140 million through the exercise of an additional $40 million accordion feature, subject to review and approval by the lenders. 74     Corporate Information Stock Exchange For more information, please contact: 5N Plus is listed on the Toronto Stock Exchange, under the symbol VNP. Transfer Agent and Registrar Computershare Investor Services Inc. Auditors PricewaterhouseCoopers LLP Head Office 4385 Garand Street Montreal, Quebec H4R 2B4 Annual Meeting Investor Relations 5N Plus Inc. 4385 Garand Street Montreal, Quebec H4R 2B4 T: 514-856-0644 F: 514-856-9611 invest@5nplus.com Si vous souhaitez obtenir une copie en français de ce rapport annuel, communiquez avec : Relations avec les investisseurs The annual shareholders meeting will be 5N Plus inc. held on Thursday, June 27, 2013 at 9:00 a.m. 4385, rue Garand Club Saint-James 1145 Union Avenue Montreal, Quebec Montréal (Québec) H4R 2B4 Aussi disponible à l’adresse : www.5nplus.com 100% Printed in Canada design : ardoise.com 5N Plus Inc. 4385 Garand Street Montreal, Quebec H4R 2B4 Canada www.5nplus.com 

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