5N Plus
Annual Report 2013

Plain-text annual report

2013 Annual Report Value-Added Growth 5NTable of Contents 1 2 5 25 34 73 Our Vision Message to Shareholders Management’s Discussion and Analysis Consolidated Financial Statements Notes to Consolidated Financial Statements Corporate Information Germanium substrate Space solar power Bismuth chemicals Pigments Cadmium telluride Thin film solar modules Micron size metallic powder Solder powder 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 1 Our Vision Sustainable growth through innovation and product excellence. 2 Message to Shareholders Dear shareholders, Another year in which we have made great strides towards our stated objectives of realigning our organization for more growth in value-added opportunities. This alignment first implies a will, which has been articulated in a clear message conveyed throughout our organization, then a strategy, and corresponding roadmap that each employee can relate to, and finally an ability to execute. Our conveyed message is all around sustainable growth, recognizing the need to grow and the numerous opportunities which are increasingly presenting themselves to a materials’ company such as ours. Addressing relatively open-ended markets and taking advantage of our unique positioning in minor metals, we have and will continue to grow, building on our global platform, with operations and extensive commercial activities throughout the world, and our unique set of technical competencies. Our ability to grow is perhaps best appreciated by looking at our track record over the last five years in which our revenues grew from $31 million to $459 million or 1381%, enabling us to be amongst the Deloitte Fast 500TM for a fourth consecutive year, in line with several growth icons such as Tesla and Facebook, ranking 101st in North America, 5th in Canada and number one in Quebec. Although revenues actually fell in 2013 when compared to 2012, largely as a result of decreasing prices in underlying commodities, 2013 still remained in many respects a year of growth with record shipments of our bismuth products, our most significant product by volume, and our germanium substrates for satellite power applications, as well as increases in market share for most products in our electronic materials business unit. We also announced during the year commissioning of our new facility in Korea, further highlighting our growth ambitions as we expand our Asian footprint. 2013 was also a year in which we introduced several new products including zinc telluride for solar modules, lead nitrate for the mining industry and some new bismuth chemical formulations for both industrial and pharmaceutical applications. We were also able to build more sustainability in our business practices throughout the year and hence provide a more solid foundation for future growth. With respect to strategy, we have crafted an approach based on increasing value-added products and processes that we believe will provide better financial performance and improve predictability, enabling us to create more value for our shareholders. Leveraging our strong commercial leadership in minor metals, we intend to develop both a stronger foothold in terms of supply and increase the complexity of our products and product offering. 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 3 We made progress on both fronts in 2013. On one hand we entered into an exclusive bismuth off-take agreement with Masan Resources through their Nui Phao mine located in Vietnam and we also strengthened our relationship with several of our suppliers throughout the world. On the other hand, we expanded our efforts in the semiconductor substrate business, increasing our ownership in Sylarus to 100%, and also entered the fine metal powder business through our partnership with, and soon to be completed acquisition of AM&M. We intend to devote significant resources to rapidly expand these businesses which hold great promise. Through our Sylarus platform, which has been renamed 5N Plus Semiconductors, we intend to both grow our existing germanium and III-V semiconductor substrate business, as well as leverage our skillset in crystal growth to other material systems. As for our fine metal powder business we see great promise in not only existing markets, such as metals pastes and inks for electronic packaging applications, but also in new applications such as additive manufacturing and 3D printing. In terms of execution, we have focused on improving efficiency and intend on continuing to do so as we have yet to reach our stated objectives and thus reap the full benefits of this exercise. We believe this requires streamlining and consolidation of some sites, a task that was undertaken in 2013 with the closure of our Trail operations and their relocation for the most part to St-George, Utah within 5N Plus Semiconductors. We also believe that improvements in our management systems, including supply chain management and costing will enable us to further reduce our costs and working capital. This focus on reducing working capital should enable us to redeploy capital to support our value-added strategy and our stated objective of sustainable growth, promoting a culture of discipline and accountability throughout the group. We also settled favorably the dispute with the former shareholders of MCP. Our financial performance in 2013 was quite spectacular as we reported $44.7 million of earnings before income tax mainly associated with the settlement of the dispute with the former shareholders of MCP. This contributed significantly to the reduction in our net debt levels together with our focus on working capital reductions, enabling us to greatly improve our financial flexibility and our ability to execute on our growth strategy. We are particularly pleased by our ability to report positive EBITDA and net earnings levels, which is a significant improvement compared to our financial performance in 2012. This is especially true given the challenging environment we have been operating in since the acquisition of MCP, characterized by significant structural changes in the solar industry which led to numerous corporate casualties, and a largely unfavorable pricing environment for many of the underlying commodities we deal with. 4 So where do we go from here and what does the future hold in light of our sustainable growth commitments? Key elements of this future include: • A continuing focus on improving profitability favored by tailwinds in commodities and positive developments in many market segments allowing us to redeploy capital towards key components of our growth strategy; • Execution on our strategic growth plan aiming to increase value-added activities, broaden our footprint in Asia and expand our recycling business leveraging our international platform; • Further improvements in efficiency as we aim to make better use of our industrial assets and reduce the financial requirements associated with our working capital; • Increasing investments in R&D together with fast tracking of our value-added opportunities aiming to speed up their impact on our top and bottom line; • An acquisition roadmap that will enable us to take advantage of existing and future synergies as we move the company to the next level; and • A management team with greater bandwidth as we recently welcomed Mr. Richard Perron as our new Chief Financial Officer and a revamped board of directors with strong international experience. Our three new director nominees are Ms. Jennie S. Hwang, Ms. Nathalie Le Prohon, and Mr. James T. Fahey, whose biographies can be consulted in our Management Proxy Circular. We wish Messrs. Dennis Wood, Chairman of the Board and John Davis, member of the Board and Chairman of the Compensation Committee, all the best in their retirement endeavors and we thank them for their invaluable dedication and contribution to the company over the years. On behalf of our employees and our management team, let me thank you again for your confidence and support. We remain more than ever confident in our ability to provide sustainable long-term value to all of you, shareholders, through growth as we execute on our value-added strategy. Jacques L’Ecuyer President and Chief Executive Officer 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T Management’s Discussion and Analysis  5 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”  or  “5N  Plus”),  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,  2013.  This  MD&A  has  been  prepared  in  accordance with the requirements of the Canadian Securities Administrators  Information contained herein includes any significant developments to February 25, 2014, the date on which the MD&A  was  approved  by  the  Company’s  board  of  directors.  Unless  otherwise  indicated,  the  terms  “we”,  “us”  “our”  and  “the  group” as used herein refer to the Company together with its subsidiaries.   The “Q4 2013” and the “Q4 2012” refer to the three‐month periods ended December, 2013 and 2012. 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.  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,  credit,  interest  rate,  inventory  pricing,  commodity  pricing,  legal  proceedings,  currency  fluctuation,  fair  value,  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 “Risk and Uncertainties” of 5N Plus’ 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.              6 Management’s Discussion and Analysis  Overview   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,  the  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 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 Asia. 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  derivative  have  been  regrouped  under  the  heading Corporate.   5N Plus Inc.                     [2]  5N PLUS 2013 ANNUAL REPORT               5 N P L U S 2 0 1 3 A N N U A L R E P O R T Management’s Discussion and Analysis  Highlights of Q4 2013 and Fiscal Year 2013   7  EBITDA1 increased by $26.1 million, from ($18.1) million in Q4 2012 to $7.9 million in Q4 2013 and by $32.9 million,  from ($12.7) million in 2012 to $20.2 million in 2013.     Revenues decreased by $9.2 million, or 7%, from $128.6 million in Q4 2012 to $119.4 million in Q4 2013 and by $92.7  million,  or  17%,  from  $551.7  million  in  2012  to  $459.0  million  in  2013.   These   decreases  are  mainly  due  to  lower  commodity prices.   Net debt1 decreased by $78.2 million, from $136.5 million as at December 31, 2012 to $58.3 million as at December  31, 2013.  The Net debt1 to adjusted EBITDA1 ratio improved in 2013, from 3.6 in 2012 to 1.9 in 2013.   Net earnings of $1.6 million and adjusted net earnings1 of $2.1 million in Q4 2013 compared to net losses of $212.0  million and $6.9 million in Q4 2012.  Net earnings of $42.8 million and adjusted net earnings of $10.8 million in 2013  compared to net loss of $227.9 million and adjusted net loss of $2.9 million in 2012.   Bookings1 increased by 18% to $156.1 million compared to $132.1 million in the fourth quarter of last year.  Backlog1  as at December 31, 2013 stood at $170.1 million which compares to backlog of $165.8 million one year ago.   On November 13, 2013, the Company was named for a fourth consecutive year as one of Canada’s fastest growing  technology  companies  in  the  Deloitte  Technology  Fast  50TM  based  on  the  percentage  of  revenue  growth  over  five  years. 5N Plus' increase in revenues of 1,681% from 2008 to 2012 resulted in a number 5 ranking. The Company was  also  ranked  101  on  Deloitte’s  Technology  Fast  500TM,  a  list  of  the  500  fastest  growing  technology,  media,  telecommunications, life sciences and clean technology companies in North America.    On October 24, 2013, the Company announced that it had entered into an exclusive long‐term off‐take agreement of  bismuth with Masan Resources, one of the largest private sector natural resources companies in Vietnam.    On July 9, 2013, the Company announced that it had entered into an exclusive option to acquire all of the issued and  outstanding  shares  in  the  capital  of  AM&M  Advanced  Machine  and  Materials  Inc.,  a  corporation  specialized  in  the  manufacturing of micron size metallic powders.   On June 18, 2013, the Company announced that it had entered into a full and final settlement agreement with former  shareholders  of  MCP  Group  SA  ("MCP"),  in  relation  with  the  dispute  previously  announced  by  the  Corporation  on  December 21, 2012.   On June 11, 2013, the Company announced an investment in a new gallium chemicals facility located in South Korea  and that it had entered into an agreement with a local chemical distributor for the supply of operating services and  logistics of the new facility. This initiative was taken to meet the growing demand for gallium in LED manufacturing in  North East Asia.   1 See Non‐IFRS Measures  5N Plus Inc.                     [3]                          8 Management’s Discussion and Analysis  The  Company  ended  the  year  with  a  relatively  strong  quarter  with  EBITDA  levels  reaching  close  to  $8  million  and  quarterly  revenues  at  their  highest  level  since  the  beginning  of  the  year,  reflecting  a  more  favorable  business  environment despite the typical year‐end demand softness patterns.  5N Plus was also able to continue its quarter‐over‐ quarter reduction  in  net  debt  level which  was  cut  by  more  than  half  during  the year  and  now  stands  at  less  than  $60  million providing greater financial flexibility.  Underlying commodity prices together with inventory levels are now more  manageable  enabling  the  Company  to  perform  much  more  effectively  than  it  has  been  able  to  ever  since  the  transformational  acquisition  made  in  2011.   Combined  with  its  efforts  aimed  at  improving  overall  efficiency,  instilling  greater  discipline  and  reducing  costs,  the  Company  was  able  to  report  positive  net  earnings  for  a  fourth  consecutive  quarter  and  break  the  trend  of  impairment  charges  every  alternating  quarter.   Although  the  latter  remains  somewhat  dependent  on  underlying  commodity  pricing  trends,  and  thus  to  some  extent  beyond  the  Company’s  control,  5N  Plus  believes that it is now much better positioned to anticipate and take advantage of these pricing trends in the future.   In  its  respective  markets,  bismuth  sales  volumes  reached  a  record  level  in  both  the  quarter  and  the  year  reflecting  growing demand and increases in market share.  Demand for solar products also remained healthy, despite some year‐ end  decreases  resulting  from  unusual  customer  buying  patterns,  with  a  relatively  bullish  outlook  for  2014  as  the  solar  in  a  number  of  unsubsidized  industry  gradually  recovers  and  demonstrates  markets.   Combined  sales  of  electronic  metals,  namely  gallium,  indium  and  germanium,  also  increased  primarily  as  a  result  of  higher  sales  of  gallium  and  related  chemicals  for  the  LED  market,  a  market  which  is  expected  to  continue  to  grow in the future as the use of LEDs for general lighting applications expands.  As for the germanium substrate business,  the Company made great progress during the year and is now fully qualified with both of the main US based suppliers of  space solar cells. Overall, this relatively bright outlook in terms of markets is further confirmed by the bookings recorded  in the quarter which reached their highest levels since the last two years enabling the backlog to increase back to its June  2012 level despite lower average underlying commodity prices.  its  overall  competitiveness  5N Plus continues to execute its strategic plan which aims to increase value added activities, broaden its footprint in Asia  and expand its recycling business leveraging and its international platform.    As a result, the Company announced during  the year commissioning of its new facility in Korea, its plans to enter the ultrafine metal powder business through the  acquisition  of  AM&M  and  its  breakthrough  atomization  technology,  and  its  exclusive  long‐term  bismuth  off‐take  agreement  with  Masan  Resources.   The  Company  also  intends  to  develop,  manufacture  and  market  selenium  based  chemicals  for  the  animal  feed,  fertilizer,  glass  and  metallurgical  industry.   Related  investments  at  its  Lao  facility  are  underway and the Company intends to produce and sell such products before year‐end.  The Company would like to thank its employees for their dedication and hard work in what was a very challenging year.  Fortunately  through  our  combined  efforts,  the  Company  was  able  to  make  tremendous  progress  and  now  have  every  reason  to  be  optimistic  on  its  ability  to  increase  shareholder  value  in  the  future.    The  Company  also  thanks  its  stakeholders and shareholders for their confidence and continued support.  5N Plus Inc.                     [4]  5N PLUS 2013 ANNUAL REPORT              5 N P L U S 2 0 1 3 A N N U A L R E P O R T Management’s Discussion and Analysis  Historical Financial Information – Years Ended December 31   (in thousands of United States dollars except per share amounts)  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  Balance Sheet Data    Total assets    Net debt (net cash)1   Retirement benefit obligation    Shareholders’ equity  Quarterly Financial Information  9 2013  $  459,012  20,193  30,375  42,661  $0.51  42,780  $0.51  $0.51  20,033  365,240  58,330  15,887  190,052  2012  $  551,675  (12,729)  37,856  (227,738)  ($2.91)  (227,849)  ($2.91)  ($2.91)  25,393  385,396  136,547  16,667  144,955  7 months ended   2011  $  391,712  2,625  37,415  (21,641)  ($0.31)  (22,464)  ($0.32)  ($0.32)  27,338  782,344  260,575  12,850  339,710  (in thousands of United States dollars (except per share amounts)  Q4 2013  $  Q3 2013  $  Q2 2013  $   Q1 2013  $  Q4 2012 $ Q3 2012 $ Q2 2012 $ Q1 2012 $ Revenues  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 I  Adjusted net earnings (loss)1  Basic adjusted net earnings (loss) per share1  Backlog1  119,416  7,942  7,942  1,638  $0,02  $0,02  2,022  $0.02  2,068  $0.02  170,013  108,570  5,775  5,775  1,323  $0.02  $0.02  1,083  $0.01  1,517  $0.02  133,352  112,637  (3,639)  6,543  34,281  $0.41  $0.41  34,185  $0.41  959  $0.01  153,277  118,389  10,115  10,115  5,538  $0.07  $0.07  5,371  $0.06  6,296  $0.08  166,290  128,620 (18,121) 6,395 (211,953) ($2.70) ($2.70) (212,006) ($2.71) (6,880) ($0.08) 165,790 120,744 9,001 9,001 1,275 $0.02 $0.02 1,218 $0.02 648 $0.01 162,323 140,076 (20,474) 5,594 (22,062) ($0.30) ($0.30) (21,922) ($0.29) (1,911) ($0.03) 188,982 162,235 16,867 16,867 4,891 $0.07 $0.07 4,972 $0.07 5,250 $0.07 215,588 Summary of Results  Revenues  Operating expenses  Adjusted EBITDA1  Impairment of inventory  EBITDA1  Gain related to the settlement of the purchase price of MCP  Litigation and restructuring costs  Impairment of property, plant and equipment  Reversal of impairment of property, plant and equipment  Impairment of intangible assets and goodwill  Interest on long‐term debt and other interest expense  Foreign exchange and derivative (gain) loss  Depreciation and amortization  Earnings (loss) before income tax  Income tax  Net earnings (loss)  Basic earnings (loss) per share  Diluted earnings (loss) per share  Q4 2013  $  119,416  111,474  7,942  ‐  7,942  ‐  569  ‐  ‐  ‐  1,779  525  2,419  2,650  1,012  1,638  $0.02  $0.02  Q4 2012  $  128,620  122,225  6,395  24,517  (18,122)  ‐  932  39,239  ‐  165,507  1,463  (360)  5,628  (230,531)  (18,578)  (211,953)  ($2.70)  ($2.70)  2013  $  459,012  428,637  30,375  10,182  20,193  (45,188)  4,068  ‐  ‐  ‐  8,524  (2,590)  10,686  44,693  1,913  42,780  $0.51  $0.51  2012  $  551,675  513,819  37,856  50,585  (12,729)  ‐  2,781  39,239  (932)  165,507  8,828  2,759  21,159  (252,070)  (24,221)  (227,849)  ($2.91)  ($2.91)  1 See Non‐IFRS Measures  5N Plus Inc.                     [5]                                                                  10 Management’s Discussion and Analysis  Revenues by Segment  Electronic Materials Segment  Eco‐Friendly Materials Segment  Total revenues  Q4 2013 $ 46,264 73,152 119,416 Q4 2012 $ 55,254 73,366 128,620 % Change ‐15% ‐2% ‐7% 2013  $  179,368  279,644  459,012  2012 $ 232,013 319,662 551,675 % Change ‐23% ‐13% ‐17% Revenues decreased by $9.2 million, or 7%, from $128.6 million in Q4 2012 to $119.4 million in Q4 2013 and by $92.7  million, or 17%, from $551.7 million in 2012 to $459.0 million in 2013. Demand for the Company’s products remained  strong  throughout  the  quarter  and  year  with  record  sales  of  bismuth  bearing  products  but  revenues  were  negatively  impacted by lower commodity prices, competitive pressures on sales price and by the restructuring of a portion of the  business which was the subject of a dispute with former shareholders of MCP.   The Electronic Materials segment revenues decreased by $7.9 million, or 15%, from $54.2 million in Q4 2012 to $46.3  million  in  Q4  2013  due  to  exceptionally  high  sales  volume  of  solar  products  in  Q4  2012.    The  Eco‐Friendly  Materials  segment  delivered  strong  sales  and  reported  record  sales  of  bismuth  bearing  products  in  both  Q4  2013  and  2013.   Revenues remained stable compared to Q4 2012 despite lower commodity prices.    The Electronic Materials segment revenues decreased by $52.6 million, or 23%, from $232.0 million in 2012 to $179.4  million in 2013.  The Eco‐Friendly Materials segment decreased by $40.0 million, or 13%, from $319.7 million in 2012 to  $279.6 in 2013. The decrease in revenues is due to the same factors mentioned above.  Net earnings (loss) and Adjusted net earnings (loss)  Net earnings (loss)  Basic net earnings (loss) per share  Adjusted net earnings (loss)  Basic adjusted net earnings (loss) per share  Q4 2013 $ 1,638 $0.02 2,068 $0.02 Q4 2012 $ (211,953) ($2.71) (6,880) ($0.08) 2013  $  42,780  $0.51  10,834  $0.13  2012 $ (227,849) ($2.91) (2,893) ($0.04) Net earnings increased by $213.7 million, from ($212.0) million in Q4 2012 to $1.7 million in Q4 2013 and adjusted net  earnings1  increased  by  $9.0  million,  from  ($6.9)  million  in  Q4  2012  to  $2.1  million  in  Q4  2013.   The   Company  had  recorded in Q4 2012 impairment charges of $229.3 million.   Net  earnings  increased  by  $270.6  million,  from  ($227.9)  million  in  2012  to  $42.8  million  in  2013  and  adjusted  net  earnings1  increased by $13.7 million,  from  ($2.9)  million  in  2012  to $10.8  million  in 2013.  The  Company  had recorded  impairment charges of $255.3 million in 2012.   The decrease in operating expenses, SG&A, amortization and financial expenses was offset by lower gross profit due to  the  decline  in  commodity  prices,  competitive  pressures  on  sales  price  and  by  the  restructuring  of  a  portion  of  the  business which was the subject of a dispute with former shareholders of MCP.  The  non‐recurring  gain  of  $45.2  million  recorded  in  the  second  quarter  of  2013  resulting  from  the  reduction  of  the  purchase  price  of  MCP  announced  on  June  18,  2013,  was  partially  offset  by  an  inventory  impairment  charge  of  $10.2  million  recorded  in  the  same  quarter  on  bismuth  and  selenium.  For  2012,  the  Company  recorded  an  inventory  impairment charge of $50.6 million, mainly on bismuth, gallium, tellurium and selenium.  Impairment Charges  Impairment of inventories  Impairment of PPE  Impairment of intangible assets  Impairment of goodwill  Impairment charges  1 See Non‐IFRS Measures  Q4 2013  $ ‐ ‐ ‐ ‐ ‐ Q4 2012  $ 24,517 39,239 40,597 124,910 229,263 2013  $  10,182  ‐  ‐  ‐  10,182  2012 $ 50,585 39,239 40,597 124,910 255,331 5N Plus Inc.                     [6]  5N PLUS 2013 ANNUAL REPORT                                     5 N P L U S 2 0 1 3 A N N U A L R E P O R T Management’s Discussion and Analysis  EBITDA and Adjusted EBITDA  11 Electronic Materials  Eco‐Friendly Materials  Corporate  EBITDA1  Electronic Materials  Eco‐Friendly Materials  Inventory write‐down  Electronic Materials  Eco‐Friendly Materials  Corporate  Adjusted EBITDA1  Q4 2013 $  4,006 6,474 (2,538) 7,942 ‐ ‐ ‐ 4,006 6,474 (2,538) 7,942 Q4 2012 $  (1,733) (11,700) (4,689) (18,122) 8,226 16,291 24,517 6,493 4,591 (4,689) 6,395 2013  $  22,316  6,253  (8,376)  20,193  150  10,032  10,182  22,466  16,285  (8,376)  30,375  2012  $  10,903 (8,203) (15,429) (12,729) 23,750 26,835 50,585 34,653 18,632 (15,429) 37,856 EBITDA increased to $7.9 million and $20.2 million in Q4 2013 and 2013 compared to ($18.1) million and ($12.7) million  in Q4 2012 and 2012 respectively. The Company recorded in 2013 an inventory write‐down of $10.2 million compared to  $50.6 million in 2012. Cost reduction initiatives were offset by gross margin pressure and by lower levels of profitability  due  to  fully  valued  inventories  resulting  from  the  decreasing  trend  in  underlying  commodity  pricing.  EBITDA  was  also  negatively impacted by the restructuring of a portion of the business which was the subject of a dispute with the former  shareholders of MCP.    Bookings and Backlog  Electronic Materials   Eco‐Friendly Materials   Total  Q4 2013 $ 80,382 89,691 170,073 BACKLOG1 Q3 2013 $ 72,309 61,043 133,352 Q4 2012 $ 100,718 65,072 165,790 Q4 2013  $  54,337  101,800  156,137  BOOKINGS1 Q3 2013 $ 31,588 57,057 88,645 Q4 2012 $ 59,342 72,744 132,086 Bookings recorded in the quarter reached their highest levels since the last two years enabling the backlog to increase  back to its June 2012 level despite lower average underlying commodity prices.  Q4 2013 vs Q4 2012  Backlog as at December 31, 2013, for the Electronic Materials segment stood at $80.4 million, and decreased by $20.3  million,  or  20%,  over  the  backlog  of  last  year.  The  backlog  for  the  Eco‐Friendly  Materials  stood  at  $89.7  million,  an  increase of $24.6 million, or 38%, over the backlog of a year ago. Overall the backlog, as at December 31, 2013, stood at  $170.1 million following the renewal pattern of most contracts which generally occurs in the fourth quarter.   Bookings for the Electronic Materials decreased by $5.0 million, or 8%, from $59.3 million in Q4 2012 to $54.3 million in  Q4 2013. Bookings for the Eco‐Friendly Materials increased by $29.1 million, or 40.0%, from $72.7 million in Q4 2012 to  $101.8 million in Q4 2013.   Q4 2013 vs Q3 2013  Bookings  for  the  Electronic  Materials  increased  by  $22.8  million,  or  72%,  and  by  $44.7  million,  or  78%,  for  the  Eco‐ Friendly Materials compared to the previous quarter.    Backlog as at December 31, 2013, increased by $8.1 million for the Electronic Materials and increased by $28.6 million for  the Eco‐Friendly Materials compared to the previous quarter.     1 See Non‐IFRS Measures  5N Plus Inc.                     [7]                                          12 Management’s Discussion and Analysis  Expenses  Depreciation and amortization  SG&A   Litigation and restructuring costs  Financial expenses   Income taxes  Q4 2013 $  2,419 8,607 569 2,304 1,012 Q4 2012 $  5,628 12,561 932 1,103 (18,578) % Change ‐57% ‐31% ‐39% 109% n/a 2013  $  10,686  36,066  4,068  5,934  1,913  2012 $  21,159 45,742 2,781 11,587 (24,221) % Change ‐49% ‐21% 46% ‐49% n/a Depreciation and Amortization  Due to impairment charges to property, plant and equipment (“PPE”) and intangible assets incurred in 2012, depreciation  and amortization expenses in Q4 2013 and 2013 decreased to $2.4 million and $10.7 million compared to $5.6 million  and $21.2 million in Q4 2012 and 2012 respectively.   SG&A   SG&A expenses decreased by $4 million, or 31%, from $12.6 million in Q4 2012 to $8.6 million in Q4 2013 and by $9.7  million,  or  21%,  from  $45.7  million  in  2012  to  $36.1  million  in  2013.  This  performance  primarily  reflects  successful  execution of the Company's cost reduction program, mainly on salaries, professional fees and maintenance.  Litigation and Restructuring costs  The  Company  recorded  litigation  and  restructuring  costs  of  $0.6  million  and  $4.1  million  for  Q4  2013  and  2013  respectively mainly related to attorney’s and other professional fees for the legal proceedings and employee severance  costs.  In 2012, the Company recorded a $0.9 million and a $2.8 million expense respectively related to an incident that  occurred in one of its U.S. sites and to employee severance costs.   Financial Expenses   Financial expenses for Q4 2013 amounted to $2.3 million compared to $1.1 million for the same period last year. This  increase is mainly due to foreign exchange and derivative expense of $0.5 million recorded in Q4 2013 compared to a  gain  of  $0.4  million  in  Q4  2012.   For   2013,  financial  expenses  decreased  by  $5.7  million  and  totalled  $5.9  million  compared  to  $11.6  million  for  2012  due  to  a  foreign  exchange  and  derivative  gain  of  $2.6  million  recorded  in  2013  compared to a foreign exchange and derivative expense of $2.8 million in 2012.   Income Taxes  Effective income tax rate was 4% in 2013 due to a non‐taxable gain of $45.2 million resulting from the reduction in the  purchase price of MCP. For 2012, the effective income tax rate was 10% mainly due to the goodwill impairment charge  which was not deductible for tax purposes.  Liquidity and Capital Resources  Funds from operations1  Net changes in non‐cash working capital items  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 2013 $ 9,043 372 9,415 (3,755) 3,510 Q4 2012  $  4,243  2,686  6,929  (4,346)  (100)  2013 $ 20,033 27,930 47,963 (11,748) (22,410) 2012 $ 25,393 76,419 101,812 33,637 (154,964) (382)  8,788 (276)  2,207  (913)  12,892 (399)  (19,914) For Q4 2013 and 2013, cash generated by operating activities was $9.4 million and $48.0 million respectively compared  to $6.9 million and $101.8 million in Q4 2012 and 2012 respectively. This decrease in 2013 is mainly attributable to the  inventory reduction of $95.6 million in 2012.  1 See Non‐IFRS Measures  5N Plus Inc.                     [8]  5N PLUS 2013 ANNUAL REPORT                                         5 N P L U S 2 0 1 3 A N N U A L R E P O R T Management’s Discussion and Analysis  13 Investing  activities  consumed  $3.8  million  in  Q4  2013  and  $11.7  million  in  2013  compared  to  $4.3  million  and  cash  provided of $33.6 million in Q4 2012 and 2012 respectively. In 2012, cash generated in investing activities was mainly due  to a reduction in temporary investments resulting from repayment of loans in Hong Kong dollars.  Cash provided by financing activities amounted to $3.5 million in Q4 2013 and cash consumed of $22.4 million in 2013  compared  to  cash  consumed  of  $0.1  million  and  $155.0  million  in  Q4  2012  and  2012  respectively,  associated  with  reduction in  the  amounts  drawn under  the multi‐currency  revolving  facility. In 2012,  the  Company had  received  $38.6  million in proceeds from the issuance of new shares and decreased its debt by $192.2 million.   Working Capital  Inventories  Other current assets   Current liabilities  Working capital1  Working capital current ratio1  As at December 31, 2013  $  174,374  97,233  (86,861)  184,746  3.13  As at December 31, 2012 $ 170,293 121,144 (104,789) 186,648 2.78 The  decrease  in  working  capital, which has now reached  its  lowest level  since  the  acquisition of  MCP  is mainly  due  to  lower accounts receivable, income taxes receivable and higher accounts payables and is consistent with the Company’s  efforts aimed at reducing indebtedness and increasing financial flexibility.    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, 2013  $  10,462  72,785  83,247  (24,917)  58,330  As at December 31, 2012 $  8,014  140,425  148,439 (11,892) 136,547 Total  debt  decreased  by  $65.2  million  to  $83.2  million  as  at  December  31,  2013,  compared  to  $148.4  million  as  at   December 31, 2012. The variation was mainly due to net reimbursement of $22.7 million and to the non‐recurring gain of  $45.2  million  in  Q2  2013  resulting  from  the  reduction  of  the  purchase  price  reached  with  the  former  shareholders  of  MCP.  Net debt after taking into account cash and cash equivalents and restricted temporary investments decreased by $78.2  million, from $136.5 million as at December 31, 2012 to $58.3 million as at December 31, 2013. The Company intends to  continue reducing its debt through cost reductions and decreases in working capital as it has done over the last several  months but an increase is possible if the price of commodities has an increasing trend in the following months.  Available Short‐Term Capital Resources  Cash and cash equivalents  Available bank indebtedness and short‐term debt  Available revolving credit facility  Available short‐term capital resources As at December 31, 2013  $  22,427  12,912  11,980  47,319  As at December 31, 2012 $  9,535  26,424  127,787  163,746 The  Company  believes  that  its  cash  flows  from  operating  activities,  combined  with  its  available  short‐term  capital  resources of $47.3 million as at December 31, 2013 will enable it to support its growth, its working capital needs and its  planned capital expenditures.  Starting  March  31,  2013,  the  senior  secured  multi‑currency  revolving  credit  facility  was  reduced  to  $100  million.  However, there was a maximum drawing limit of $80 million until February 15, 2014. Such amendment established new  5N Plus Inc.                     [9]                                      14 Management’s Discussion and Analysis  financial  covenants  for  the  year  2013  and  maintained  the  original  maturity  (August  2015).  The  interest  rate  has  been  changed  and  is  linked  to  the  Net  Senior  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 approval by the lenders.   Funds from Operations  Funds from operations1  Net acquisition of PPE and intangible assets  Working capital changes  Issuance of common shares  Settlement of the purchase price of MCP  Others  Total movement in net debt1  Net debt1, beginning of period  Net debt1, end of period  Q4 2013 $ 9,043 (4,013) 372 ‐ ‐ (212) (3,853) 5,190 (63,520) (58,330) Q4 2012 $ 4,243 (4,196) 2,686 ‐ ‐ 948 (562) 3,681 (140,228) (136,547) 2013  $  20,033  (11,615)  27,930  ‐  45,188  (3,319)  58,184  78,217  (136,547)  (58,330)  2012 $ 25,393 (15,888) 76,419 38,636 ‐ (532) 98,635 124,028 (260,575) (136,547) Funds from operations increased to $9.0 million in Q4 2013 compared to $4.2 million in Q4 2012 and decreased from  $25.4 million in 2012 to $20.0 million in 2013.   The  decrease  in  2013  was  mainly  attributable  to  the  decreasing  underlying  commodity  pricing  trend  which  negatively  impacted selling prices and in turn led to lower profit margins.    Net debt1 to annualized adjusted EBITDA ratio  Annualized funds from operations1 to net debt (%)  Q4 2013 1.84  62.0  Q4 2012 5.34 12.4  2013  1.92  34.3  2012  3.60  18.6  Net debt to annualized adjusted EBITDA ratio for Q4 2013 was 1.84 and 1.92 for 2013. Annualized funds from operations  generated in the same periods represented 62.0% and 34.3% of our net debt.   Share Information  Issued and outstanding shares  Stock options potentially issuable  Warrants potentially issuable  As at February 25, 2014  83,908,269  1,637,951  6,451,807  As at December 31, 2013 83,908,269 1,637,951 6,451,807 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, 2013 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.   1 See Non‐IFRS Measures 5N Plus Inc.                     [10]  5N PLUS 2013 ANNUAL REPORT                              5 N P L U S 2 0 1 3 A N N U A L R E P O R T Management’s Discussion and Analysis  15 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  Expired  Outstanding, end of period  Exercisable, end of period  Number of options  1,585,448 546,939 (141,386) ‐ (353,050) 1,637,951 1,001,826 2013 Weighted average exercise price  CA$  4.67 2.39 5.55 ‐ 3.00 4.19 4.94 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 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 Notes 17 and 26 of the audited consolidated financial statements for the year ended December 31,  2013.    The contractual maturities of the Company’s financial liabilities as at December 31, 2013 are as follows:  Bank indebtedness and short‐term debt  Trade and accrued liabilities  Derivative financial instruments  Long‐term debt  Total   Carrying amount $ 10,462 65,016 4,237 72,785 152,500 1 year $ 11,137 65,016 3,284 6,017 85,454 2‐3 years $ 4‐5 years Beyond 5 years $ $ ‐ ‐ 953 69,553 70,506 ‐ ‐ ‐ 173 173 ‐ ‐ ‐ 19 19 Total $ 11,137 65,016 4,237 75,762 156,152 Contingencies   In  the  normal  course  of  operations,  the  Company  is  exposed  to  events  that  could  give  rise  to  contingent  liabilities  or  assets.  As at February 25, 2014, the Company was not aware of any significant events that would have a material effect  on its consolidated financial statements.   The  Company  settled  its  dispute  with  the  former  shareholders  of  MCP,  thereby  prohibiting  further  related  action  by  either party involved in the settlement. As of the date hereof, the Company does not believe that it is probable that an  outflow of resources, which could be material to the consolidated financial statements, will be required by the Company  following potential third party claims pertaining to actions or events related to the alleged breaches of representations  and warranties by the Vendors.  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:  5N Plus Inc.                     [11]                                 16 Management’s Discussion and Analysis   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 fiscal year ended December 31, 2013 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 2013 in accordance with IFRS.  The Company’s significant accounting policies are  described in Note 2 of the December 31, 2013 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  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, 2012.  Changes in Accounting Policies   The Company has adopted the following new and revised standards, along with any consequential amendments, effective  January 1, 2013. These changes were made in accordance with the application transitional provisions.  IAS 1, “Presentations of Financial Statement”. These amendments required the Company to group other comprehensive  income item by those that will be reclassified subsequently to the consolidated statement of earnings and those that will  not. The Company has reclassified comprehensive income items of the comparative period. These changes did not result  in any net adjustments to other comprehensive income or comprehensive income.  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). Furthermore, the amendments  to  IAS 19  enhance  the  disclosure  requirements  for  defined  benefit  plans  and  the  risks  that  the  Company  is  exposed  through  participation  in  those  plans.  The  impact  of  the  adoption  of  IAS 19  is  presented  in  Note 4  of  the  consolidated  financial statements for the year ended December 31, 2013.  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  impact  of  the  adoption  of  IFRS 10  did  not  result  in  any  change  in  the  consolidation  status  of  any  of  its  subsidiaries or investees.  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 unconsolidated structured entities.   5N Plus Inc.                     [12]  5N PLUS 2013 ANNUAL REPORT            5 N P L U S 2 0 1 3 A N N U A L R E P O R T Management’s Discussion and Analysis  17 The  standard  carries  forward  existing  disclosures  and  also  introduces  significant  additional  disclosure  that  address  the  nature  of,  and  risks  associated  with,  an  entity’s  interests  in  other  entities.  The  Corporation  has  incorporated  the  new  disclosure  requirements  within  these  financial  statements.   IFRS   13,  “Fair  Value  Measurement”,  provides  a  single  framework for measuring fair value. The measurement of the fair value of an asset or liability is based on assumptions  that  market  participants  would  use  when  pricing  the  asset  or  liability  under  current  market  conditions,  including  assumptions about risk. The adoption of IFRS 13 did not require any adjustments to the valuation techniques used by the  Company to measure fair value and did not result in any measurement adjustments as at January 1, 2013.  In  May  2013,  the  IASB  amended  IAS  36,  Impairment  of  assets  regarding  disclosures  for  non‐financial  assets.  This  amendment removed certain disclosures related to the recoverable amount of CGUs which had been included in IAS 36  by the issue of IFRS 13. The amendment is not mandatory until January 1st, 2014, however the Company has decided to  early adopt the amendment as of January 1, 2013.   IFRS 7, Financial instruments —   disclosure ("IFRS 7") — The amendments to IFRS 7 contain new disclosure requirements  for  financial  assets  and  liabilities  that  are  either  offset  in  the  consolidated  balance  sheet  or  subject  to  master  netting  arrangements  or  other  similar  arrangements.  The  amendments  are  to  be  applied  retrospectively.  The  impact  of  the  adoption of IFRS 7 did not result in any change in the disclosure about offsetting of financial assets and financial liabilities.   Future Changes in Accounting Standards  A  number  of  new  standards,  amendments  to  standards  and  interpretations  are  effective  for  annual  periods  beginning  after  January 1,  2014,  and  have  not been applied  in preparing  the  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, as issued, reflects the current status of the IASB’s work plan on the replacement of IAS 39  and applies to classification and measurement of financial assets and financial liabilities, as defined in IAS 39.  The IASB is  also  addressing  hedge  accounting  and  impairment  of  financial  assets.  In  December  2013  the  IASB  removed  the  mandatory effective date of IFRS 9 until all phases of the project have been completed. The mandatory effective date has  yet to be determined however it has been deferred beyond annual periods beginning on or after January 1, 2015.  The Company has not yet quantified the effect of the published phases of the Standard nor does it intend at this time to  early adopt the Standard until the mandatory effective date.  IFRIC 21, Levies —   IFRIC 21 provides guidance on accounting for levies in accordance with the requirements of IAS 37,  Provisions,  Contingent  Liabilities  and  Contingent  Assets. The  interpretation defines  a levy as  an  outflow  from an  entity  imposed by a government in accordance with legislation and confirms that a liability for a levy is recognized only when  the triggering event specified in the legislation occurs. The interpretation is effective for annual periods beginning on or  after January 1, 2014 however the Corporation has not yet assessed the impact of this interpretation.  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.  5N Plus Inc.                     [13]                            18 Management’s Discussion and Analysis  Impairment of Non‐Financial Assets  An impairment loss is recognized for the amount by which an asset’s or Cash Generating Units (“CGU”), 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 the appropriate adjustment to asset‐specific risk factors.  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  on  an  individual  items  basis  and  considered  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  sale  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 judgment 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.  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 2013 consolidated financial statements of the Company.  Financial Instruments and Risk Management  Fair Value of financial instruments  A  detailed  description  of  the  methods  and  assumptions  used  to  measure  the  fair  value  of  the  Company  financial  instruments and their fair value are discussed in Note 17 – Categories of Financial Assets and Financial Liabilities in the  2013 consolidated financial statements of the Company.  5N Plus Inc.                     [14]  5N PLUS 2013 ANNUAL REPORT                  5 N P L U S 2 0 1 3 A N N U A L R E P O R T Management’s Discussion and Analysis  The fair value of the derivative financial instruments was as follows:  19 Assets (Liabilities)  Interest rate swap  Foreign exchange forward contracts  Derivative forward contracts  Options  Warrants   Total   December 31, 2013  $  (2,588)  (1,468)  955  ‐  (181)  (3,282)  December 31, 2012 $ (3,870) (1,080) ‐ (239) (1,165) (6,354) 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, 2013, 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 ($2,588) as at December 31, 2013 and is recorded as part of derivative financial liabilities in the consolidated  statement of financial position.  Currency Risk  The  Company’s  sales  are  primarily  denominated  in  U.S. dollars  whereas  a  portion  of  its  operating  costs are  realized  in  local currencies, such as Euros, Canadian dollars and Pounds Sterling. Even though, the purchases of raw materials are  denominated  in  U.S.  dollars,  which  reduce  to  some  extent  exchange  rate  fluctuations,  we  are  subject  to  currency  translation risk  which  can  negatively  impact  our  results.   Management has  implemented a policy  for  managing  foreign  exchange risk against the relevant functional currency.  The Company manages the foreign exchange risk by entering into  various foreign exchange forward contracts.   Foreign  exchange  forward  contracts  are  described  in  Note  17  in  the  2013  consolidated  financial  statements  of  the  Company.  The Company had the following currency exposures on December 31, 2013:  Cash and cash equivalents  Temporary investments (restricted)  Accounts receivable  Bank indebtedness and short‐term debt  Trade and accrued liabilities  Long‐term debt  Net financial (liabilities) assets   CA$ 351 ‐ 564 ‐ (1,724) (897) (1,706) EUR GBP RMB  4,847 2,490 15,131 ‐ (15,827) (3,448) 3,193 1,398 ‐ 2,506 ‐ (1,642)  ‐ 2,262 7,188  ‐  3,541  (10,462) (6,073) ‐  (5,806) HK$ 10 ‐ 276 ‐ (172) ‐ 114 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, 2013 for the Company’s financial instruments  denominated in non‐functional currencies:  1% Strengthening  Earnings (loss) before tax  1% Weakening  Earnings (loss) before tax  CA$  (17) 17 EUR  GBP  RMB  HK$  32 (32) 23 (23)  (58)  58  1 (1) Options  The  market  value  of  those  financial  instruments  depends  on  several  factors,  such  as  foreign  exchange  rate  market  volatility, the remaining duration of the instruments and other market conditions. For these reasons, it is very difficult for  5N Plus Inc.                     [15]                                                    20 Management’s Discussion and Analysis  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 ($0.2) million  as  at  December 31,  2013  and  ($1.2)  million  as  at  December 31,  2012.  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, 2013 and 2012, the Company had an allowance for doubtful accounts of $0.2 million. 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.  Under  the  terms  of  its  credit  facility,  the  Company is required to satisfy certain restrictive covenants. 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  on  the  credit  facility  during  a  certain  period  will  be  violated  in  the  next  12 months.  However,  risk  remains.  Successful  achievement  of  these  budgeted  results  is  dependent  on  stability  in  the  price  of  metals  and  other  raw  materials, the reduction of debt due to the optimization of the Company’s working capital and the continued viability and  support of the Company’s banks.   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.   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 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  5N Plus Inc.                     [16]  5N PLUS 2013 ANNUAL REPORT            5 N P L U S 2 0 1 3 A N N U A L R E P O R T Management’s Discussion and Analysis  21 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.  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.  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 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 supply contracts.  5N Plus Inc.                     [17]              22 Management’s Discussion and Analysis  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.  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,  walkouts 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 a material 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.   5N Plus Inc.                     [18]  5N PLUS 2013 ANNUAL REPORT                  5 N P L U S 2 0 1 3 A N N U A L R E P O R T Management’s Discussion and Analysis  23 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, litigation and restructuring  costs, acquisition‐related costs and the settlement of purchase price of MCP. 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.    EBITDA margin is defined as EBITDA divided by revenues.  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 EBITDA margin is defined as Adjusted EBITDA divided by revenues.  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, litigation and restructuring costs, settlement of purchase  price 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,  litigation  and  restructuring  costs,  the  settlement  of  purchase  price  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,  litigation  and  restructuring  costs,  the  settlement  of  purchase price 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 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.   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  of  liquid  assets  that  is  calculated  by  taking  current  assets  and  subtracting  current  liabilities.  Given that the company is currently indebted, we use it as an indicator of our financial efficiency and aim to  maintain it at the lowest possible level.    Working capital ratio is calculated by dividing current assets by 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.  5N Plus Inc.                     [19]                          24 5N PLUS INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (Figures in thousands of United States dollars) 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 25 5N PLUS INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (Figures in thousands of United States dollars) 26 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, CPA, CA Chief Financial Officer Montréal, Canada February 25, 2014 February 25, 2014 Independent Auditor’s Report To the Shareholders of 5N Plus Inc. We have audited the accompanying consolidated financial statements of 5N Plus Inc., which comprise the consolidated statements of financial position as at December 31, 2013 and 2012 and the consolidated statements of earnings (loss), statements of comprehensive income (loss), statements of cash flows and statements of changes in equity for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. 1250 René-Lévesque Boulevard West, Suite 2800, Montréal, Quebec, Canada H3B 2G4 T: +1 514 205 5000, F: +1 514 876 1502, www.pwc.com/ca “PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership. 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 27 February 25, 2014 Independent Auditor’s Report To the Shareholders of 5N Plus Inc. We have audited the accompanying consolidated financial statements of 5N Plus Inc., which comprise the consolidated statements of financial position as at December 31, 2013 and 2012 and the consolidated statements of earnings (loss), statements of comprehensive income (loss), statements of cash flows and statements of changes in equity for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. 1250 René-Lévesque Boulevard West, Suite 2800, Montréal, Quebec, Canada H3B 2G4 T: +1 514 205 5000, F: +1 514 876 1502, www.pwc.com/ca “PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership. 28 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of 5N Plus Inc. as at December 31, 2013 and 2012 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. 1 5N PLUS INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Figures in thousands of United States dollars) December 31, December 31, CPA auditor, CA, public accountancy permit No. A116853 Investments accounted for using the equity method (Note 10) ASSETS Current Cash and cash equivalents Temporary investments, restricted Accounts receivable (Note 5) Inventories (Note 6) Income tax receivable Derivative financial assets (Note 17) Other current assets Total current assets Property, plant and equipment (Note 7) Intangible assets (Note 8) Deferred tax asset (Note 16) 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 2013 $ 22,427 2,490 60,616 174,374 8,455 955 2,290 271,607 59,614 13,143 13,387 444 7,045 93,633 365,240 10,462 65,016 3,660 3,284 4,439 86,861 68,346 1,600 15,887 953 1,064 87,850 174,711 190,052 477 190,529 365,240 As at 2012 (Note 4) $ 9,535 2,357 87,807 170,293 18,931 - 2,514 291,437 55,548 16,010 12,650 503 9,248 93,959 385,396 8,014 62,214 2,217 2,817 29,527 104,789 110,898 2,632 16,667 3,537 1,560 135,294 240,083 144,955 358 145,313 385,396 1 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 29 5N PLUS INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Figures in thousands of United States dollars) As at December 31, 2013 $ As at December 31, 2012 (Note 4) $ ASSETS Current Cash and cash equivalents Temporary investments, restricted Accounts receivable (Note 5) Inventories (Note 6) Income tax receivable Derivative financial assets (Note 17) Other current assets Total current assets Property, plant and equipment (Note 7) Intangible assets (Note 8) Deferred tax asset (Note 16) 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. 22,427 2,490 60,616 174,374 8,455 955 2,290 271,607 59,614 13,143 13,387 444 7,045 93,633 365,240 10,462 65,016 3,660 3,284 4,439 86,861 68,346 1,600 15,887 953 1,064 87,850 174,711 190,052 477 190,529 365,240 9,535 2,357 87,807 170,293 18,931 - 2,514 291,437 55,548 16,010 12,650 503 9,248 93,959 385,396 8,014 62,214 2,217 2,817 29,527 104,789 110,898 2,632 16,667 3,537 1,560 135,294 240,083 144,955 358 145,313 385,396 1 30 5N PLUS INC. CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) 5N PLUS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Figures in thousands of United States dollars, except per share information) (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 loss from joint ventures Operating earnings (loss) Financial expenses Interest on long-term debt Other interest expense (Note 28) Foreign exchange and derivative loss (gain) Earnings (loss) before income tax Income tax expense (recovery) (Note 16) Net earnings (loss) for the year Attributable to: Equity holders of 5N Plus Inc. Non-controlling interest Earnings (loss) per share attributable to equity holders of 5N Plus Inc. (Note 22) Basic earnings (loss) per share Diluted earnings (loss) per share For the year ended December 31, 2013 $ For the year ended December 31, 2012 $ 459,012 405,114 36,066 (32,854) 59 408,385 50,627 5,935 2,589 (2,590) 5,934 44,693 1,913 42,780 42,661 119 42,780 0.51 0.51 0.51 551,675 520,247 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) Net earnings (loss) for the year Other comprehensive income (loss), net of tax i) Items that may be reclassified subsequently to the consolidated statement of earnings (loss) Cash flow hedges, net of income tax of $(345); 2012 – $406 De-designation of cash flow hedges, net of income tax of $103; 2012 – $(312) Currency translation adjustment ii) Items that will not be reclassified subsequently to the consolidated statement of earnings (loss) Retroactive remeasurements of retirement benefit obligation, net of income tax of nil ;2012 – $1,252 (Note 4) Remeasurements of retirement benefit obligation, net of income tax of $414; 2012 – nil Other comprehensive income (loss), net of tax Comprehensive income (loss) for the year Attributable to equity holders of 5N Plus Inc. Attributable to non-controlling interest For the For the year ended year ended December 31, December 31, 2013 $ 2012 $ 42,780 (227,849) 937 (282) 291 946 - 923 923 (1,102) 848 215 (39) (2,788) - (2,788) 1,869 (2,827) 44,649 44,530 119 (230,676) (230,565) (111) The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 2 3 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 31 5N PLUS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Figures in thousands of United States dollars, except per share information) Net earnings (loss) for the year Other comprehensive income (loss), net of tax i) Items that may be reclassified subsequently to the consolidated statement of earnings (loss) Cash flow hedges, net of income tax of $(345); 2012 – $406 De-designation of cash flow hedges, net of income tax of $103; 2012 – $(312) Currency translation adjustment ii) Items that will not be reclassified subsequently to the consolidated statement of earnings (loss) Retroactive remeasurements of retirement benefit obligation, net of income tax of nil ;2012 – $1,252 (Note 4) Remeasurements of retirement benefit obligation, net of income tax of $414; 2012 – nil Other comprehensive income (loss), net of tax Comprehensive income (loss) for the year 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, 2013 $ For the year ended December 31, 2012 $ 42,780 (227,849) 937 (282) 291 946 - 923 923 (1,102) 848 215 (39) (2,788) - (2,788) 1,869 (2,827) 44,649 44,530 119 (230,676) (230,565) (111) 3 32 5N PLUS INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 5N PLUS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Figures in thousands of United States dollars, except number of shares) (Figures in thousands of United States dollars) Total Equity Shareholders’ Equity Share capital Balance at beginning of year Common shares issued on exercise of stock options Common shares issued for cash (Note 18) Balance at end of year Contributed surplus Balance at beginning of year Share-based compensation expense Exercise of stock options Balance at end of year Retained earnings (deficit) Balance at beginning of year Net earnings (loss) attributable to equity holders of 5N Plus Inc. for the year Share issuance expense (net of income tax of nil; 2012 – $436) (Note 18) Balance at end of year Accumulated other comprehensive loss Balance at beginning of year Cash flow hedges (net of income tax of $(345); 2012 – $406) De-designation of cash flow hedges (net of income tax of $103; 2012 – $(312)) Currency translation adjustment Remeasurements of retirement benefit obligation (net of deferred tax of $(414); 2012 – $1,252) Balance at end of year Total shareholders’ equity at end of year Non-controlling interest Balance at beginning of year Share of profit (loss) Balance at end of year Total Equity Number of shares 83,908,269 - - 83,908,269 For the year ended December 31, 2013 Amount $ 343,272 - - 343,272 3,180 567 - 3,747 (198,073) 42,661 - (155,412) (3,424) 937 (282) 291 923 (1,555) 190,052 358 119 477 190,529 Number of shares 70,961,125 43,531 12,903,613 83,908,269 For the year ended December 31, 2012 (Note 4) Amount $ 305,928 225 37,119 343,272 2,691 563 (74) 3,180 30,850 (227,738) (1,185) (198,073) (597) (1,102) 848 215 (2,788) (3,424) 144,955 469 (111) 358 145,313 The accompanying notes are an integral part of these consolidated financial statements. Operating activities Net earnings (loss) for the year Adjustments to reconcile net earnings (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 loss from joint ventures Gain related to the settlement of the purchase price of MCP Group SA (Note 13) 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 gain on non-hedge financial instruments Unrealized foreign exchange loss 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 operating activities Investing activities Additions to property, plant and equipment Disposal of property, plant and equipment Acquisition of intangible assets Temporary investments Temporary investments, restricted Cash flows from (used in) investing activities Financing activities Repayment of long-term debt Net increase (decrease) in bank indebtedness and short-term debt Issuance of common shares and warrants (Note 18) Share issuance expense Financial instruments Cash flows 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 year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental information(a) Net income tax paid (recovered) Interest paid For the year ended For the year ended December 31, December 31, 2013 $ 2012 $ 42,780 (227,849) 10,686 2,017 567 (1,769) 59 (45,188) 10,182 - - - - (847) 1,546 20,033 27,930 47,963 (11,063) 245 (797) - (133) (11,748) (25,186) 2,448 - - 328 (22,410) (913) 12,892 9,535 22,427 (7,636) 5,472 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 (16,460) 919 (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 (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. 4 5 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 33 5N PLUS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Figures in thousands of United States dollars) Operating activities Net earnings (loss) for the year Adjustments to reconcile net earnings (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 loss from joint ventures Gain related to the settlement of the purchase price of MCP Group SA (Note 13) 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 gain on non-hedge financial instruments Unrealized foreign exchange loss 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 operating activities Investing activities Additions to property, plant and equipment Disposal of property, plant and equipment Acquisition of intangible assets Temporary investments Temporary investments, restricted Cash flows from (used in) investing activities Financing activities Repayment of long-term debt Net increase (decrease) in bank indebtedness and short-term debt Issuance of common shares and warrants (Note 18) Share issuance expense Financial instruments Cash flows 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 year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental information(a) Net income tax paid (recovered) Interest paid (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. For the year ended December 31, 2013 $ For the year ended December 31, 2012 $ 42,780 (227,849) 10,686 2,017 567 (1,769) 59 (45,188) 10,182 - - - - (847) 1,546 20,033 27,930 47,963 (11,063) 245 (797) - (133) (11,748) (25,186) 2,448 - - 328 (22,410) (913) 12,892 9,535 22,427 (7,636) 5,472 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 (16,460) 919 (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 5 34 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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. 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 headed by a vice president who oversees locally managed operations in Europe and China. The segment manufactures and sells refined bismuth and bismuth chemicals and low melting-point alloys as well as refined selenium and selenium chemicals. The Company’s operations are not subject to seasonal fluctuations. These consolidated financial statements were authorized for issuance by the Company’s Board of Directors on February 25, 2014. Acquisition-related costs are expensed as incurred. 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 Canadian generally accepted accounting principles as set forth in Part 1 of the Chartered Professional Accountants of Canada (CPA Canada) Handbook – Accounting, which incorporates International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). 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 further disclosed in this note, in the Significant management estimation and judgment in applying accounting policies section. a) Subsidiaries Subsidiaries are all entities (including structured entities) over which the Company has control. Control exists when the Company is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through the power over the entity. 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. 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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. The following table includes the principal subsidiaries which significantly impact the results or assets of the Company: 5N Plus Inc. 5N PV Gmbh 5N Plus Lübeck Gmbh 5N Plus UK Limited 5N Plus Belgium SA 5N Plus Asia Limited 5N Plus Wisconsin Inc Country of incorporation Canada Germany Germany United Kingdom Belgium Hong Kong United States % Equity interest 2013 2012 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 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 International Accounting Standard (“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. loss. 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 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. 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. 6 7 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 35 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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. The following table includes the principal subsidiaries which significantly impact the results or assets of the Company: 5N Plus Inc. 5N PV Gmbh 5N Plus Lübeck Gmbh 5N Plus UK Limited 5N Plus Belgium SA 5N Plus Asia Limited 5N Plus Wisconsin Inc Country of incorporation Canada Germany Germany United Kingdom Belgium Hong Kong United States % Equity interest 2012 2013 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 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 International Accounting Standard (“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. 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. 7 36 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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 (loss) is reclassified to profit or loss where appropriate. The Company’s share of post-acquisition profit or loss is recognized in the consolidated statements of earnings (loss), and its share of post-acquisition movements in other comprehensive income (loss) is recognized in other comprehensive income (loss) 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 statements 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 statements 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 statements of earnings (loss), except when deferred in other comprehensive income (loss) as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange gains and losses are presented in the consolidated statements of earnings (loss) within “foreign exchange and derivative loss (gain)”. 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 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 (loss). 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 (loss). 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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) 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; ii) income and expenses for each statement of earnings (loss) 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 (loss). 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 (loss). 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. The Eco-Friendly Materials segment manufactures and sells refined bismuth and bismuth chemicals and low melting- point alloys as well as refined selenium and selenium chemicals. Corporate expenses associated with the head office and unallocated selling, general and administrative expenses together with financing costs and foreign exchange and derivative loss (gain) have been regrouped under the heading “Corporate and unallocated”. Corresponding operations and activities are managed accordingly by the Company’s key decision-makers. Each operating segment is managed separately as each of these service lines requires different technologies, resources and marketing approaches. The financial information of the recycling and trading of complex material is allocated to the two main segments. All intersegment transactions between the Electronic Materials and the Eco-Friendly Materials segments 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. 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 Company; and (iii) the costs incurred or to be incurred can be measured reliably. 8 9 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 37 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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 (loss) 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 (loss). 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 (loss). 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. The Eco-Friendly Materials segment manufactures and sells refined bismuth and bismuth chemicals and low melting- point alloys as well as refined selenium and selenium chemicals. Corporate expenses associated with the head office and unallocated selling, general and administrative expenses together with financing costs and foreign exchange and derivative loss (gain) have been regrouped under the heading “Corporate and unallocated”. Corresponding operations and activities are managed accordingly by the Company’s key decision-makers. Each operating segment is managed separately as each of these service lines requires different technologies, resources and marketing approaches. The financial information of the recycling and trading of complex material is allocated to the two main segments. All intersegment transactions between the Electronic Materials and the Eco-Friendly Materials segments 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. 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 Company; and (iii) the costs incurred or to be incurred can be measured reliably. 9 38 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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. 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. b) Loans and receivables Customer relationships Technology Trade name and non-compete agreements Software Intellectual property Development costs Period 10 years 5 years 2 to 5 years 5 years 10 years Not exceeding 10 years 10 11 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) Impairment of non-financial assets Impairment of goodwill 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. 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. 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. 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 “accounts receivable”, “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 them within 12 months of the end of the reporting period. 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 39 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) Impairment of non-financial assets Impairment of goodwill 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. 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. 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 “accounts receivable”, “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 them within 12 months of the end of the reporting period. 11 40 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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 financial assets at fair value through profit or loss are presented in the consolidated statements of earnings (loss) within foreign exchange and derivative loss (gain) in the period in which they arise. 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 the 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 bank indebtedness, short-term debt and long-term debt (“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 and derivative loss (gain). 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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). 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 maturity of the 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 b) Cash flow 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). The Company generally applies cash flow hedge accounting to foreign exchange forward contracts and interest-rate derivatives entered into to hedge foreign exchange risks on forecasted transactions. 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. 12 13 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 41 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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: hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedge); a) b) hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge); or hedges of a net investment in a foreign operation (net investment hedge). c) 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 maturity of the 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 foreign exchange forward contracts and interest-rate derivatives entered into to hedge foreign exchange risks on forecasted transactions. 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. 13 42 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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 weighted average cost. 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. 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. Temporary investments, restricted Temporary investments represent restricted deposits held to secure certain liabilities of the Company. deferred income tax liability is settled. 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. Employee future benefits benefits are as follows: 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. 14 15 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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. All other borrowing costs are recognized in profit or loss in the period in which they are incurred. Income taxes respectively. 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, 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 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. The Company contributes to a defined benefit pension plan. The significant policies related to employee future   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.  Actuarial gains and losses arising from experience adjustment and changes in actuarial assumptions are charged or credited to equity in other comprehensive income (loss) in the period in which they arise. 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 43 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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. 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.  Actuarial gains and losses arising from experience adjustment and changes in actuarial assumptions are charged or credited to equity in other comprehensive income (loss) in the period in which they arise. 15 44 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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 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. 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) Impairment of non-financial assets An impairment loss is recognized for the amount by which an asset’s or CGU’s 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 7, 8 and 9). 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 future selling prices to change rapidly. The Company evaluates its inventories using a group of similar items basis and considers expected future prices as well as events that have occurred between the statement of 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. Inventories 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 – CHANGES IN ACCOUNTING POLICIES The Company has adopted the following new and revised standards, along with any consequential amendments, effective January 1, 2013. These changes were made in accordance with the application transitional provisions. The Company has adopted the amendment to IAS 1, “Presentation of Financial Statements”. These amendments required the Company to group other comprehensive income items by those that will be reclassified subsequently to the interim consolidated statement of earnings and those that will not. The Company has reclassified comprehensive income items for the comparative period. These changes did not result in any net adjustments to other comprehensive income (loss) or comprehensive income (loss). 16 17 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 45 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) Impairment of non-financial assets An impairment loss is recognized for the amount by which an asset’s or CGU’s 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 7, 8 and 9). 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 future selling prices to change rapidly. The Company evaluates its inventories using a group of similar items basis and considers expected future prices as well as events that have occurred between the statement of 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 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 – CHANGES IN ACCOUNTING POLICIES The Company has adopted the following new and revised standards, along with any consequential amendments, effective January 1, 2013. These changes were made in accordance with the application transitional provisions. The Company has adopted the amendment to IAS 1, “Presentation of Financial Statements”. These amendments required the Company to group other comprehensive income items by those that will be reclassified subsequently to the interim consolidated statement of earnings and those that will not. The Company has reclassified comprehensive income items for the comparative period. These changes did not result in any net adjustments to other comprehensive income (loss) or comprehensive income (loss). 17 46 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) (Figures in thousands of United States dollars) 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). Furthermore, the amendments to IAS 19 enhance the disclosure requirements for defined benefit plans and the risks that the Company is exposed through participation in those plans. The impact of the adoption of IAS 19 is presented in Note 4. 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 impact of the adoption of IFRS 10 did not result in any change in the consolidation status of any of its subsidiaries or investees. IFRS 12, “Disclosure 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 unconsolidated structured entities. The standard carries forward existing disclosures and also introduces significant additional disclosures that address the nature of, and risks associated with, an entity’s interests in other entities. The Company has incorporated the new disclosure requirements within these financial statements. IFRS 13, “Fair Value Measurement”, provides a single framework for measuring fair value. The measurement of the fair value of an asset or liability is based on assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. The adoption of IFRS 13 did not require any adjustments to the valuation techniques used by the Company to measure fair value and did not result in any measurement adjustments as at January 1, 2013. In May 2013, the IASB amended IAS 36, “Impairment of Assets”, regarding disclosures for non-financial assets. This amendment removed certain disclosures related to the recoverable amount of CGUs which had been included in IAS 36 by the issue of IFRS 13. The amendment is not mandatory until January 1, 2014, however the Company has decided to early adopt the amendment as of January 1, 2013. IFRS 7, Financial Instruments: Disclosures — The amendments to IFRS 7 contain new disclosure requirements for financial assets and liabilities that are either offset in the consolidated statement of financial position or subject to master netting arrangements or other similar arrangements. The amendments are to be applied retrospectively. The impact of the adoption of IFRS 7 did not result in any change in the disclosure of offsetting of financial assets and financial liabilities. New standards not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning on or after January 1, 2014, 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. IFRS 9, “Financial Instruments”, as issued, reflects the current status of the IASB’s work plan on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities, as defined in IAS 39. The IASB is also addressing hedge accounting and impairment of financial assets. In December 2013 the IASB removed the mandatory effective date of IFRS 9 until all phases of the project have been completed. The mandatory effective date has yet to be determined however it has been deferred beyond annual periods beginning on or after January 1, 2015. The Company has not yet quantified the effect of the published phases of IFRS 9 nor does it intend at this time to early adopt IFRS 9 until the mandatory effective date. 18 International Financial Reporting Interpretations Committee Interpretation 21, “Levies”, provides guidance on accounting for levies in accordance with the requirements of IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”. The interpretation defines a levy as an outflow from an entity imposed by a government in accordance with legislation and confirms that a liability for a levy is recognized only when the triggering event specified in the legislation occurs. The interpretation is effective for annual periods beginning on or after January 1, 2014, however the Company has not yet assessed the impact of this interpretation. NOTE 4 – IAS 19, EMPLOYEE BENEFITS Adjustments to the statements of financial position: Increase in deferred tax assets related to the retirement benefit obligation Equity before accounting change Increase in retirement benefit obligation Net change Equity after accounting change Adjustments to comprehensive loss: Comprehensive income (loss) before accounting change Decrease in other comprehensive income for retroactive remeasurements of retirement benefit obligation, net of deferred tax of $1,252 Comprehensive loss after accounting change Adjustments to accumulated other comprehensive income (loss): Opening balance before accounting change Decrease in other comprehensive income for remeasurements of retirement benefit obligation Opening balance after accounting change NOTE 5 – ACCOUNTS RECEIVABLE Gross trade receivables Allowance for doubtful accounts Trade receivables Sales taxes receivable Other receivables Total accounts receivable December 31, 2012 $ 148,470 (4,575) 1,418 (3,157) 145,313 2012 $ (227,888) (2,788) (230,676) 2013 $ (267) (3,157) (3,424) 2013 $ 54,008 (218) 53,790 4,413 2,413 60,616 2012 $ (228) (369) (597) 2012 $ 79,249 (168) 79,081 4,604 4,122 87,807 19 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 47 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) International Financial Reporting Interpretations Committee Interpretation 21, “Levies”, provides guidance on accounting for levies in accordance with the requirements of IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”. The interpretation defines a levy as an outflow from an entity imposed by a government in accordance with legislation and confirms that a liability for a levy is recognized only when the triggering event specified in the legislation occurs. The interpretation is effective for annual periods beginning on or after January 1, 2014, however the Company has not yet assessed the impact of this interpretation. NOTE 4 – IAS 19, EMPLOYEE BENEFITS Adjustments to the statements of financial position: Equity before accounting change Increase in retirement benefit obligation Increase in deferred tax assets related to the retirement benefit obligation Net change Equity after accounting change Adjustments to comprehensive loss: Comprehensive income (loss) before accounting change Decrease in other comprehensive income for retroactive remeasurements of retirement benefit obligation, net of deferred tax of $1,252 Comprehensive loss after accounting change Adjustments to accumulated other comprehensive income (loss): Opening balance before accounting change Decrease in other comprehensive income for remeasurements of retirement benefit obligation Opening balance after accounting change NOTE 5 – ACCOUNTS RECEIVABLE Gross trade receivables Allowance for doubtful accounts Trade receivables Sales taxes receivable Other receivables Total accounts receivable December 31, 2012 $ 148,470 (4,575) 1,418 (3,157) 145,313 2012 $ (227,888) (2,788) (230,676) 2013 $ (267) (3,157) (3,424) 2013 $ 54,008 (218) 53,790 4,413 2,413 60,616 2012 $ (228) (369) (597) 2012 $ 79,249 (168) 79,081 4,604 4,122 87,807 19 48 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) (Figures in thousands of United States dollars) 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 2013 $ 45,356 129,018 174,374 2012 $ 60,410 109,883 170,293 For the year ended December 31, 2013, a total of $373,548 of inventories was included as an expense in cost of sales (2012 – $517,604). This includes $10,182 of impairment of inventories ($10,032 for the Eco-Friendly Materials segment and $150 for the Electronic Materials segment) (2012 – $50,585 ($26,835 for the Eco-Friendly Materials segment and $23,750 for the Electronic Materials segment)). For the year ended December 31, 2013, a total of $25,627 previously written down was recognized as a reduction of expenses in cost of sales ($19,623 for the Eco-Friendly Materials segment and $6,004 for the Electronic Materials segment) (2012 – $56,137 ($19,647 for the Eco-Friendly Materials segment and $36,490 for the Electronic Materials segment)). The majority of inventories are pledged as security for the revolving credit facility (Note 13). NOTE 7 – PROPERTY, PLANT AND EQUIPMENT Effect of foreign exchange and adjustment Year ended December 31, 2012 As at December 31, 2011 Additions Disposals Impairment losses(a)(b) Reversal of impairment(c) Depreciation As at December 31, 2012 As at December 31, 2012 Cost Accumulated depreciation Net book value Year ended December 31, 2013 As at December 31, 2012 Additions Disposals Depreciation Effect of foreign exchange As at December 31, 2013 As at December 31, 2013 Cost Accumulated depreciation Net book value Furniture, office equipment and rolling stock improvements Leasehold Production equipment $ Land and buildings $ - - 37,602 5,653 (18,899) (1,784) 90 22,662 26,058 (3,396) 22,662 22,662 1,187 (41) (1,297) 93 22,604 27,140 (4,536) 22,604 45,367 9,762 (705) (19,225) 932 (5,885) (163) 30,083 35,772 (5,689) 30,083 30,083 9,498 (182) (4,676) (65) 34,658 44,016 (9,358) 34,658 $ 2,445 1,635 (192) (878) - (1,494) (19) 1,497 2,752 (1,255) 1,497 1,497 621 (22) (925) 1 1,172 3,060 (1,888) 1,172 $ - - - - 1,069 614 (22) (237) (118) 1,306 1,952 (646) 1,306 1,306 (124) (2) 1,180 1,952 (772) 1,180 Total $ 86,483 17,664 (919) (39,239) 932 (9,281) (92) 55,548 66,534 (10,986) 55,548 55,548 11,306 (245) (7,022) 27 59,614 76,168 (16,554) 59,614 (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 loss of $11,004 in the Electronic Materials segment. The impairment represents the excess of the carrying amount over the recoverable 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. 20 21 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 49 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) NOTE 7 – PROPERTY, PLANT AND EQUIPMENT 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 Year ended December 31, 2013 As at December 31, 2012 Additions Disposals Depreciation Effect of foreign exchange As at December 31, 2013 As at December 31, 2013 Cost Accumulated depreciation Net book value Land and buildings $ Production equipment $ Furniture, office equipment and rolling stock $ Leasehold improvements $ 37,602 5,653 - (18,899) - (1,784) 90 22,662 26,058 (3,396) 22,662 22,662 1,187 (41) (1,297) 93 22,604 27,140 (4,536) 22,604 45,367 9,762 (705) (19,225) 932 (5,885) (163) 30,083 35,772 (5,689) 30,083 30,083 9,498 (182) (4,676) (65) 34,658 44,016 (9,358) 34,658 2,445 1,635 (192) (878) - (1,494) (19) 1,497 2,752 (1,255) 1,497 1,497 621 (22) (925) 1 1,172 3,060 (1,888) 1,172 1,069 614 (22) (237) - (118) - 1,306 1,952 (646) 1,306 1,306 - - (124) (2) 1,180 1,952 (772) 1,180 Total $ 86,483 17,664 (919) (39,239) 932 (9,281) (92) 55,548 66,534 (10,986) 55,548 55,548 11,306 (245) (7,022) 27 59,614 76,168 (16,554) 59,614 (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 loss of $11,004 in the Electronic Materials segment. The impairment represents the excess of the carrying amount over the recoverable 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. 21 50 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) NOTE 8 – INTANGIBLE ASSETS Customer relationships $ Trade name and non-compete agreements $ Software, intellectual property and development $ Technology $ 10,458 - 10,458 1,828 1,048 2,876 5,625 - 5,625 1,862 1,157 3,019 3,062 - 3,062 1,417 372 1,789 3,706 797 4,503 1,734 1,087 2,821 Total $ 22,851 797 23,648 6,841 3,664 10,505 7,582 2,606 1,273 1,682 13,143 Customer relationships $ Technology $ Trade name and non-compete agreements $ Software, intellectual property and development $ 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 Cost As at December 31, 2012 Additions As at December 31, 2013 Accumulated amortization As at December 31, 2012 Amortization As at December 31, 2013 Net book value as at December 31, 2013 Cost As at December 31, 2011 Additions Adjustment Impairment losses(a) As at December 31, 2012 Accumulated amortization As at December 31, 2011 Amortization Adjustment Impairment losses(a) As at December 31, 2012 Net book value as at December 31, 2012 (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). As at December 31, 2013, there was no indication that the intangible asset value had increased. Therefore, there is no impairment reversal. 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) NOTE 9 – GOODWILL $ - 124,910 (124,910) As at December 31, 2011 Impairment losses As at December 31, 2012 segments respectively. The impairment in 2012 was split $14,450 and $110,460 between the Eco-Friendly Materials and Electronic Materials Impairment of goodwill, intangible assets and property, plant and equipment As at December 31, 2012, for the purposes of the annual assessment of impairment testing of property, plant and equipment and intangible assets with finite useful lives, the Company determined that it has four cash-generating units: (i) the solar sector; (ii) the germanium and related business; (iii) the remaining Electronic Materials segment; and (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 the germanium and related business. 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 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. As at December 31, 2012, 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 dispose 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%. 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 the 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. 22 23 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 51 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) NOTE 9 – GOODWILL As at December 31, 2011 Impairment losses As at December 31, 2012 $ 124,910 (124,910) - The impairment in 2012 was split $14,450 and $110,460 between the Eco-Friendly Materials and Electronic Materials segments respectively. Impairment of goodwill, intangible assets and property, plant and equipment As at December 31, 2012, for the purposes of the annual assessment of impairment testing of property, plant and equipment and intangible assets with finite useful lives, the Company determined that it has four cash-generating units: (i) the solar sector; (ii) the germanium and related business; (iii) the remaining Electronic Materials segment; and (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 the germanium and related business. 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 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. As at December 31, 2012, 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 dispose 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%. 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 the 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. 23 52 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) (Figures in thousands of United States dollars) NOTE 10 – INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD NOTE 13 – BANK INDEBTEDNESS, SHORT- AND LONG-TERM DEBT Beginning of year Reversal due to acquisition of remaining 50% interest(a) Share of loss from joint ventures End of year 2013 $ 503 - (59) 444 2012 $ 1,513 (677) (333) 503 a) Bank indebtedness and short-term debt The Company has credit lines with financial institutions in China. These credit lines are guaranteed by certain assets of the Company in China. The Chinese renminbi (“RMB”) credit line bears interest at 105% to 110% of the RMB base rate. (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 Net earnings (loss) NOTE 11 – OTHER ASSETS Deferred costs Deposit Loan receivable from a related party (Note 25) Other Total other assets NOTE 12 – TRADE AND ACCRUED LIABILITIES Trade payables Accrued liabilities Total trade and accrued liabilities Trade payables are non-interest bearing. 2013 $ 4,767 4,285 2,428 (59) 2013 $ 1,243 106 4,014 1,682 7,045 2013 $ 54,556 10,460 65,016 2012 $ 5,057 4,575 4,127 (333) 2012 $ 2,676 1,500 3,958 1,114 9,248 2012 $ 49,500 12,714 62,214 As at December 31, 2013 Contractual currency Facility available Amount drawn As at December 31, 2013 Reporting currency Facility available Amount drawn As at December 31, 2012 Contractual currency Facility available Amount drawn As at December 31, 2012 Reporting currency Facility available Amount drawn RMB Total 155,000 63,911 155,000 63,911 US$ 23,374 10,462 Total 23,374 10,462 RMB Total 217,000 50,500 217,000 50,500 US$ 34,438 8,014 Total 34,438 8,014 24 25 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 53 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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 certain assets of the Company in China. The Chinese renminbi (“RMB”) credit line bears interest at 105% to 110% of the RMB base rate. As at December 31, 2013 Contractual currency Facility available Amount drawn As at December 31, 2013 Reporting currency Facility available Amount drawn As at December 31, 2012 Contractual currency Facility available Amount drawn As at December 31, 2012 Reporting currency Facility available Amount drawn RMB Total 155,000 63,911 155,000 63,911 US$ 23,374 10,462 Total 23,374 10,462 RMB Total 217,000 50,500 217,000 50,500 US$ 34,438 8,014 Total 34,438 8,014 25 54 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) b) Long-term debt Unsecured balance of purchase price and holdback to the former shareholders of MCP Group SA for an amount of €2,500. The holdback is repayable in April 2014(a). Senior secured revolving facility of $100,000 with a syndicate of banks, maturing in August 2015(b) 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(c) Debt, bearing interest at a rate of three-month LIBOR plus 3.00%, repaid in April 2013 Other loans Less: Current portion of long-term debt 2013 $ 2012 $ 3,448 68,020 733 - 584 72,785 4,439 68,346 65,928 72,213 797 769 718 140,425 29,527 110,898 (a) The Company entered into a full and final settlement agreement with Florinvest SA, Heresford Ltd., Metals Corp., SCRL and SRIW SA (the “Vendors”), which are all former shareholders of MCP Group SA (“MCP”), in relation to the dispute previously announced by the Company. The Company acquired MCP from the Vendors on April 11, 2011, from which remained a balance of the purchase price and accrued interest. The Company filed a counterclaim in arbitration proceedings against the Vendors, as it estimated that the Vendors had breached the representations and warranties of the acquisition agreement. Other civil proceedings were then commenced by the Company and the Vendors before reaching a settlement. This full and final settlement entails: (i) a final adjustment to the purchase price of MCP through the final payment by the Company of an all-inclusive lump-sum amount of €17.5 million to the Vendors from which €15 million was paid in June 2013, with the balance to be paid on April 9, 2014; (ii) the withdrawal and cancellation of all arbitration and civil proceedings; and (iii) the granting of mutual releases and discharges. In June 2013, the Company recorded a gain of $45,188 related to this settlement coming from the total amount due under the promissory note, holdback and accrued interest less the total all-inclusive amount of €17.5 million and related expenses. (b) In March 2013, the Company signed an amendment to its senior secured multi-currency revolving credit facility, under which the facility was reduced to $100,000 starting March 31, 2013. The amendment established new financial covenants for the year 2013 and maintained the original maturity (August 2015). The interest rate was 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 3.50%. Standby fees from 0.75% to 1.125% are paid on the unused portion. At any time, the Company has the option to request that the credit facility be expanded to $140,000 through the exercise of an additional $40,000 accordion feature, subject to review and approval by the lenders. This revolving credit facility can be drawn in US dollars, Canadian dollars or Euros. The amount drawn as at December 31, 2013 is in US dollars. The amount drawn as at December 31, 2012 was $1,052 in Canadian dollars and $71,161 in US dollars. The facility is subject to covenants. As at December 31, 2013, the Company has met all covenants. (c) 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, including a maximum drawing limit on the credit facility of $80,000 from August 16, 2013 to February 15, 2014. 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, including the addition of a new temporary maximum withdrawal limit on the credit facility, will be violated in the next 12 months. 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 2013 $ 15,887 2012 $ 16,667 26 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) Movement in the defined benefit obligation is as follows: 2013 $ 16,667 94 509 689 (734) (1,338) 15,887 2013 3.4% 2.0% 2.0% 2012 $ 12,850 73 627 (525) (398) 4,040 16,667 2012 3.1% 2.0% 2.0% Beginning of year Current service cost Interest cost Effect of foreign exchange Benefits paid Actuarial losses (gains) End of year Discount rate Salary growth rate Pension growth rate Discount rate Salary growth rate Pension growth rate Life expectancy Pension liability At December 31, 2013 Pension liability At December 31, 2012 The principal actuarial assumptions as at year ended were as follows: The sensitivity of the defined benefit obligation to changes in assumptions is set out below. The effects on each plan of a change in an assumption are weighted proportionately to the total plan obligations to determine the total impact for each assumption presented. Impact on defined benefit obligation Increase in Decrease in Change in assumption 0.50% 0.50% 0.50% liability (6.26)% 0.52% 5.29% Increase by 1 year liability 6.97% (0.49)% (4.87)% Decrease by 1 year in assumption in assumption 3.52% (3.16)% The weighted average duration of the defined benefit obligation is 13.50 years (2012 – 13.92 years). Expected maturity analysis of undiscounted pension liability: Less than a year 5 years Over 5 years Total Between 1 and 762 710 3,196 2,980 22,792 26,750 23,690 27,380 27 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 55 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) Movement in the defined benefit obligation is as follows: Beginning of year Current service cost Interest cost Effect of foreign exchange Benefits paid Actuarial losses (gains) End of year The principal actuarial assumptions as at year ended were as follows: Discount rate Salary growth rate Pension growth rate 2013 $ 16,667 94 509 689 (734) (1,338) 15,887 2013 3.4% 2.0% 2.0% 2012 $ 12,850 73 627 (525) (398) 4,040 16,667 2012 3.1% 2.0% 2.0% The sensitivity of the defined benefit obligation to changes in assumptions is set out below. The effects on each plan of a change in an assumption are weighted proportionately to the total plan obligations to determine the total impact for each assumption presented. Discount rate Salary growth rate Pension growth rate Life expectancy Impact on defined benefit obligation Change in assumption 0.50% 0.50% 0.50% Increase in liability (6.26)% 0.52% 5.29% Decrease in liability 6.97% (0.49)% (4.87)% Increase by 1 year in assumption 3.52% Decrease by 1 year in assumption (3.16)% The weighted average duration of the defined benefit obligation is 13.50 years (2012 – 13.92 years). Expected maturity analysis of undiscounted pension liability: Pension liability At December 31, 2013 Pension liability At December 31, 2012 Less than a year Between 1 and 5 years Over 5 years Total 762 710 3,196 2,980 22,792 26,750 23,690 27,380 27 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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 year Tax charge relating to components of other comprehensive income (loss) Charged to consolidated statements of earnings (loss) Tax charged directly to equity Retroactive remeasurements of retirement benefit obligation (Note 4) End of year 2013 $ 2012 (Note 4) $ 2,313 11,074 1,685 10,965 - (1,600) 11,787 - (2,632) 10,018 2013 $ 10,018 (656) 2,425 - - 11,787 2012 (Note 4) $ (16,437) 137 24,464 436 1,418 10,018 56 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) NOTE 15 – OTHER LIABILITIES At December 31, 2011 Utilized At December 31, 2012 – non-current liabilities Additional provisions Utilized As at December 31, 2013 – non-current liabilities NOTE 16 – INCOME TAX Current tax: Current tax on net earnings (loss) for the year Adjustment in respect of prior years Total current tax Deferred tax: Recognition and reversal of temporary differences Total deferred tax Income tax expense (recovery) Site provision $ 884 (884) - - - - Deferred revenues $ 1,060 (1,050) 10 215 (161) 64 Other $ 2,227 (677) 1,550 224 (774) 1,000 2013 $ 4,744 (406) 4,338 Total $ 4,171 (2,611) 1,560 439 (935) 1,064 2012 $ 1,167 (924) 243 (2,425) (2,425) 1,913 (24,464) (24,464) (24,221) 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: Tax on earnings (loss) at local statutory rate Increase (decrease) resulting from: Unrecorded losses carried forward Non-deductible expenses (non-taxable gain) for tax purposes(a) 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 expense (recovery) $ 12,038 1,405 (11,044) - (938) 171 527 (162) (84) 1,913 2013 % 26.9 3.2 (24.7) - (2.1) 0.4 1.1 (0.3) (0.2) 4.3 $ (67,807) 7,319 1,718 33,600 (1,030) (178) 530 1,344 283 (24,221) 2012 % 26.9 (2.9) (0.7) (13.4) 0.4 0.1 (0.2) (0.5) (0.1) 9.6 (a) The effective tax rate for the year ended December 31, 2013, is mainly affected by the gain related to the settlement of the purchase price of MCP, which decreases the effective rate by 26.33%. 28 29 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 57 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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 year Tax charge relating to components of other comprehensive income (loss) Charged to consolidated statements of earnings (loss) Tax charged directly to equity Retroactive remeasurements of retirement benefit obligation (Note 4) End of year 2013 $ 2012 (Note 4) $ 2,313 11,074 1,685 10,965 - (1,600) 11,787 - (2,632) 10,018 2013 $ 10,018 (656) 2,425 - - 11,787 2012 (Note 4) $ (16,437) 137 24,464 436 1,418 10,018 29 58 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 : s w o l l o f s a s i , n o i t c i d s i r u j 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 . C N I S U L P N 5 ) 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 ( $ l a t o T 6 6 1 6 0 7 , 2 2 7 8 , 2 $ ) 0 4 9 , 3 ( - ) 0 4 9 , 3 ( y b t e s f f O n o i t c i d s i r u j 0 5 6 , 2 1 ) 9 8 8 , 6 ( 7 8 3 , 3 1 ) 8 3 1 , 9 ( $ l a t o T 6 4 6 , 6 6 6 1 2 1 8 , 6 7 3 1 6 3 4 2 0 9 , 0 1 2 5 2 , 1 9 3 5 , 9 1 - 2 4 6 , 3 ) 6 5 6 ( 5 2 5 , 2 2 6 4 7 , 1 6 6 1 2 1 9 , 1 - 4 9 1 7 3 1 2 5 2 , 1 5 9 4 , 3 - 6 0 2 ) 6 5 6 ( 5 4 0 , 3 $ s r e h t O $ s e e f 2 2 6 , 1 - 2 2 6 , 1 - - ) 9 0 6 ( 6 3 4 9 4 4 , 1 - - 5 8 2 4 3 7 , 1 $ - - - - - - 3 4 2 , 8 3 4 2 , 8 ) 6 6 9 ( - - 7 7 2 , 7 d r a w r o f - - - - - - - - - - - - $ s t e s s a 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 y r r a c s s o L e l b i g n a t n I $ 8 7 2 , 3 - 8 7 2 , 3 - ) 5 3 5 , 1 ( - - 3 4 7 , 1 - - 0 7 5 3 1 3 , 2 $ - - - - - - 9 0 6 , 4 9 0 6 , 4 7 4 5 , 3 - - 6 5 1 , 8 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 1 1 0 2 ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t o o t t n e m t s u j d A d e t s u j d a 1 1 0 2 , 1 3 r e b m e c e D t a s A 1 1 0 2 , 1 3 r e b m e c e D t a s A s t e s s a x a t d e r r e f e D 2 1 0 2 ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t o o t t n e m t s u j d A ) s s o l ( e m o c n i e v i s n e h e r p m o c o t ) d e t i d e r c ( d e g r a h C d e t s u j d a 2 1 0 2 , 1 3 r e b m e c e D t a s A ) s s o l ( e m o c n i e v i s n e h e r p m o c o t ) d e t i d e r c ( d e g r a h C f o s 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 ( ) d e t i d e r c ( s g n i n r a e d e g r a h C y t i u q e o t ) d e t i d e r c ( d e g r a h C 3 1 0 2 , 1 3 r e b m e c e D t a s A f o s 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 ( y t i u q e o t ) d e t i d e r c ( ) s s o l ( s g n i n r a e d e g r a h C d e g r a h C 2 3 6 , 2 ) 9 8 8 , 6 ( 0 0 6 , 1 ) 8 3 1 , 9 ( 3 4 1 , 9 1 ) 0 4 9 , 3 ( $ 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 3 8 0 , 3 2 1 2 5 , 9 ) 2 6 5 , 3 1 ( 7 1 2 , 1 8 3 7 , 0 1 $ 5 7 9 1 2 3 6 9 2 , 1 ) 6 5 4 ( 0 4 8 $ - - - - - $ 0 1 9 , 6 1 0 8 4 , 4 ) 0 3 4 , 2 1 ( ) 4 0 2 ( 6 7 2 , 4 $ 6 1 2 8 5 ) 8 5 1 ( 6 5 5 , 1 4 1 6 , 1 y r r a c s s o L e l b i g n a t n I s r e h t O d r a w r o f s t e s s a s e i r o t n e v n I $ 2 8 9 , 4 ) 5 9 2 , 1 ( 7 8 6 , 3 1 2 3 8 0 0 , 4 , 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 ( s g n i n r a e f o s 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 2 1 0 2 , 1 3 r e b m e c e D t a s A ) s s o l ( s g n i n r a e f o s 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 3 1 0 2 , 1 3 r e b m e c e D t a s A 1 1 0 2 , 1 3 r e b m e c e D 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 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 0 3 (Figures in thousands of United States dollars) The deferred tax assets of $13,387, 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 $40,448 as at 2013 (2012 – $43,364). As at December 31, 2013, the Company had the following operating tax losses available for carryforward for which no deferred tax benefit has been recorded in the account. $ 25,574 17,388 8,716 153 355 7,172 59,358 Expiry No limit No limit 2031–2033 No limit 2015–2016 2018-2019 United Kingdom Belgium United States Malaysia Peru China Total Fair value NOTE 17 – CATEGORIES OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES 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, 2013 and 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 Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs). 31 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 59 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) The deferred tax assets of $13,387, 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 $40,448 as at 2013 (2012 – $43,364). As at December 31, 2013, the Company had the following operating tax losses available for carryforward for which no deferred tax benefit has been recorded in the account. United Kingdom Belgium United States Malaysia Peru China Total $ 25,574 17,388 8,716 153 355 7,172 59,358 Expiry No limit No limit 2031–2033 No limit 2015–2016 2018-2019 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, 2013 and 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 Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs). 31 60 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) (Figures in thousands of United States dollars) 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, 2013 Financial assets (liabilities) Interest rate swap Foreign exchange forward contracts Derivative forward contracts Warrants Total December 31, 2012 Financial assets (liabilities) Interest rate swap Foreign exchange forward contracts Options Warrants Total Derivative assets and liabilities Level 1 $ - - - (181) (181) Level 1 $ - - - (1,165) (1,165) Level 2 $ (2,588) (1,468) 955 - (3,101) Level 2 $ (3,870) (1,080) (239) - (5,189) 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 or Canadian dollars; and to sell Euros in exchange for US dollars, related to hedge strategies;  Derivative forward contracts to sell precious metals at a fixed price; and  Warrants. Assets (liabilities) Interest rate swap(a) Foreign exchange forward contracts(b) Options Derivative forward contracts(c) Warrants(d) Total 2013 $ (2,588) (1,468) - 955 (181) (3,282) 2012 $ (3,870) (1,080) (239) - (1,165) (6,354) (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 $30,000 of nominal value of the swap. The Company reclassified the estimated fair value of this portion of the swap from accumulated other comprehensive income to unrealized loss on de-designation within the consolidated statement of earnings (loss). The Company assessed the effectiveness of the cash flow hedge as at December 31, 2013. (b) The foreign exchange contracts are to cover projected Euro surpluses and Canadian dollar requirements. As of December 31, 2013, the contracts are as follows: (cid:127) The Company entered into twelve monthly foreign exchange collar contracts in June 2013, effective from July 2013 to June 2014, to sell US dollars in exchange for Canadian dollars. The six remaining contracts covering January to June 2014 were amended in December 2013. Under these collars, if the US$/CA$ rate is between 0.9950 and 1.0700, a monthly nominal amount of $750 is exchanged at the rate of 1.0700. If the US$/CA$ rate is higher than 1.0700, a monthly nominal amount of $1,500 is exchanged at the rate of 1.0700. If the US$/CA$ rate is below 0.9950, no nominal amount is exchanged and the monthly contract is terminated. (cid:127) The Company entered into six monthly foreign exchange collar contracts in December 2013, effective from July 2014 to December 2014, to sell US dollars in exchange for Canadian dollars. Under these collars, if the US$/CA$ rate is below $1.0620, a monthly nominal amount of $750 is exchanged at the rate of 1.0620. If the US$/CA$ rate is between 1.0620 and 1.1100, no nominal amount is exchanged. If the US$/CA$ rate is above 1.1100, a monthly nominal amount of $1,500 is exchanged at the rate of 1.0700. (cid:127) The Company entered into twelve monthly foreign exchange collar contracts in October 2013, effective from January 2014 to December 2014, to sell Euro in exchange for US dollars. Under these contracts, if the Euro/US$ rate is between 1.2750 and 1.4025, a monthly nominal amount of $3,000 is exchanged at the rate of 1.4025. If the Euro/US$ rate is higher than 1.4025, a monthly nominal amount of $6,000 is exchanged at the rate of 1.4025. If the Euro/US$ rate is below 1.275, no nominal amount is exchanged, and the monthly contract is terminated. (cid:127) The Company entered into a foreign exchange synthetic collar contract in December 2013, maturing on December 15, 2014, to sell Euro in exchange for US dollars, in order to cover its expected excess Euro cash flows in the first quarter of fiscal year 2015. Under this contract, the Company bought a put for 12,000 Euros at 1.3025 Euro/US$, and sold a call on 18,000 Euros at 1.3625 Euro/US$. (c) In March 2013, the Company entered into derivative forward contracts to sell silver metal at fixed price at $30.43 per ounce as at March 4, 2014 to cover purchases of materials containing precious metal (silver). The nominal value of the contracts was approximately $2,600 at inception. Gains or losses on these derivative forward contracts are recorded as part of the cost of sales. (d) On June 6, 2012, the Company issued 6,451,807 warrants (Note 18), which expire on June 6, 2014. Gains or losses on these warrants are recorded in foreign exchange and derivative loss (gain). The following methods were used to estimate fair value: (cid:127) Interest rate swap: Estimated by discounting expected future cash flows using period-end interest rate yield curves; (cid:127) Foreign exchange forward contracts: Estimated by discounting expected future cash flows using period-end currency rate; (cid:127) Derivative forward contracts: Estimated by discounting expected future cash flows using period-end market price of the precious metal (silver); (cid:127) Options: Standard Black-Scholes model using period-end market data as input; and (cid:127) Warrants: Fair value based on the TSX closing price. The ticker symbol of the publicly traded warrants is VNP.WT. 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 of a 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$37,119) to share capital. The warrants were recorded as a derivative liability. In accordance with IFRS, an obligation to issue shares for a price that is not fixed in the Company’s functional currency and that does not qualify as a rights offering to all shareholders of that class must be classified as a derivative liability and measured at fair value, with changes recognized in the consolidated statements of earnings (loss) as they arise. 32 33 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 61 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) (b) The foreign exchange contracts are to cover projected Euro surpluses and Canadian dollar requirements. As of December 31, 2013, the contracts are as follows: (cid:127) The Company entered into twelve monthly foreign exchange collar contracts in June 2013, effective from July 2013 to June 2014, to sell US dollars in exchange for Canadian dollars. The six remaining contracts covering January to June 2014 were amended in December 2013. Under these collars, if the US$/CA$ rate is between 0.9950 and 1.0700, a monthly nominal amount of $750 is exchanged at the rate of 1.0700. If the US$/CA$ rate is higher than 1.0700, a monthly nominal amount of $1,500 is exchanged at the rate of 1.0700. If the US$/CA$ rate is below 0.9950, no nominal amount is exchanged and the monthly contract is terminated. (cid:127) The Company entered into six monthly foreign exchange collar contracts in December 2013, effective from July 2014 to December 2014, to sell US dollars in exchange for Canadian dollars. Under these collars, if the US$/CA$ rate is below $1.0620, a monthly nominal amount of $750 is exchanged at the rate of 1.0620. If the US$/CA$ rate is between 1.0620 and 1.1100, no nominal amount is exchanged. If the US$/CA$ rate is above 1.1100, a monthly nominal amount of $1,500 is exchanged at the rate of 1.0700. (cid:127) The Company entered into twelve monthly foreign exchange collar contracts in October 2013, effective from January 2014 to December 2014, to sell Euro in exchange for US dollars. Under these contracts, if the Euro/US$ rate is between 1.2750 and 1.4025, a monthly nominal amount of $3,000 is exchanged at the rate of 1.4025. If the Euro/US$ rate is higher than 1.4025, a monthly nominal amount of $6,000 is exchanged at the rate of 1.4025. If the Euro/US$ rate is below 1.275, no nominal amount is exchanged, and the monthly contract is terminated. (cid:127) The Company entered into a foreign exchange synthetic collar contract in December 2013, maturing on December 15, 2014, to sell Euro in exchange for US dollars, in order to cover its expected excess Euro cash flows in the first quarter of fiscal year 2015. Under this contract, the Company bought a put for 12,000 Euros at 1.3025 Euro/US$, and sold a call on 18,000 Euros at 1.3625 Euro/US$. (c) In March 2013, the Company entered into derivative forward contracts to sell silver metal at fixed price at $30.43 per ounce as at March 4, 2014 to cover purchases of materials containing precious metal (silver). The nominal value of the contracts was approximately $2,600 at inception. Gains or losses on these derivative forward contracts are recorded as part of the cost of sales. (d) On June 6, 2012, the Company issued 6,451,807 warrants (Note 18), which expire on June 6, 2014. Gains or losses on these warrants are recorded in foreign exchange and derivative loss (gain). The following methods were used to estimate fair value: (cid:127) Interest rate swap: Estimated by discounting expected future cash flows using period-end interest rate yield curves; (cid:127) Foreign exchange forward contracts: Estimated by discounting expected future cash flows using period-end currency rate; (cid:127) Derivative forward contracts: Estimated by discounting expected future cash flows using period-end market price of the precious metal (silver); (cid:127) Options: Standard Black-Scholes model using period-end market data as input; and (cid:127) Warrants: Fair value based on the TSX closing price. The ticker symbol of the publicly traded warrants is VNP.WT. 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 of a 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. 33 As at December 31, 2013 Total assets excluding the following: Investment accounted for using the equity method Deferred tax asset As at December 31, 2012 Total assets excluding the following: Investment accounted for using the equity method Deferred tax asset Eco-Friendly Materials Electronic Materials Corporate and unallocated $ - $ - 154,309 9,451 $ 189,397 444 3,936 162,073 5,291 $ 204,578 503 5,996 7,703 $ - - $ - 5,592 1,363 Total $ 351,409 444 13,387 Total $ 372,243 503 12,650 Eco-Friendly Materials Electronic Materials Corporate and unallocated (1) Earnings (loss) before income tax, depreciation and amortization and the following: interest on long-term debt and other interest expense, litigation and restructuring costs, impairment of inventories, reversal of impairment of property, plant and equipment, impairment of property, plant and equipment, intangible assets and goodwill, acquisition-related costs, foreign exchange and derivative loss (gain) and settlement of the purchase price of MCP. (2) The foreign exchange and derivative loss (gain) excludes the loss (gain) on foreign exchange forward contracts on US$/CA$ recorded as part of wages and salaries and the loss (gain) on derivative forward contracts to sell silver metal recorded as part of cost of goods sold. (3) The total revenues of $42,416 from the recycling and trading of complex materials is allocated to the Eco-Friendly materials and Electronic (4) The total adjusted EBITDA of $8,644 from the recycling and trading of complex materials is allocated to the Eco-Friendly materials and The geographic distribution of the Company’s revenues based on the location of the customers for the years ended December 31, 2013 and 2012, and the identifiable non-current assets as at December 31, 2013 and 2012 are 62 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) (Figures in thousands of United States dollars) The total issuance costs of the units amounting to $1,185 (net of income tax of $436) was attributed to retained earnings. Number 12,903,613 Amount CA$ 40,001 (1,419) 38,582 Amount US$ 38,485 (1,366) 37,119 Units issued for cash Less: Warrants Net amount attributable to share capital No issuance of units in 2013. NOTE 19 – OPERATING SEGMENTS The following tables summarize the information reviewed by the Company’s management when measuring performance: For the year ended December 31, 2013 Segment revenues Adjusted EBITDA(1) Interest on long-term debt and other interest expense Litigation and restructuring costs Impairment of inventories (Note 6) Gain related to the settlement of the purchase price of MCP Foreign exchange and derivative loss (gain)(2) Depreciation and amortization Earnings before income tax Capital expenditures For the year ended December 31, 2012 Segment revenues Adjusted EBITDA(1) Interest on long-term debt and other interest expense Litigation and restructuring costs Impairment of inventories (Note 6) Impairment of property, plant and equipment (Note 7) Impairment of intangible assets (Note 8) Impairment of goodwill (Note 9) Foreign exchange and derivative loss (gain)(2) Depreciation and amortization Reversal of impairment of property, plant and equipment (Note 7) Loss before income tax Capital expenditures Eco-Friendly Materials $ Electronic Materials $ Corporate and unallocated $ 279,644(3) 16,285(4) - 1,080 10,032 - - 3,957 1,216 7,126 179,368(3) 22,466(4) - 441 150 - - 6,569 15,306 4,180 - (8,376) 8,524 2,547 - (45,188) (2,590) 160 28,171 - Eco-Friendly Materials $ Electronic Materials $ Corporate and unallocated $ 319,662 18,632 - 1,325 26,835 28,235 32,194 14,450 - 11,470 232,013 34,653 - 1,456 23,750 11,004 8,403 110,460 - 9,563 - (95,877) 7,445 (932) (129,051) 8,830 - (15,429) 8,828 - - - - - 2,759 126 - (27,142) 1,389 Total $ 459,012 30,375 8,524 4,068 10,182 (45,188) (2,590) 10,686 44,693 11,306 Total $ 551,675 37,856 8,828 2,781 50,585 39,239 40,597 124,910 2,759 21,159 (932) (252,070) 17,664 34 materials segments. Electronic materials segments. summarized as follows: Revenues Asia China Japan Others Americas Other Europe United States France Germany United Kingdom Other Other Total Asia Hong Kong Other United States Canada Europe Belgium Germany Other Total Non-current assets as at 2013 $ 50,578 7,633 94,274 82,764 19,982 27,668 66,611 22,628 79,264 7,610 459,012 2013 $ 8,510 11,295 6,634 20,552 11,874 28,635 6,133 93,633 2012 $ 72,672 10,425 106,575 102,344 21,231 33,067 90,455 27,021 84,097 3,788 551,675 2012 $ 10,801 9,543 6,058 27,133 10,582 23,755 6,087 93,959 35 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 63 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) As at December 31, 2013 Total assets excluding the following: Investment accounted for using the equity method Deferred tax asset As at December 31, 2012 Total assets excluding the following: Investment accounted for using the equity method Deferred tax asset Eco-Friendly Materials $ 154,309 - 9,451 Electronic Materials $ 189,397 444 3,936 Corporate and unallocated $ 7,703 - - Eco-Friendly Materials $ 162,073 - 5,291 Electronic Materials $ 204,578 503 5,996 Corporate and unallocated $ 5,592 - 1,363 Total $ 351,409 444 13,387 Total $ 372,243 503 12,650 (1) Earnings (loss) before income tax, depreciation and amortization and the following: interest on long-term debt and other interest expense, litigation and restructuring costs, impairment of inventories, reversal of impairment of property, plant and equipment, impairment of property, plant and equipment, intangible assets and goodwill, acquisition-related costs, foreign exchange and derivative loss (gain) and settlement of the purchase price of MCP. (2) The foreign exchange and derivative loss (gain) excludes the loss (gain) on foreign exchange forward contracts on US$/CA$ recorded as part of wages and salaries and the loss (gain) on derivative forward contracts to sell silver metal recorded as part of cost of goods sold. (3) The total revenues of $42,416 from the recycling and trading of complex materials is allocated to the Eco-Friendly materials and Electronic materials segments. (4) The total adjusted EBITDA of $8,644 from the recycling and trading of complex materials is allocated to the Eco-Friendly materials and Electronic materials segments. The geographic distribution of the Company’s revenues based on the location of the customers for the years ended December 31, 2013 and 2012, and the identifiable non-current assets as at December 31, 2013 and 2012 are summarized as follows: Revenues Asia China Japan Others Americas United States Other Europe France Germany United Kingdom Other Other Total Non-current assets as at Asia Hong Kong Other United States Canada Europe Belgium Germany Other Total 2013 $ 50,578 7,633 94,274 82,764 19,982 27,668 66,611 22,628 79,264 7,610 459,012 2013 $ 8,510 11,295 6,634 20,552 11,874 28,635 6,133 93,633 2012 $ 72,672 10,425 106,575 102,344 21,231 33,067 90,455 27,021 84,097 3,788 551,675 2012 $ 10,801 9,543 6,058 27,133 10,582 23,755 6,087 93,959 35 64 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) For the year ended December 31, 2013, one customer represented approximately 11.58 % (2012 – 13.3%) of the revenues, and is included in the Electronic Materials revenues. 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 The consolidated statements of cash flows exclude or include the following transactions: a) Excluded additions unpaid at end of year: Additions to property, plant and equipment b) Included additions unpaid at beginning of year: Additions to property, plant and equipment NOTE 21 – SHARE CAPITAL 2013 $ 28,104 (14,263) 10,235 466 1,945 1,443 27,930 2013 $ 1,637 1,394 2012 $ (10,549) 95,615 (7,816) 1,221 (3,915) 1,863 76,419 2012 $ 1,394 190 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, 2013 and 2012, no preferred shares were issued None of the Company’s shares is held by any subsidiary or joint venture. 36 37 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) NOTE 22 – EARNINGS (LOSS) PER SHARE share. Numerators Net earnings (loss) attributable to equity holders of 5N Plus Inc. Net earnings (loss) for the year The following table reconciles the numerators and denominators used for the computation of basic and diluted loss per 2013 $ 42,661 42,780 2012 $ (227,738) (227,849) 2013 2012 83,908,269 78,352,364 67,123 - 83,975,392 78,352,364 A total number of 11,629,951 stock options and a total number of 6,451,807 warrants were excluded from the computation of diluted loss per share due to their anti-dilutive effect because of the Company’s stock price for the year ended December 31, 2013. 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. Weighted average number of shares outstanding – Basic Effect of dilutive securities Weighted average number of shares outstanding – Diluted NOTE 23 – SHARE-BASED COMPENSATION As at December 31, 2013, the Company had the following share-based compensation plans. Stock option plan On April 11, 2011, the Company adopted a new stock option 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, 2013 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 and one year for retired directors. 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, 2013, the Company granted 190,000 RSUs (2012 – 33,978), 26,720 of RSUs were paid (2012 – nil) and there were no cancellations (2012 – 12,385). As at December 31, 2013, 242,760 RSUs were outstanding (2012 – 79,480). 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 65 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) NOTE 22 – EARNINGS (LOSS) PER SHARE The following table reconciles the numerators and denominators used for the computation of basic and diluted loss per share. Numerators Net earnings (loss) attributable to equity holders of 5N Plus Inc. Net earnings (loss) for the year 2013 $ 42,661 42,780 2012 $ (227,738) (227,849) A total number of 11,629,951 stock options and a total number of 6,451,807 warrants were excluded from the computation of diluted loss per share due to their anti-dilutive effect because of the Company’s stock price for the year ended December 31, 2013. 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. Weighted average number of shares outstanding – Basic Effect of dilutive securities Weighted average number of shares outstanding – Diluted 2013 2012 83,908,269 78,352,364 67,123 - 83,975,392 78,352,364 NOTE 23 – SHARE-BASED COMPENSATION As at December 31, 2013, the Company had the following share-based compensation plans. Stock option plan On April 11, 2011, the Company adopted a new stock option 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, 2013 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 and one year for retired directors. 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, 2013, the Company granted 190,000 RSUs (2012 – 33,978), 26,720 of RSUs were paid (2012 – nil) and there were no cancellations (2012 – 12,385). As at December 31, 2013, 242,760 RSUs were outstanding (2012 – 79,480). 37 66 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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, 2013 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, 2013, the Company granted 15,000 RSUFE and cancelled 1,725 RSUFE. As at December 31, 2013, 67,639 RSUFE were outstanding (2012 – 54,364). 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, 2013, 23,153 SARs were cancelled and 51,816 SARs were paid. As at December 31, 2013, 48,198 SARs were outstanding (2012 – 123,167). The following table presents information concerning all outstanding stock options: 2013 Weighted average exercise price CA$ 4.67 2.39 5.55 - 3.00 4.19 4.94 Number of options 1,585,448 546,939 (141,386) - (353,050) 1,637,951 1,001,826 Outstanding, beginning of year Granted Cancelled Exercised Expired Outstanding, end of year Exercisable, end of year The outstanding stock options as at December 31, 2013 are as follows: Maturity June and August 2014 October 2014 January 2015 to October 2016 June and September 2017 December 2017 April 2018 November 2018 May 2019 Low CA$ 9.13 3.81 4.87 8.50 6.16 3.61 2.22 2.20 Number of options 1,543,211 325,840 (240,072) (43,531) - 1,585,448 1,024,656 Exercise price High CA$ 9.13 3.81 5.47 8.64 6.16 3.61 2.22 2.20 2012 Weighted average exercise price CA$ 5.28 2.22 5.60 3.36 - 4.67 4.94 Number of options 7,500 2,500 534,987 226,840 7,500 65,284 318,340 475,000 1,637,951 38 Expense Stock options SARs RSUs Total Liability RSUs RSUFE SARs Total Commitments 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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 years ended December 31, 2013 and 2012: Expected stock price volatility Dividend Risk-free interest rate Expected option life Fair value – weighted average of options issued The following table shows the share-based compensation expense recorded in the consolidated statements of earnings (loss) for the years ended December 31, 2013 and 2012: The following table shows the carrying amount and the intrinsic value of the share-based compensation liabilities: NOTE 24 – COMMITMENTS AND CONTINGENCIES The Company rents certain premises and equipment under the terms of operating leases. Future minimum payments excluding operating costs are as follows: Within one year After one year but not more than five years Total commitments Contingencies 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. As further described in Note 13(b), in 2013, the Company settled its case with the former shareholders of MCP, thereby prohibiting further related action by either party involved in the settlement. As of the date hereof, the Company does not believe that it is probable that an outflow of resources, which could be material to the consolidated financial statements, will be required by the Company following potential third party claims pertaining to actions or events related to the alleged breaches of representations and warranties by the Vendors. 2013 59% None 1.10% 4 years $1.00 2013 $ 567 15 148 730 2013 182 $ 4 124 310 2013 $ 2,265 3,635 5,900 2012 53% None 1.07% 4 years $0.93 2012 $ 563 92 - 655 2012 $ 92 10 189 291 2012 $ 2,148 2,612 4,760 39 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 67 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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 years ended December 31, 2013 and 2012: Expected stock price volatility Dividend Risk-free interest rate Expected option life Fair value – weighted average of options issued 2013 59% None 1.10% 4 years $1.00 2012 53% None 1.07% 4 years $0.93 The following table shows the share-based compensation expense recorded in the consolidated statements of earnings (loss) for the years ended December 31, 2013 and 2012: Expense Stock options SARs RSUs Total 2013 $ 567 15 148 730 2012 $ 563 92 - 655 The following table shows the carrying amount and the intrinsic value of the share-based compensation liabilities: Liability RSUs RSUFE SARs Total 2013 $ 182 4 124 310 2012 $ 92 10 189 291 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 are as follows: Within one year After one year but not more than five years Total commitments Contingencies 2013 $ 2,265 3,635 5,900 2012 $ 2,148 2,612 4,760 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. As further described in Note 13(b), in 2013, the Company settled its case with the former shareholders of MCP, thereby prohibiting further related action by either party involved in the settlement. As of the date hereof, the Company does not believe that it is probable that an outflow of resources, which could be material to the consolidated financial statements, will be required by the Company following potential third party claims pertaining to actions or events related to the alleged breaches of representations and warranties by the Vendors. 39 68 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) (Figures in thousands of United States dollars) 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, a 50% joint venture, supplies gallium metal to other companies of the group. During the year ended December 31, 2013, the Company purchased $4,850 worth of gallium from Ingal (2012 – $5,994). As at December 31, 2013, the Company has a loan receivable from Ingal of $4,014 (€2,911) (2012 – $3,958 (€3,000) (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 earnings (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) (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. 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 (loss). 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. 2013 HK$ $ 10 276 (172) - - - 114 HK$ $ 1 (1) The following table summarizes in US dollar equivalents the Company’s major currency exposures as at December 31, 2013: 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$ $ 351 564 - - (1,724) (897) (1,706) EUR $ 4,847 2,490 15,131 - (15,827) (3,448) 3,193 GBP $ 1,398 2,506 - - - (1,642) RMB 7,188 $ - - 3,541 (10,462) (6,073) 2,262 (5,806) The following table shows the impact on earnings (loss) before income tax of a one-percentage point strengthening or weakening of foreign currencies against the US dollar as at December 31, 2013 for the Company’s financial instruments denominated in non-functional currencies: 1% Strengthening Earnings (loss) before tax 1% Weakening Earnings (loss) before tax CA$ $ (17) 17 EUR $ GBP $ RMB $ 32 23 (32) (23) (58) 58 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) Interest rate risk interest rate. (iii) Other price 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 As at December 31, 2013, 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 $(2,588) as at December 31, 2013 and is recorded as part of derivative financial liabilities in the consolidated statement of financial position. 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. In March 2013, the Company entered into derivative forward contracts to sell silver metal at fixed at $30.43 per ounce as at March 4, 2014 to cover purchases of materials containing precious metal (silver). The nominal value of the contracts was approximately $2,600 at inception (Note 17). 40 41 5N PLUS 2013 ANNUAL REPORT 5 N P L U S 2 0 1 3 A N N U A L R E P O R T 69 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) The following table summarizes in US dollar equivalents the Company’s major currency exposures as at December 31, 2013: Cash and cash equivalents Temporary investments, restricted Accounts receivable Bank indebtedness and short-term debt Trade and accrued liabilities Long-term debt Net financial assets (liabilities) CA$ $ 351 - 564 - (1,724) (897) (1,706) EUR $ 4,847 2,490 15,131 - (15,827) (3,448) 3,193 GBP $ 1,398 - 2,506 - (1,642) - 2,262 RMB $ 7,188 - 3,541 (10,462) (6,073) - (5,806) 2013 HK$ $ 10 - 276 - (172) - 114 The following table shows the impact on earnings (loss) before income tax of a one-percentage point strengthening or weakening of foreign currencies against the US dollar as at December 31, 2013 for the Company’s financial instruments denominated in non-functional currencies: 1% Strengthening Earnings (loss) before tax 1% Weakening Earnings (loss) before tax CA$ $ (17) 17 EUR $ GBP $ RMB $ 32 23 (32) (23) (58) 58 HK$ $ 1 (1) 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) 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, 2013, 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 $(2,588) as at December 31, 2013 and is recorded as part of derivative financial liabilities in the consolidated statement of financial position. (iii) 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. In March 2013, the Company entered into derivative forward contracts to sell silver metal at fixed at $30.43 per ounce as at March 4, 2014 to cover purchases of materials containing precious metal (silver). The nominal value of the contracts was approximately $2,600 at inception (Note 17). 41 70 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) Warrants 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) Liquidity risk 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 $(181) as at December 31, 2013 (2012 – $(1,165)). 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. 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. Credit risk The following table reflects the contractual maturity of the Company’s financial liabilities as at December 31, 2013: 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, 2013 and 2012, the Company has an allowance for doubtful accounts of $218 and $168 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, 2013, no financial assets are past due except for trade receivables. The aging analysis of the latter two categories of trade receivables is as follows: Up to 3 months More than 3 months 2013 $ 20,889 625 21,514 The following table summarizes the changes in the allowance for doubtful accounts for trade receivables: Beginning of year Provision for impairment Trade receivables written off during the year as uncollectible(a) Unused amounts reversed End of year 2013 $ 168 50 - - 218 2012 $ 22,966 1,395 24,361 2012 $ 482 1,333 (1,647) - 168 (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). Less: Cash and cash equivalents and temporary investments, restricted Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. Total borrowings Net debt Shareholders’ equity Debt-to-equity ratio 42 Bank indebtedness and short-term debt Trade and accrued liabilities Derivative financial instruments Long-term debt Total Carrying amount $ 10,462 65,016 4,237 72,785 152,500 1 year $ 11,137 65,016 3,284 6,017 85,454 2-3 4-5 years years Beyond 5 years $ - - 953 69,553 70,506 $ - - - 173 173 $ - - - 19 19 2013 Total $ 11,137 65,016 4,237 75,762 156,152 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. 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 December 31, 2013 and 2012 are as follows: 2013 $ 83,247 (24,917) 58,330 190,052 31% 2012 $ 148,439 (11,892) 136,547 144,955 94% 43 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 71 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) 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, 2013: Bank indebtedness and short-term debt Trade and accrued liabilities Derivative financial instruments Long-term debt Total Carrying amount $ 10,462 65,016 4,237 72,785 152,500 1 year $ 11,137 65,016 3,284 6,017 85,454 2-3 years $ 4-5 years $ Beyond 5 years $ - - 953 69,553 70,506 - - - 173 173 - - - 19 19 2013 Total $ 11,137 65,016 4,237 75,762 156,152 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. 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 December 31, 2013 and 2012 are as follows: Total borrowings Less: Cash and cash equivalents and temporary investments, restricted Net debt Shareholders’ equity Debt-to-equity ratio 2013 $ 83,247 (24,917) 58,330 190,052 31% 2012 $ 148,439 (11,892) 136,547 144,955 94% 43 72 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Figures in thousands of United States dollars) NOTE 28 – KEY MANAGEMENT COMPENSATION AND EXPENSES 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 Wages and salaries Share-based compensation Total Expenses by nature Wages and salaries(1) Share-based compensation expense Depreciation of property, plant and equipment and amortization of intangible assets Amortization of other assets Research and development, net of tax credit Litigation and restructuring costs Impairment of goodwill Impairment of inventories Impairment of property, plant and equipment Impairment of intangible assets Reversal of impairment of property, plant and equipment Gain related to the settlement of the purchase price of MCP Gain related to the derivative forward contracts to sell silver metal (Note 17) (1) Includes gain on foreign exchange forward contracts related to US$/CA$ (Note 17) 2013 $ 4,427 636 5,063 2013 $ 39,525 730 10,686 2,017 3,758 4,068 - 10,182 - - - (45,188) (955) 2012 $ 4,731 219 4,950 2012 $ 43,006 655 21,159 1,040 1,410 2,781 124,910 50,585 39,239 40,597 (932) - - 44 5N PLUS 2013 ANNUAL REPORT5 N P L U S 2 0 1 3 A N N U A L R E P O R T 73 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 Wednesday, May 7, 2014 at 10:30 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 5N Plus Inc. 4385 Garand Street Montreal, Quebec H4R 2B4 Canada www.5nplus.com 5N

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