5N Plus
Annual Report 2015

Plain-text annual report

SPECIALTY METALS + CHEMICALS 2015 ANNUAL REPORT  2 Message to the Shareholders 4 Management’s Discussion and Analysis 24 Consolidated Financial Statements 33 Notes to Consolidated Financial Statements 67 Corporate Information 5N PLUS + 2015 ANNUAL REPORT 1 Table of contentsDear Shareholders, Shortly after joining 5N Plus on February 15, 2016, we announced our 2015 yearly results to the financial community. The results clearly depicted a year steeped in challenges and changes for 5N Plus and more broadly for the industry as a whole. Perhaps the most notable challenge came from the collapse in the price of the underlying basket of metals which the Company utilizes to produce value-added products. This decline, resulted in a significant and adverse impact to the Company’s bottom line, despite, continuation of the healthy demand for our products and services. Furthermore, the Company underwent a leadership change after Mr. Jacques L’Ecuyer, founder, former President and CEO announced last fall his desire to step down. Under Jacques’s visionary leadership 5N Plus expanded its footprint, product portfolio and market presence and positioned itself as a vanguard in the minor metal industry. Given this development, a healthy progression in the Company’s natural evolution would call for the management to focus its attention on improving bottom line performance and extracting appropriate value from existing investments and assets. A year steeped in challenges and changes… in which we managed to reduce debt by 60% while continuing to invest in the business 2015 was a year of dramatic decreases in underlying circumstances, the Company focused on prudent commodity prices, driven by slowdown in the global cash management, reduction of working capital and economy and compounded by uncertainty surrounding aggressive reduction of debt. As a result, we were the Fanya exchange in China. Being structurally able to decrease debt levels by $49.1 million, from long in inventories and given the absence of suitable $84 million one year earlier, while continuing to invest hedging instruments, typical in our industry, our in our future growth segments across the business. Company is significantly exposed to commodity In addition, the Company succeeded in maintaining prices. Correspondingly, the more than 60% decrease robust sales with leading market share across various in commodity prices against an inventory value of product segments. more than $200 million in our books at the beginning of the year led to significant inventory impairment charges of $58.3 million in 2015. In light of these 2 5N PLUS + 2015 ANNUAL REPORT Message to the ShareholdersManagement to focus its attention on improving bottom line performance and extracting appropriate value from existing assets. Over the past few months I have had the pleasure technological know-how as they are well aligned of meeting with many shareholders and perhaps the with relevant markets of the future and remain a core most common question is what prompted my decision enabler for applications ranging from LED’s and clean to join 5N Plus in these difficult times? My answer energy to pharmaceutical products and industrial to this question has invariably been that I believe in lead-free alternatives. the viability of the industry in which the Company operates and most importantly I see a pent-up potential in 5N Plus which once unleashed can bring significant value to its shareholders. While I may be new to the Company, I am not new to the industry and over the years I have had the opportunity to monitor 5N Plus’ activities. In my view, under the leadership of Jacques and his unique spirit of entrepreneurial leadership the Company had managed to expand its scope and growth prospect in various directions. Considering this development, I believe it is now time to leverage this posture and optimize the trajectory of the Company so as to extract competitive and On behalf of our employees worldwide, I would like to thank all of you for your continuing support and patience. Let me assure you we, the employees of 5N Plus, are committed to working diligently in order to reward your patience with tangible value creation and position the Company for the world of tomorrow. We would also like to thank Mr. Jacques L’Ecuyer for his leadership and dedication. Last but certainly not least, we would like to thank the Board of Directors for their tireless effort in making sure our journey to address the opportunities and challenges of tomorrow is along a sustainable path. sustainable value form the existing investments and Sincerely Yours, assets. To that end, the management team and I, in full collaboration with the Board of Directors have begun the process of developing the Company’s strategic plan and expect to communicate this plan AJ Roshan later this year. It is important to note that a key President and Chief Executive Officer feature of the plan will focus on enhancing value creation based on our existing competencies and 5N PLUS + 2015 ANNUAL REPORT 3 Message to the ShareholdersManagement’s Discussion and Analysis  This Management’s Discussion and Analysis (“MD&A”) of the financial condition and results of operations is intended to  assist  readers  in  understanding  5N  Plus  Inc.  (the  “Company”  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,  2015.  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 23, 2016, 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 2015” and the “Q4 2014” refer to the three‐month periods ended December 31, 2015 and 2014. 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 and investments, credit, liquidity, interest  rate, inventory pricing, commodity pricing, 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 this MD&A dated February 23, 2016. 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.  4 5N PLUS + 2015 ANNUAL REPORT 5N Plus Inc. [1]  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 EBITDA1 which is reconciled to consolidated numbers by taking into account corporate income  and expenses.    The  Electronic  Materials  segment  operates  in  North  America,  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 (terrestrial and spatial 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 the responsibility of the Electronic Materials executive team.  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 operates in North America, 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. Management of such activities is the responsibility of the Eco‐ Friendly Materials executive team.  Corporate expenses associated with the head office and unallocated selling, general and administrative expenses (SG&A)  together with financial expenses (revenues) have been regrouped under the heading Corporate.   1 See Non‐IFRS Measures 5N Plus Inc.                     [2]  5 5N PLUS + 2015 ANNUAL REPORT                                                                             Management’s Discussion and Analysis  Highlights of Q4 2015 and Fiscal Year 2015  The Company operated throughout the year in a challenging global environment where its key underlying commodities  underwent a dramatic decrease in prices, dropping on average by over 60%. Despite these unfavorable market conditions,  the Company managed to substantially reduce its overall debt levels.          Revenues for 2015 reached $311.0 million down from $508.2 million in fiscal year 2014.  Revenues for the fourth  quarter of 2015 reached $59.4 million, down from $114.8 million for the fourth quarter of 2014. Backlog1 as at  December  31,  2015  reached  a  level  of  158  days  of  sales  outstanding  up  by  36  days  over  the  backlog  as  at  December 31, 2014. Bookings1 for the fourth quarter of 2015, reached 95 days which compares to 104 days in  the fourth quarter of 2014.   Adjusted EBITDA1 and EBITDA1 reached positive $4.0 million and negative $54.7 million in 2015 compared to  $35.0 million and $39.4 million in 2014, with the EBITDA impacted by important inventory impairment charges  totalling  $58.3  million  in  2015.  Adjusted  EBITDA  and  EBITDA  were  $0.7  million  and  negative  $26.0  million  respectively in the fourth quarter of 2015 compared to $5.7 million and $4.0 million for the fourth quarter of  2014.  The Company incurred a net loss of $97.2 million in 2015 and $42.6 million in the fourth quarter of 2015.  This  compares to net earnings of $10.7 million in 2014 and a net loss of $2.5 million in the fourth quarter of 2014.     Net debt1 was reduced by $49.1 million during the year standing at $34.9 million as at December 31, 2015 down  from $84.0 million one year earlier, positively impacted by working capital management, the lowest level for the  Company since the acquisition of MCP Group.  On  December  10,  2015,  the  Company  announced  the  appointment  of  its  new  President  and  Chief  Executive  Officer, Mr. Arjang Roshan, effective February 15, 2016.    The Company also announced soon after the year‐end the appointment of Mr. Luc Bertrand as its new Chairman  of the Board, effective January 11, 2016.  He succeeds Mr. Jean‐Marie Bourassa, who continues to serve on the  Board and as Chair of the Audit & Risk Management Committee, a position he already holds.  On  February  23,  2016,  Mr.  Arjang  Roshan  has  been  appointed  as  a  member  of  the  Board  effective  today  in  replacement of Mr. Jacques L’Ecuyer who has resigned from the Board of Directors.  Following a record year in 2014, fiscal year 2015 was a difficult year for the Company. The Company’s performance was  negatively  impacted  by  significant  and  drastic  decreases  in  the  price  of  the  commodities  utilized  across  the  various  products and segments.  Despite the difficult environment, the Company exercised discipline to sustainably secure future  sales,  generated  significant  cash‐flow  and  showed  rigor  in  substantially  reducing  debt  levels  by  almost  60%  to  $34.9  million down from $84.0 million at the beginning of the year. Sales of the key products including bismuth and CdTe for  solar  cell  applications  remained  close  to  record  levels,  while  the  Company  continued  to  make  progress  in  its  growth  markets.     Given  the  significant  losses  stemming,  primarily  from  inventory  impairment  charges  and  accelerated  amortization  on  selected assets, the Company’s financial performance of 2015 was far from expectations, reinforcing the need to take  appropriate actions to mitigate the impact of negative market volatility. Moving forward, while the metal markets will  continue  to  influence  the  Company’s  performance,  5N  Plus  will  become  more  focused  on  improving  its  performance  relative to the factors which it has control over. The new President and Chief Executive Officer, Mr. Arjang Roshan, is  excited about the challenge and looks forward to working closely with the management team and the people at 5N Plus  to reposition the Company for the future.  5N  Plus  would  like  to  take  this  opportunity  to  thank  its  founder  and  former  President  and  Chief  Executive  Officer,                       Mr. Jacques L’Ecuyer who took the Company through many years of impressive growth, and also thank all employees for  their  dedication,  conviction  and  hard  work,  counting  on  their  engagement  and  support  for  the  challenges  and  opportunities ahead. The Company primary focus in this respect will be to improve financial performance and set solid  basis for further growth.  1 See Non‐IFRS Measures  6 5N PLUS + 2015 ANNUAL REPORT 5N Plus Inc.                     [3]                                                                       Management’s Discussion and Analysis  Summary of Results  Revenues  Operating expenses  Adjusted EBITDA1  Impairment of inventory  Allowance for a doubtful note receivable from a related party Litigation and restructuring costs  Gain on disposal of property, plant and equipment  Change in fair value of debenture conversion option  Foreign exchange and derivative gain  EBITDA1  Interest on long‐term debt, imputed interest and other       interest expense  Depreciation and amortization  (Loss) Earnings  before income taxes  Income tax expense (recovery)   Current  Deferred  Net (loss) earnings  Basic (loss) earnings per share  Diluted (loss) earnings  per share  Revenues by Segment  Electronic Materials   Eco‐Friendly Materials   Total revenues  Q4 2015 $ 59,367 58,693 674 (24,582) (544) (2,953) ‐ ‐ 1,405 (26,000) 2,012  7,287 (35,299) 4,044 3,272 7,316 (42,615) ($0.51) ($0.51) Q4 2014 $ 114,781 109,124 5,657 (5,251) ‐ (1,178) ‐ 1,368 3,425 4,021 2,860  2,546 (1,385) (2,237) 3,305 1,068 (2,453) ($0.03) ($0.04) 2015  $  311,012  307,053  3,959  (58,327)   (2,991)  (3,453)  ‐  1,840  4,276  (54,696)  8,967  27,166  (90,829)  3,655  2,717  6,372  (97,201)  ($1.16)  ($1.16)  2014 $ 508,195 473,150 35,045 (5,251) ‐ (1,952) 1,312 7,179 3,111 39,444 8,769  11,148 19,527 4,875 3,979 8,854 10,673 $0.13 $0.05 Change  (38%)  (39%)  (39%)  Q4 2015  Q4 2014  Change  $  18,833  40,534  59,367  $  41,898  72,883  114,781  (55%)  (44%)  (48%)  2015  $  104,265  206,747  311,012  2014  $  169,367  338,828  508,195  Revenues decreased by 48% compared to the prior year quarter, impacted by continuing erosion in the Company’s key  metal market prices which have on average decreased by more than 60% since the beginning of the year. Revenues in Q4  2015  for  the  Electronic  Materials  segment  reached  $18.8  million,  lower  from  $41.9  million  in  Q4  2014,  impacted  negatively by prices and sales mix, and to a lesser extent volume. Eco‐Friendly Materials segment revenues reached $40.5  million, lower from $72.9 million in Q4 2014, as well mostly impacted by prices and sales mix when compared to the prior  year quarter.  For  fiscal  year  2015,  revenues  decreased  by  39%  compared  to  the  prior  fiscal  year,  explained  mostly  by  unfavorable  variances  from  prices  and  sales  mix,  and  to  a  lesser  extent  volume.    Revenues  for  the  Electronic  Materials  segment  reached $104.3 million, lower from $169.4 million in fiscal year 2014. Eco‐Friendly Materials segment revenues reached  $206.7 million, lower from $338.8 million in fiscal year 2014.   EBITDA and Adjusted EBITDA  Q4 2015  Q4 2014   Change  $  64  3,377  (475)  (2,292)  674  (26,000)  $  4,853  3,106  (454)  (1,848)  5,657  4,021  Electronic Materials  Eco‐Friendly Materials  Corporate      Research and Development      Other   Adjusted EBITDA1  EBITDA1  1 See Non‐IFRS Measures 2015  $  10,740  2,839  (1,599)  (8,021)  3,959  (99%)  9%  (5%)  (24%)  (88%)  (747%)  (54,696)  2014  $  23,642  22,167  (1,195) (9,569) 35,045  39,444   Change  (55%)  (87%)  (34%)  16%  (89%)  (239%)  5N Plus Inc.                     [4]  7 5N PLUS + 2015 ANNUAL REPORT                                                                                                                    Management’s Discussion and Analysis  In Q4 2015, EBITDA1 reached a negative amount of $26.0 million compared to a positive amount of $4.0 million, with  margins impacted by commodity pricing decreasing rapidly across most metals and an inventory impairment charge of  $24.6 million. In Q4 2015, Adjusted EBITDA1 amounted to $0.7 million compared to $5.7 million for the same period a  year  ago.  The Adjusted EBITDA  decreased mainly  from  lower  selling  prices  compared to  the  same  period  a  year  ago.  Adjusted EBITDA for the Electronic Materials segment decreased by $4.8 million to $0.1 million representing an Adjusted  EBITDA margin1 of nil compared to 12% for the prior year quarter. Adjusted EBITDA for the Eco‐Friendly Materials segment  increased marginally to $3.4 million compared to $3.1 million in Q4 2014. On a consolidated basis, margins have been  impacted by further unfavorable underlying commodity pricing for many of our metals.  In fiscal year 2015, EBITDA reached negative $54.7 million compared to a positive amount of $39.4 million for fiscal year  2014, margins impacted by decreasing commodity pricing that started in the fourth quarter of 2014 and an inventory  impairment charge of $58.3 million. Adjusted EBITDA amounted to $4.0 million compared to $35.0 million for fiscal year  2014. The Adjusted EBITDA decreased mainly from lower selling prices and to a lesser extent volume compared to the  same period a year ago. Adjusted EBITDA for the Electronic Materials segment decreased by $12.9 million at $10.7 million  achieving an Adjusted EBITDA margin of 10% compared to 14% for the prior year. Adjusted EBITDA for the Eco‐Friendly  Materials  segment  decreased  to  $2.8  million  compared  to  $22.2  million  in  fiscal  year  2014  with  an  Adjusted  EBITDA  margin of 1% compared to 7% for the prior year.  Net (loss) earnings and Adjusted net (loss) earnings   Net (loss) earnings  Basic net (loss) earnings  per share  Reconciling items:  Impairment of inventory  Accelerated amortization of intangible assets  Allowance for a doubtful note receivable from a related party  Litigation and restructuring costs  Change in fair value of debenture conversion option  Income taxes on taxable items above  Adjusted net (loss) earnings1  Basic adjusted net (loss) earnings per share1  Q4 2015 $  (42,615)  ($0.51)  24,582  ‐  544  2,953  ‐  1,570  (12,966)  ($0.15)  Q4 2014 $  (2,453)  ($0.03)  5,251  ‐  ‐  1,178  (1,368)  (1,361)  1,247  $0.01  2015  $  (97,201)  ($1.16)  58,327  11,834  2,991  3,453  (1,840)  (4,779)  (27,215)  ($0.32)  2014 $  10,673  $0.13  5,251  ‐  ‐  1,952  (7,179)  (61)  10,636  $0.13  In  Q4  2015,  Adjusted  net  earnings1  decreased  by  $14.2  million  from  an  Adjusted  net  earnings  of  $1.2  million  to  an  Adjusted net loss of $13.0 million when compared to the same period last year. Net loss reached $42.6 million in Q4 2015  compared to $2.5 million for the same period last year. The decrease in net earnings compared to prior year quarter is  mainly  explained  by  higher  inventory  impairment  charge  of  $19.3  million,  lower  positive  change  in  fair  value  of  the  debenture  conversion  option,  lower  foreign  exchange  gain  and  higher  income  tax  expenses  following  the  reversal  of  previously recorded tax assets.   In fiscal year 2015, Adjusted net earnings decreased by $37.9 million from an Adjusted net earnings of $10.6 million to an  Adjusted net loss of $27.2 million when compared to fiscal year 2014. Net loss reached $97.2 million compared to net  earnings of $10.7 million for the same period last year. The decrease in net earnings compared to fiscal year 2014 is mainly  explained by higher inventory impairment charge of $53.1 million, lower Adjusted EBITDA1, accelerated amortization of  selected  intangible  assets  of  $11.8  million  following  our  review  of  economic  life  and  carrying  value  of  some  assets,  combined with an allowance for a doubtful note receivable from a related party and an increase in financial expenses  mitigated by lower income tax expenses.  1 See Non‐IFRS Measures 8 5N PLUS + 2015 ANNUAL REPORT 5N Plus Inc.                     [5]                                                                                             Management’s Discussion and Analysis  Inventory Impairment Charges   Electronic Materials   Eco‐Friendly Materials   Total  Q4 2015 $ 13,373 11,209 24,582 Q4 2014 $ 856 4,395 5,251 2015  $  29,989  28,338  58,327  2014 $ 856 4,395 5,251 An inventory impairment charge of $24.6 million on most products was recorded in Q4 2015 and of $58.3 million in 2015  compared to $5.3 million for the same periods of 2014, reflecting the expected net realized value as at December 31,  2015  following  decline  in  commodity  prices  impacting  our  industry.  Despite  improvements  to  the  inventory  levels  expressed  in  days,  the  Company’s  inventory  remains  structurally  long  impacted  by  drastic  decreases  in  underlying  commodity prices, representing on average a decrease of 62% in prices to its commodity basket since the beginning of  the year.  Bookings and Backlog   Electronic Materials   Eco‐Friendly Materials   Total  (number of days based on annualized revenues)*  Electronic Materials   Eco‐Friendly Materials   Weighted average  Q4 2015 $ 47,225 55,714 102,939 Q4 2015 229 125 158 BACKLOG1 Q3 2015 $ 54,965 45,603 100,568 BACKLOG1 Q3 2015 201 95 134 Q4 2014 $ 83,676 69,483 153,159 Q4 2014 182 87 122 Q4 2015  $  11,093  50,645  61,738  BOOKINGS1 Q3 2015 $ 11,596 26,355 37,951 Q4 2015  54  114  95  BOOKINGS1 Q3 2015 42 55 50 Q4 2014 $ 45,821 84,936 130,757 Q4 2014 100 106 104 *Bookings and backlog are also presented in number of days to normalize the impact of commodity prices.  Q4 2015 vs Q3 2015  Overall the backlog1 as at December 31, 2015 represented 158 days of annualized revenues, higher than the previous  quarter following the renewal pattern of most contracts which generally occurs in the first and fourth quarters of the  year. Backlog expressed in number of days is higher in Q4 2015 than in Q3 2015.   Backlog  as  at December  31, 2015,  for  the Electronic  Materials  segment  represented 229  days  of  annualized  segment  revenues increasing by 28 days, or 14%, over the backlog of Q3 2015. The backlog for the Eco‐Friendly Materials segment  represented 125 days of annualized segment revenues, an increase of 30 days or 32%, over the backlog of Q3 2015.   Bookings1 for the Electronic Materials segment increased by 12 days to 54 days compared to Q3 2015.  Bookings for the  Eco‐Friendly Materials segment increased by 59 days, from 55 days in Q3 2015 to 114 days in Q4 2015.  Q4 2015 vs Q4 2014  Backlogs as at December 31, 2015 for the Electronic Materials segment increased by 47 days, and increased by 38 days  for the Eco‐Friendly Materials segment compared to December 31, 2014.    Booking decreased by 46 days for the Electronic Materials segment and increased by 8 days for the Eco‐Friendly Materials  segment compared to the previous year quarter.  1  See Non‐IFRS Measures  5N Plus Inc.                     [6]  9 5N PLUS + 2015 ANNUAL REPORT                                                                                                          Management’s Discussion and Analysis  Expenses  Depreciation and amortization  SG&A   Litigation and restructuring costs  Allowance for a doubtful note receivable from a  related party  Financial  expenses (revenues)   Income tax expense  Total expenses  Q4 2015 $  7,287 7,308 2,953 544  607 7,316 26,015 Q4 2014 $  2,546 8,639 1,178 ‐  (1,933) 1,068 11,498 Change 186% (15%) 151% 100%  131% 585% 126% 2015  $  27,166  28,494  3,453  2,991  2,851  6,372  71,327  2014 $  11,148 36,922 1,952 ‐  (1,521) 8,854 57,355 Change 144% (23%) 77% 100%  287% (28%) 24% Depreciation and Amortization  Depreciation  and  amortization  expenses  in  Q4  2015  and  YTD  2015  amounted  to  $7.3  million  and  $27.2  million  respectively, compared to $2.5 million and $11.1 million for the same periods of 2014. The increase in fiscal year 2015 is  attributable to an accelerated amortization of selected intangible assets of $11.8 million recorded in Q2.   SG&A   For Q4 2015 and fiscal year 2015, SG&A expenses were $7.3 million and $28.5 million respectively, compared to $8.6  million and $36.9 million for the same periods of 2014. Variation is mostly explained by lower wages and professional  expenses as well as favourable exchange rates across most local currency denominated expenses on an YTD basis. SG&A  are at their lowest level since the acquisition of MCP Group.  Litigation and Restructuring costs  The Company recorded litigation and restructuring costs as provision of $3.0 million and $3.5 million respectively for      Q4  2015 and fiscal year 2015, compared to $1.2 million and $2.0 million for the same periods a year ago, following initiatives  to reduce its operating expenses and renegotiate unfavourable purchasing contracts.   Allowance for a doubtful note receivable from a related party  During  fiscal  year  2015,  the  Company  assessed  that  under  current  and  foreseeable  market  price  of  gallium,  its  note  receivable from Ingal Stade GmBh, a 50% joint venture, is not likely to be reimbursed, therefore the Company recorded  an allowance for a doubtful note receivable from a related party of $0.5 million and $3.0 respectively for Q4 2015 and  2015.    Financial revenues and expenses   Financial expenses for Q4 2015 amounted to $0.6 million compared to financial revenues of $1.9 million for the same  period last year. The increase in financial expenses of $2.5 million is mainly due to lower gain from the change in the fair  value of the debenture conversion option combined with lower unrealized foreign exchange and derivative gain.  For fiscal year 2015, financial expenses amounted to $2.9 million compared to financial revenues of $1.5 million for the  same period last year for the same reasons mentioned above.   Income Taxes  Although the Company reported a net loss before income taxes of $35.3 million in Q4 2015 and $90.8 million in 2015,  income tax expense for Q4 2015 was $7.3 million and $6.4 million for 2015. The effective tax rate for Q4 2015 and fiscal  year  2015  are  higher  due  to  losses  carried  forward  for  which  no  deferred  tax  asset  was  recognized  as  well  as  the  devaluation of various deferred tax assets in certain jurisdictions due to their historical losses combined with the impact  of foreign exchange fluctuation on temporary differences from some foreign countries.   10 5N PLUS + 2015 ANNUAL REPORT 5N Plus Inc.                     [7]                                       Management’s Discussion and Analysis  Liquidity and Capital Resources  Funds (used in) 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 decrease in cash and cash equivalents  Q4 2015 $  (5,734) 21,866 16,132 (3,671) (11,536) (134)  791 Q4 2014 $  4,030 (8,019) (3,989) (4,529) 11,268 (261)  2,489 Change (242%) 373% 504% (19%) (202%) (49%)  (68%) 2015  $  (9,851)  73,860  64,009  (18,316)  (49,129)  (525)  (3,961)  2014 $  17,592 (34,765) (17,173) (15,753) 24,121 (845)  (9,650) Change (156%) 312% 473% 16% (304%) (38%)  (59%) For Q4 2015, cash generated by operating activities was $16.1 million compared to cash consumed of $4.0 million for the  same period last year. The increase is mainly attributable to a better management of non‐cash working capital mainly  through  $58.3  million  in  inventory  reduction  and  $35.8  million  in  trade  accounts  receivable  partially  offset  by  lower  accounts payable.  Investing  activities  consumed  $3.7  million  in  Q4  2015  compared  to  $4.5  million  in  the  same  period  a  year  ago.  This  decrease is explained by a decrease in acquisition of property, plant and equipment and intangible assets.   Financing activities consumed $11.5 million in Q4 2015 compared to cash generated of $11.3 million in the same period  a year ago. This decrease is mainly associated with a net reduction in the amounts drawn under the revolving facility  following a better management of non‐cash working capital.  For fiscal year 2015, cash generated by operating activities was $64.0 million compared to cash consumed of $17.2 million  in fiscal year 2014. The increase in mainly attributable to the favorable change in the non‐cash working capital due to its  better management. Investing activities consumed $18.3 million compared to $15.8 million for the same period a year  ago mainly explained by an increase in addition to property, plant and equipment and intangible assets. Cash consumed  by financing activities was $49.1 million compared to cash generated of $24.1 million for fiscal year 2014. This decrease  is mainly associated with the issuance of convertible debentures net of fees in Q2 2014 partially offset by repayment of  long‐term debt.  Working Capital  Inventories  Other current assets   Current liabilities  Working capital1  Working capital current ratio1  As at December 31, 2015  $  89,052  50,593  (45,777)  93,868  3.05  As at December 31, 2014 $ 204,454 93,100 (67,992) 229,562 4.38 The decrease in working capital1 is mainly due to a better alignment between material usage and purchase in an effort to  reduce inventory as well as lower average commodity pricing compared to December 31, 2014.  Net Debt  Bank indebtedness  Long‐term debt including current portion  Convertible debentures  Cross‐currency swap  Total Debt  Cash and cash equivalents and restricted cash  Net Debt1  1  See Non‐IFRS Measures  As at December 31, 2015  $  ‐  1,947  40,288  1,443  43,678  (8,816)  34,862  As at December 31, 2014 $  975  51,823  46,101  ‐  98,899 (14,892) 84,007 5N Plus Inc.                     [8]  11 5N PLUS + 2015 ANNUAL REPORT                                                                                                 Management’s Discussion and Analysis  On December 7, 2015, the Company entered into a cross‐currency swap to hedge the convertible debenture denominated  in Canadian dollars to US dollars.  Total  debt,  including  the  cross‐currency  swap  decreased  by  $55.2  million  to  $43.7  million  as  at  December  31,  2015,  compared to $98.9 million as at December 31, 2014. The decrease of total debt is due to the decrease in working capital.   Net  debt1  after  taking  into  account  cash  and  cash  equivalents  and  restricted  cash  decreased  by  $49.1  million,  from        $84.0 million as at December 31, 2014 to $34.9 million as at December 31, 2015.   Available Short‐Term Capital Resources  Cash and cash equivalents  Available bank indebtedness   Available revolving credit facility (reduced on February 18, 2016 as explained below)  Available short‐term capital resources  As at December 31, 2015  $  8,816  1,541  103,969  114,326  As at December 31, 2014  $ 12,777  650  79,976  93,403 In August 2014, the Company signed a senior secured multi‐currency revolving credit facility of $125,000 maturing in  August 2018, which was reduced to $100,000 as at June 30, 2015 and subsequently to $50,000 as at February 18, 2016.  At  any  time,  the  Company  has  the  option  to  request  that  the  credit  facility  be  expanded  through  the  exercise  of  an  additional $50,000 ($25,000 as at December 31, 2014) accordion feature, subject to review and approval by the lenders.  This revolving credit facility can be drawn in US dollars, Canadian dollars or Hong Kong dollars. Drawings bear interest at  either the Canadian prime rate, US base rate, Hong Kong base rate or LIBOR, plus a margin based on the Company’s senior  consolidated  debt  to  EBITDA  ratio.  Under  the  terms  of  its  credit  facility,  the  Company  is  required  to  satisfy  certain  restrictive covenants as to financial ratios, including a temporary drawing limit on the credit facility of maximum $25,000,  which could be further reduced to $15,000 if certain conditions are not met from February 18, 2016 to December 31,  2016. As at December 31, 2015, the Company has met all covenants.  In addition, in August 2014, the Company’s subsidiary in Belgium entered into a bi‐lateral credit facility of 5,000 Euros,  which was reduced to 2,500 Euros as at February 18, 2016. This credit facility is coterminous with the new senior secured  multi‐currency revolving credit facility, and guaranteed by the same security pool. This bi‐lateral facility can be drawn in  Euros or US dollars and bears interest at similar rates as the revolving credit facility. No amount was used as at December  31, 2015 and 2014.  Funds from Operations  Funds (used in) from operations1 Net acquisition of PPE and intangible assets  Working capital changes  Issuance of common shares  Others  Total movement in net debt1  Net debt1, beginning of period  Net debt1, end of period  Q4 2015 $ (5,734) (3,308) 21,866 ‐ (994) 17,564 11,830 (46,692) (34,862) Q4 2014 $ 4,030 (4,484) (8,019) ‐ 333 (12,170) (8,140) (75,867) (84,007) 2015  $  (9,851)  (19,956)  73,860  ‐  5,092  58,996  49,145  (84,007)  (34,862)  2014 $ 17,592 (14,221) (34,765) 164 5,553 (43,269) (25,677) (58,330) (84,007) For  Q4  2015  and  fiscal  year  2015,  funds  used  in  operations1  decreased  to  $5.7  million  and  $9.9  million  respectively,  compared  to  funds  from  operations1  of  $4.0  million  and  $17.6  million  for  the  same  periods  of  2014.  However,  these  decreases were more than compensated by favorable working capital changes following management initiatives.  1  See Non‐IFRS Measures  12 5N PLUS + 2015 ANNUAL REPORT 5N Plus Inc.                     [9]                                                                                                 Management’s Discussion and Analysis  Share Information   Issued and outstanding shares  Stock options potentially issuable  Convertible debentures potentially issuable  As at February 23, 2016  83,979,657  1,558,345  9,777,777  As at December 31, 2015 83,979,657  1,558,345  9,777,777  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 Stock Option Plan may be exercised during a period not exceeding ten years from the date of  grant. The stock options outstanding as at December 31, 2015 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.  The following table presents information concerning all outstanding stock options:  Outstanding, beginning of year  Granted  Cancelled  Exercised  Expired  Outstanding, end of year  Exercisable, end of year  2015 Weighted average Number of options exercise price Number of options 1,702,100 232,000 (75,755) ‐ (300,000) 1,558,345 1,024,324 CA$    4.21 2.40 3.24 ‐ 5.45 3.74 4.08 1,637,951 352,000 (206,463) (71,388) (10,000) 1,702,100 1,192,918 2014 Weighted average exercise price CA$ 4.19 3.99 4.16 2.46 7.80 4.21 4.37 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 25 of the audited consolidated financial statements for the year ended December 31,  2015.    The following table reflects the contractual maturity of the Company’s financial liabilities as at December 31, 2015:  Trade and accrued liabilities  Long‐term debt  Convertible debentures  Long‐term payable (included in other liabilities)  Total  Carrying amount  1 year  2‐3 years  4‐5 years  Total  $ 38,744 1,947 40,288 14,939 95,918 $ 38,744 534 3,170 ‐ 42,448 $  ‐  1,671  3,170  16,585  21,426  $  ‐  17  50,474  ‐  50,491  $ 38,744 2,222 56,814 16,585 114,365 5N Plus Inc.                     [10]  13 5N PLUS + 2015 ANNUAL REPORT                                     Management’s Discussion and Analysis  Commitments  The Company rents certain premises and equipment under the terms of operating leases. Future minimum payments  excluding operating costs are as follows:  No later than 1 year  Later than 1 year but no later than 5 years  Later than 5 years  Total   2015  $  2,289  2,479  364  5,132  2014 $ 2,881 4,133 967 7,981 As at December 31, 2015, in the normal course of business, the Company contracted letters of credit for an amount of up  to $0.5 million (2014 – $0.4 million).  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.  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 other things, attest to the  design  of  the  disclosure  controls  and  procedures  and  the  design  and  effectiveness  of  internal  controls  over  financial  reporting.   Disclosure Controls and Procedures  The Chief Executive Officer and the Chief Financial Officer have designed disclosure controls and procedures, or have  caused them to be designed under their supervision, in order to provide reasonable assurance that:   material information relating to the Company has been made known to them; and   information required to be disclosed in the Company’s filings is recorded, processed, summarized and reported  within the time periods specified in securities legislation.  An evaluation was carried out, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the  effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer  and the Chief Financial Officer concluded that the disclosure controls and procedures are effective.  Internal Control over Financial Reporting  The Chief Executive Officer and the Chief Financial Officer have also designed internal controls over financial reporting  (ICFR), 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.  Based on their evaluation carried out to assess the effectiveness of the Company’s ICFR , the Chief Executive Officer and  the Chief Financial Officer have concluded that the ICFR were designed and operated effectively as at December 2015,  using  the  Internal  Control  –  Integrated  Framework  (2013  Framework)  issued  by  the  Committee  of  Sponsoring  Organizations of the Treadway Commission (“COSO 2013 Framework”).  Changes in Internal Control over Financial Reporting  No changes were made to our ICFR during fiscal year ended December 31, 2015 that have materially affected, or are  reasonably likely to materially affect, our internal controls over financial reporting.  14 5N PLUS + 2015 ANNUAL REPORT 5N Plus Inc.                     [11]                          Management’s Discussion and Analysis  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 2015 in accordance with IFRS.  The Company’s significant accounting policies are described  in  Note  2  of  the  December  31,  2015  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, 2014, except for the following.  Assets are reviewed for an indication of impairment at each statement of financial position date upon the occurrence of  events or changes in circumstances indicating that the carrying value of the assets may not be recoverable which requires  significant judgment.  Future Changes in Accounting Policies  The following standards have been issued but are not yet effective:  In May 2014, the IASB issued IFRS 15, “Revenues from Contracts with Customers”, to specify how and when to recognize  revenue  as  well  as  requiring  the  provision  of  more  information  and  relevant  disclosure.  IFRS 15  supersedes  IAS  18,  “Revenue”, IAS 11, “Construction Contracts”, and other revenue‐related interpretations. The standard will be mandatory  on January 1, 2018 for the Company with earlier adoption permitted. The Company is currently evaluating the impact of  this standard on its consolidated financial statements.  In July 2014, the IASB amended IFRS 9, “Financial Instruments”, to bring together the classification and measurement,  impairment and hedge accounting phases of the IASB’s project to replace IAS 39, “Financial Instruments: Recognition and  Measurement”. The standard supersedes all previous versions of IFRS 9 and will be mandatory on January 1, 2018 for the  Company  with  earlier  application  permitted.  The  Company  is  currently  evaluating  the  impact  of  this  standard  on  its  consolidated financial statements.  In January 2016, IASB issued IFRS 16, “Leases”, which specifies how an IFRS reporter will recognize, measure, present and  disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities  for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify  leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor,  IAS 17. The standard will be mandatory for annual periods beginning on or after January 1, 2019. The Company is currently  evaluating the impact of this standard on its consolidated financial statements.   In January 2016, IASB amended IAS 7, “Statement of Cash Flows”, The amendments require that the following changes in  liabilities arising from financing activities are disclosed (to the extent necessary): (i) changes from financing cash flows;  (ii) changes arising from obtaining or losing control of subsidiaries or other businesses; (iii) the effect of changes in foreign  exchange rates; (iv) changes in fair values; and (v) other changes. One way to fulfil the new disclosure requirement is to  provide a reconciliation between the opening and closing balances in the statement of financial position for liabilities  arising from financing activities. Finally, the amendments state that changes in liabilities arising from financing activities  must be disclosed separately from changes in other assets and liabilities. This amendment will be mandatory for reporting  periods beginning on or after January 1, 2017. The Company is currently evaluating the impact of this standard on its  consolidated financial statements.  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.  5N Plus Inc.                     [12]  15 5N PLUS + 2015 ANNUAL REPORT                       Management’s Discussion and Analysis  Estimation uncertainty  When preparing the consolidated financial statements, management undertakes a number of judgments, estimates and  assumptions about recognition and measurement of assets, liabilities, revenues and expenses. Estimates and underlying  assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which  the estimates are revised and in any future periods affected.  Information  about  the  significant  judgments,  estimates  and  assumptions  that  have  the  most  significant  effect  on  the  recognition and measurement of assets, liabilities, revenues and expenses are discussed below.  Impairment of non‐financial assets  Non‐financial assets are reviewed for an indication of impairment at each statement of financial position date upon the  occurrence of events or changes in circumstances indicating that the carrying value of the assets may not be recoverable  which requires significant judgement.   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 of disposal and value in use.  To determine fair value less cost to dispose, 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  using  pricing  information on metal available as at December 31, 2015. 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. Management believes that the following assumptions are the most susceptible to change and  therefore could impact the valuation of the assets in the next year: metal prices which have an impact on revenues and  metal margins, the discount rate, foreign exchange rates and the ability to use existing tax losses in the future.  Management performed an impairment test on its non‐current assets in accordance with IAS 36 “Impairment of assets”,  since  the  market  capitalization  of  the  Company  was  lower  than the carrying  amount  of  the net  assets.  Based  on this  analysis, management concluded that no impairment was required on the remaining non‐current assets.  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  consolidated  statement  of  financial  position  date  and  the  date  of  the  completion  of  the  consolidated  financial  statements. Net realizable value for inventory to satisfy a specific sales contract is measured at the contract price.  Debenture conversion option  The  convertible  debentures  issued  by  the  Company  included  conversion  and  early  redemption  options,  which  are  considered as Level 3 financial instruments. The derivative is measured at fair value through profit or loss, and its fair  value must be measured at each reporting period, with subsequent changes in fair value recorded in the consolidated  statement of (loss) earnings. A derivative valuation model is used, and includes assumptions, to estimate the fair value.  Detailed assumptions used in the model to determine the fair value of the embedded derivative, upon inception and as  at December 31, 2015, are provided in note 13 of the 2015 consolidated financial statements of the Company.  16 5N PLUS + 2015 ANNUAL REPORT 5N Plus Inc.                     [13]                         Management’s Discussion and Analysis  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  a  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 describes in Notes 9, 10, 24 and 27 in the 2015 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 – Fair Value of Financial Instruments in the 2015 consolidated  financial statements of the Company.  The fair value of the derivatives financial instruments was as follows:  Derivatives forward contracts  Debenture conversion option  Cross‐currency swap  2015  $  ‐  (87)  (1,443)  2014 $  147  (2,093)  ‐  Financial Risk Management  For  a  detailed  description  of  nature  and  extent  of  risks  arising  from  financial  instruments,  and  their  related  risk  management, refer to Note 25 of the 2015 consolidated financial statements of the Company.  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’s policy is to limit its exposure to interest rate risk fluctuation by ensuring that a reasonable portion of its bank  advance,  long‐term  debt  and  convertible  debentures  are  at  fixed  rate.  The  Company  is  exposed  to  interest  rate  fluctuations on its revolving credit facility, which bears a floating interest rate. A 1% increase/decrease in interest rates  would not have a significant impact on the Company’s net earnings.  Foreign 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.    5N Plus Inc.                     [14]  17 5N PLUS + 2015 ANNUAL REPORT                         Management’s Discussion and Analysis  On December 7, 2015, the Company entered into cross‐currency swap to hedge cash flows under the CA$ convertible  debentures, applying hedge accounting principles to the transaction.  In addition, the Company will occasionally enter  into foreign exchange forward contracts to sell US dollars in exchange for Canadian dollars and Euros. 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 are incurred in Canadian dollars and Euros. The Company will also enter into foreign exchange contracts to sell  Euros for US dollars.   The following table summarizes in US dollar equivalents the Company’s major currency exposures as at December 31,  2015:  Cash and cash equivalents  Accounts receivable  Trade and accrued liabilities  Long‐term debt  Net financial assets (liabilities)  CA$ $ 355 480 (5,798) (420) (5,383) EUR $ 3,894 8,330 (7,902) (52) 4,270 GBP $ 401 4 (1,065) ‐ (660) RMB $ 878 7,789 (6,006) ‐ 2,661 Other $ 131 449 (674) ‐ (94) 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, 2015 for the Company’s financial instruments  denominated in non‐functional currencies:  1% Strengthening  Earnings before tax  1% Weakening  Earnings before tax  CA$ $ (54) 54 EUR $ 43 (43) GBP $ (7) 7  RMB Other $ 27 (27) $ (1) 1 Credit Risk  Credit risk refers to the possibility that a customer or counterparty will fail to fulfill its obligations under a contract and,  as a result, create a financial loss for the Company. The Company has a large number of clients and is no longer dependent  on a specific client. 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, 2015 and 2014, the Company has an allowance for doubtful accounts of $0.5 million and $0.1 million  respectively. The provision for doubtful accounts, if any, is included in selling, general and administrative expenses in the  consolidated statement of (loss) earnings, and is 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 will need to execute on its  EBITDA  and  cash  flow  estimates.  Management  believes  that  the  assumptions  used  by  the  Company  in  preparing  its  estimates  are  reasonable.  However,  risk  remains.  Successful  achievement  of  these  estimates  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.   5N Plus Inc.                     [15]  18 5N PLUS + 2015 ANNUAL REPORT                               Management’s Discussion and Analysis  Risk 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 and Investments  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 investments and any future acquisitions that we may  complete  and  will  depend  in  part  on  successfully  consolidating  functions  and  integrating  operations,  procedures  and  personnel  in  a  timely  and  efficient  manner,  as  well  as  our  ability  to  realize  the  anticipated  growth  opportunities  and  synergies  from  combining  the  acquired  businesses  and  operations  with  ours.  The  integration  of  acquired  businesses  requires the dedication of substantial management effort, time and resources which may divert management’s focus and  resources from other strategic opportunities and from operational matters during this process. The integration process  may  result  in  the  loss  of  key  employees,  significant  expenses  and  the  disruption  of  ongoing  business,  customer  and  employee relationships that may adversely affect our ability to achieve the anticipated benefits of these acquisitions and  investments.  International Operations  We operate in a number of countries, including China and Laos, 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. Our facility in Tilly, Belgium completed 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. The remediation performed has been approved and audited by local authorities and the Company has received a  full compliance confirmation and complete release and discharge from the authorities.  Competition Risk  We are the leading producer of specialty metal and chemical products and have a limited number of competitors, few of  which are as fully integrated as we are or have a similar range of products. Accordingly, they have limitation 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. 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.  5N Plus Inc.                     [16]  19 5N PLUS + 2015 ANNUAL REPORT                 Management’s Discussion and Analysis  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.  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.  20 5N PLUS + 2015 ANNUAL REPORT 5N Plus Inc.                     [17]                      Management’s Discussion and Analysis  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 negative  effect  on  the  Company’s  financial  results.    Another  risk  associated  with  a  public  issuer  status  is  the  disclosure  of  key  Company information as compared to privately owned competitors.  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 orders we have received but have not yet executed and that are expected to translate  into sales within the next twelve months expressed in number of days. Bookings represent orders received during the  period considered, expressed in days, and is calculated by adding revenues to the increase or decrease in backlog for the  period  considered  divided  by  annualized  year  revenues.  We  use  backlog  to  provide  an  indication  of  expected  future  revenues in days, and bookings to determine our ability to sustain and increase our revenues.   EBITDA means net earnings (loss) before interest expenses (revenues), income taxes, depreciation and amortization. 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, allowance for doubtful of a receivable  from a related party, litigation and restructuring costs, gain on disposal of property, plant and equipment, change in fair  value of debenture conversion option, foreign exchange and derivatives loss (gain). 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 (loss) means the net earnings (loss) before the effect of charge of impairment related to inventory,  PPE  and  intangible  assets,  impairment  of  goodwill,  allowance  for  doubtful  of  a  note  receivable  from  a  related  party,  litigation and restructuring costs, change in fair value of debenture conversion option 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, intangible  asset impairment charges, allowance for doubtful of a receivable from a related party, litigation and restructuring costs  and change in fair value of debenture conversion option. 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, allowance for doubtful of a receivable from a related party,  litigation and restructuring costs and change in fair value of debenture conversion option per share. The definition of this  non‐IFRS measure used by the Company may differ from that used by other companies.     5N Plus Inc.                     [18]  21 5N PLUS + 2015 ANNUAL REPORT                         Management’s Discussion and Analysis  Funds (used in) 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 (used in) 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 restricted cash. We use it as an indicator of our overall financial position, and calculate it by taking our  total  debt,  including  the  current  portion  and  the  cross‐currency  swap  related  to  the  convertible  debenture,  and  subtracting cash and cash equivalents and restricted cash.   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.  Metal Prices  22 5N PLUS + 2015 ANNUAL REPORT 5N Plus Inc.                     [19]                         Management’s Discussion and Analysis  Selected Data Information  The following table provides selected quarterly financial information for the years 2013 through to 2015.  1  (in thousands of United States dollars except per share amounts)  Fiscal 2015  Revenues  EBITDA1  Adjusted EBITDA1  Net loss attributable to equity holders of 5N Plus   Basic loss per share attributable to equity holders of 5N Plus   Net loss   Basic loss per share  Diluted loss per share  Adjusted net loss1   Basic adjusted net loss per share1  Funds used in operations1  Backlog1  Fiscal 2014  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  Adjusted net earnings 1  Basic adjusted net earnings (loss) per share1  Funds from operations1  Backlog1  Fiscal 2013  Revenues  EBITDA1  Adjusted EBITDA1  Net earnings attributable to equity holders of 5N Plus   Basic earnings per share attributable to equity holders of 5N Plus   Net earnings   Basic earnings per share  Diluted earnings per share  Adjusted net earnings 1  Basic adjusted net earnings per share1  Funds from operations1  Backlog1  Q1 Q2 Q3  Q4 95,663 3,406 270 (1,949) ($0.02) (1,951) ($0.02) ($0.05) (2,472) ($0,03) (2,015) 142 days  142,379 11,178 10,501 4,655 $0.06 4,519 $0.05 $0.05 4,916 $0.06 6,806 120 days 118,389 12,121 10,115 5,371 $0.06 5,538 $0.07 $0.07 6,296 $0.08 4,608 128 days 87,250 (5,966) 1,963 (20,463) ($0.24) (20,464) ($0.24) ($0.24) (6,125) ($0,07) (1,482) 137 days 136,597 11,524 10,816 4,436 $0,05 4,436 $0.05 $0.05 4,303 $0.05 5,774 100 days 112,637 38,008 6,543 34,185 $0.41 34,281 $0.41 $0.41 959 $0.01 1,560 124 days 68,732  (26,136)  1,052  (32,171)  ($0.38)  (32,171)  ($0.38)  ($0.38)  (5,652)  ($0,07)  (620)  134 days  114,438  12,721  8,071  4,172  $0.05  4,171  $0.05  ($0.01)  170  $‐  982  109 days  108,570  6,926  5,775  1,083  $0.01  1,323  $0.02  $0.02  1,517  $0.02  4,822  112 days  59,367 (26,000) 674 (42,615) ($0.51) (42,615) ($0.51) ($0.51) (12,966) ($0,15) (5,734) 158 days 114,781 4,021 5,657 (2,451) ($0.03) (2,453) ($0.03) ($0.04) 1,247 $0.01 4,030 122 days 119,416 6,848 7,942 2,022 $0,02 1,638 $0.02 $0.02 2,068 $0.02 9,043 130 days Total 311,012 (54,696) 3,959 (97,198) ($1.16) (97,201) ($1.16) ($1.16) (27,215) ($0.32) (9,851) 158 days Total 508,195 39,444 35,045 10,812 $0.13 10,673 $0.13 $0.05 10,636 $0.13 17,592 122 days Total 459,012 63,903 30,375 42,661 $0.51 42,780 $0.51 $0.51 10,840 $0.13 20,033 130 days (in thousands of United States dollars)  Balance Sheet Data  Total assets  Net debt (net cash)1  Retirement benefit obligation  Shareholders’ equity  2015  $  220,737  34,862  13,934  96,632  2014  $  399,531  84,007  16,928  196,443  2013  $  365,240  58,330  15,887  190,052  1 See Non‐IFRS Measures  5N Plus Inc.                     [20]  23 5N PLUS + 2015 ANNUAL REPORT                                                                                                        5N PLUS INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 (Figures in thousands of United States dollars) 24 5N PLUS + 2015 ANNUAL REPORT 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 Arjang Roshan President and Chief Executive Officer SIGNED Richard Perron Chief Financial Officer Montréal, Canada February 23, 2016 5N PLUS + 2015 ANNUAL REPORT 25 February 23, 2016 Independent Auditor’s Report To the Shareholders of 5N Plus Inc. We have audited the accompanying consolidated financial statements of 5N Plus Inc. and its subsidiaries, which comprise the consolidated statements of financial position at December 31, 2015 and 2014 and the consolidated statements of (loss) earnings, comprehensive loss, changes in equity and cash flows 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 2500, Montréal, Quebec, Canada H3B 4Y1 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. 26 5N PLUS + 2015 ANNUAL REPORT Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of 5N Plus Inc. and its subsidiaries as at December 31, 2015 and 2014 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. 1 CPA auditor, CA, public accountancy permit No. A116853 5N PLUS + 2015 ANNUAL REPORT 27 5N PLUS INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Figures in thousands of United States dollars) ASSETS Current Cash and cash equivalents Restricted cash Accounts receivable Inventories Income tax receivable Derivative financial assets Other current assets Total current assets Property, plant and equipment Intangible assets Deferred tax asset Investments accounted for using the equity method Other assets Total non-current assets Total assets LIABILITIES AND EQUITY Current Bank indebtedness Trade and accrued liabilities Income tax payable Long-term debt due within one year Total current liabilities Long-term debt Convertible debentures Deferred tax liability Retirement benefit obligation Derivative financial liabilities Other liabilities Total non-current liabilities Total liabilities Shareholders’ equity Non-controlling interest Total equity Total liabilities and equity Commitments and contingencies (Note 23) The accompanying notes are an integral part of these consolidated financial statements. Notes December 31 2015 $ December 31 2014 $ 5 6 17 7 8 16 9 10 12 11 12 12 13 16 14 17 15 8,816 - 37,325 89,052 2,632 - 1,820 139,645 67,646 7,315 3,478 310 2,343 81,092 220,737 - 38,744 6,598 435 45,777 1,512 40,288 668 13,934 1,530 20,403 78,335 124,112 96,632 (7) 96,625 220,737 12,777 2,115 72,391 204,454 2,705 147 2,965 297,554 68,261 15,728 11,037 316 6,635 101,977 399,531 975 60,286 6,064 667 67,992 51,156 46,101 3,111 16,928 2,093 15,711 135,100 203,092 196,443 (4) 196,439 399,531 28 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS Years ended December 31 (Figures in thousands of United States dollars, except per share information) Notes Revenues Cost of sales Selling, general and administrative expenses Other expenses Share of loss from joint ventures Operating (loss) earnings Gain on disposal of property, plant and equipment Financial expenses (revenues) Interest on long-term debt Imputed interest and other interest expense Changes in fair value of debenture conversion option Foreign exchange and derivative gain (Loss) earnings before income tax Income tax expense Current Deferred Net (loss) earnings for the year Attributable to: Equity holders of 5N Plus Inc. Non-controlling interest (Loss) earnings per share attributable to equity holders of 5N Plus Inc. Basic (loss) earnings per share Diluted (loss) earnings per share The accompanying notes are an integral part of these consolidated financial statements. 27 27 27 9 17 16 16 21 21 21 2015 $ 311,012 346,970 28,494 23,210 316 398,990 (87,978) 2014 $ 508,195 445,673 36,922 8,778 128 491,501 16,694 - 1,312 4,617 4,350 (1,840) (4,276) 2,851 (90,829) 3,655 2,717 6,372 (97,201) (97,198) (3) (97,201) (1.16) (1.16) (1.16) 5,465 3,304 (7,179) (3,111) (1,521) 19,527 4,875 3,979 8,854 10,673 10,812 (139) 10,673 0.13 0.13 0.05 5N PLUS + 2015 ANNUAL REPORT 29 5N PLUS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Years ended December 31 (Figures in thousands of United States dollars) Notes 2015 $ 2014 $ Net (loss) earnings for the year (97,201) 10,673 Other comprehensive loss Items that may be reclassified subsequently to the consolidated statements of (loss) earnings Net changes in cash flow hedges Effective portion of changes in fair value of cash flow hedges Reclassification to consolidated statements of (loss) earnings Income taxes Currency translation adjustment Items that will not be reclassified subsequently to the consolidated statements of (loss) earnings Remeasurement of retirement benefit obligation Income taxes Other comprehensive loss Comprehensive (loss) income for the year Attributable to equity holders of 5N Plus Inc. Attributable to non-controlling interests The accompanying notes are an integral part of these consolidated financial statements. 17 14 (354) (262) 117 (499) (801) (1,300) 1,038 (2,516) (1,478) (2,778) (99,979) (99,976) (3) 560 (184) (111) 265 (57) 208 (3,365) 1,043 (2,322) (2,114) 8,559 8,698 (139) 30 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS Years ended December 31 $ l a t o T y t i u q e 9 3 4 , 6 9 1 ) 1 0 2 , 7 9 ( ) 9 9 4 ( ) 1 0 8 ( ) 8 7 4 , 1 ( ) 9 7 9 , 9 9 ( 5 6 1 5 2 6 , 6 9 $ l a t o T y t i u q e 9 2 5 , 0 9 1 (Figures in thousands of United States dollars, except per share information) Notes ) 4 ( $ g n - n o N s Revenues t s e Cost of sales r e t Selling, general and administrative expenses n Other expenses Share of loss from joint ventures i l l o r t n o c ) 3 ( - i - - ) 3 ( - ) 7 ( $ - n o N s t s e r e t n i g n i l l o r t n o c y n a p m o C e h t f o l o h y t i u q e o t Operating (loss) earnings $ l a t o T ’ s r e d y t i u q e 3 4 4 , 6 9 1 ) 8 9 1 , 7 9 ( ) 9 9 4 ( ) 1 0 8 ( ) 8 7 4 , 1 ( ) 6 7 9 , 9 9 ( 5 6 1 2 3 6 , 6 9 Gain on disposal of property, plant and equipment $ Financial expenses (revenues) s Interest on long-term debt r e d Imputed interest and other interest expense Changes in fair value of debenture conversion option Foreign exchange and derivative gain ) 8 0 3 , 7 4 1 ( ) 8 9 1 , 7 9 ( ) 8 9 1 , 7 9 ( t i c i f e D - - - - (Loss) earnings before income tax r e h Income tax expense t o s s o l $ ) 9 6 6 , 3 ( - - ) 9 9 4 ( ) 1 0 8 ( ) 8 7 4 , 1 ( ) 8 7 7 , 2 ( ) 6 0 5 , 4 4 2 ( ) 7 4 4 , 6 ( e l b a t Current u b Deferred i r t t A d e t a l u m u c c A Net (loss) earnings for the year $ s u l p r u s Attributable to: Equity holders of 5N Plus Inc. Non-controlling interest l o h e r a h s e v i s n e h e r p m o c d e t u b i r t n o C $ y t i u q e $ t i c i f e D $ s s o l y n a p m o C e h t f o s r e d l o h y t i u q e o t e l b a t u b i r t t A l a t o T ’ s r e d l o h e r a h s r e h t o d e t a l u m u c c A e v i s n e h e r p m o c d e t u b i r t n o C 3 7 6 , 0 1 ) 9 3 1 ( 2 1 8 , 0 1 2 1 8 , 0 1 - 7 7 4 27 27 27 9 2 5 0 , 0 9 1 ) 2 1 4 , 5 5 1 ( 17 ) 5 5 5 , 1 ( 16 16 (Loss) earnings per share attributable to equity holders of 5N Plus Inc. Basic (loss) earnings per share Diluted (loss) earnings per share l a t i p a c e r a h S $ - - - - - - 6 0 5 , 3 4 3 6 0 5 , 3 4 3 e r a h S - $ l a t i p a c 21 21 21 2 7 2 , 3 4 3 The accompanying notes are an integral part of these consolidated financial statements. ) 7 5 ( 5 6 2 ) 2 2 3 , 2 ( 9 5 5 , 8 4 6 1 7 3 2 ) 0 5 0 , 3 ( 9 3 4 , 6 9 1 2015 $ 2014 $ - ) 9 3 1 ( - - 311,012 346,970 28,494 23,210 316 398,990 (87,978) ) 7 5 ( 8 9 6 , 8 ) 2 2 3 , 2 ( 5 6 2 - - 4 6 1 7 3 2 ) 2 4 3 ( ) 4 ( 508,195 445,673 36,922 8,778 128 491,501 16,694 3 4 4 , 6 9 1 ) 8 0 7 , 2 ( - 1,312 - 5 6 2 - - 2 1 8 , 0 1 4,617 4,350 (1,840) (4,276) 2,851 (90,829) ) 7 5 ( ) 2 2 3 , 2 ( ) 4 1 1 , 2 ( 3,655 2,717 6,372 (97,201) - - ) 8 0 7 , 2 ( - - - ) 8 0 3 , 7 4 1 ( 5,465 3,304 (7,179) (3,111) (1,521) 19,527 ) 9 6 6 , 3 ( 4,875 3,979 8,854 10,673 - 4 1 9 , 3 (97,198) (3) (97,201) (1.16) (1.16) (1.16) - - - - 10,812 (139) 10,673 0.13 0.13 0.05 6 0 5 , 3 4 3 - - 4 3 2 - - - - 4 1 9 , 3 5 6 1 9 7 0 , 4 - - - - - ) 0 7 ( 7 3 2 $ s u l p r u s 7 4 7 , 3 Y T I U Q E N I S E G N 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 . C N I S U L P N 5 ) s e r a h s f o r e b m u n t p e c x e , 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 ( r e b m u N s e r a h s f o 5 1 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t r o F 7 5 6 , 9 7 9 , 3 8 r a e y f o g n i n n i g e b t a s e c n a l a B - - - - - - 7 5 6 , 9 7 9 , 3 8 r e b m u N s e r a h s f o n o i t a g i l b o t i f e n e b t n e m e r i t e r f o t n e m e r u s a e m e R s e g d e h w o l f h s a c n i s e g n a h c t e N t n e m t s u j d a n o i t a l s n a r t y c n e r r u C s s o l e v i s n e h e r p m o c r e h t O r a e y e h t r o f s s o l t e N s s o l e v i s n e h e r p m o c l a t o T n o i t a s n e p m o c d e s a b - e r a h S r a e y f o d n e t a s e c n a l a B 4 1 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t r o F 9 6 2 , 8 0 9 3 8 , r a e y f o g n i n n i g e b t a s e c n a l a B - - - - - - - 8 8 3 , 1 7 7 5 6 , 9 7 9 3 8 , n o i t a g i l b o t i f e n e b t n e m e r i t e r f o t n e m e r u s a e m e R ) s s o l ( e m o c n i e v i s n e h e r p m o c l a t o T s n o i t p o k c o t s f o e s i c r e x E s e g d e h w o l f h s a c n i s e g n a h c t e N t n e m t s u j d a n o i t a l s n a r t y c n e r r u C ) 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 r a e y e h t r o f s g n i n r a e t e N s t s e r e t n i g n i l l o r t n o c - n o n s ’ y r a i d i s b u s a n o i t a s n e p m o c d e s a b - e r a h S f o e s a h c r u P ) 4 e t o N ( s t s o c n o i t c a s n a r t g n i d u l c n i r a e y f o d n e t a s e c n a l a B . 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 e s e h t f o t r a p l a r g e t n i n a e r a s e t o n g n i y n a p m o c c a e h T 5N PLUS + 2015 ANNUAL REPORT 31 5N PLUS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 (Figures in thousands of United States dollars) Operating activities Net (loss) earnings for the year Adjustments to reconcile net (loss) earnings to cash flows Depreciation of property, plant and equipment and amortization of intangible assets Amortization of other assets Amortization of deferred revenues Impairment of inventories Allowance for doubtful accounts receivable Allowance for a doubtful note receivable from a related party Share-based compensation expense Deferred income tax Share of loss from joint ventures Gain on disposal of property, plant and equipment Imputed interest Retirement benefit obligation Change in fair value of debenture conversion option Unrealized loss (gain) on non-hedge financial instruments Unrealized foreign exchange gain on assets and liabilities Funds (used in) from operations before the following Net change in non-cash working capital balances related to operations Cash flows from (used in) operating activities Investing activities Business acquisitions, net of cash acquired Investment in a joint venture Additions to property, plant and equipment Proceeds on disposal of property, plant and equipment Additions of intangible assets Restricted cash Cash flows used in investing activities Financing activities Repayment of long-term debt Proceeds from the issuance of long-term debt Issue expenses related to long-term debt Proceeds from the issuance of convertible debentures, net of transaction costs (Note 13) Net decrease in bank indebtedness Issuance of common shares Financial instruments – net Increase in other liabilities Purchase of a subsidiary’s non-controlling interest including transaction costs (Note 4) Cash flows (used in) from financing activities Effect of foreign exchange rate changes on cash and cash equivalents Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental information(1) Income tax paid (recovered) Interest paid Notes 2015 $ 2014 $ (97,201) 10,673 15 6 5, 25 10, 27 22 16 9 14 17 19 4 9 7, 19 8 13 15 4 27,166 1,331 (796) 58,327 799 2,991 400 2,717 316 - 2,897 (232) (1,840) 198 (6,924) (9,851) 73,860 64,009 - (310) (14,818) - (5,138) 1,950 (18,316) (67,613) 17,829 (423) - (971) - (51) 2,100 - (49,129) (525) (3,961) 12,777 8,816 2,585 3,924 11,148 732 (427) 5,251 - - 668 3,979 128 (1,312) 1,575 (143) (7,179) (2,892) (4,609) 17,592 (34,765) (17,173) (1,525) - (13,611) 2,174 (2,784) (7) (15,753) (101,305) 80,343 (1,915) 58,062 (9,487) 164 23 1,286 (3,050) 24,121 (845) (9,650) 22,427 12,777 (2,779) 5,715 (1) Amounts paid (recovered) for income tax and interest 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. 32 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – NATURE OF ACTIVITIES 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. These consolidated financial statements were approved by the Board of Directors on February 23, 2016. 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 which are recorded at fair value. 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. 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 L beck GmbH 5N Plus UK Limited 5N Plus Belgium SA 5N Plus Asia Limited 5N Plus Wisconsin Inc Country of incorporation % Equity interest 2014 2015 Canada Germany Germany United Kingdom Belgium Hong Kong United States 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 5N PLUS + 2015 ANNUAL REPORT 33 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The US dollar is the functional currency of all those subsidiaries. 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) Joint ventures A joint venture is a contractual agreement whereby the Company agrees with other parties to undertake an economic activity that is subject to joint control, i.e. strategic financial and operating decisions relating to the joint venture’s activities require the unanimous consent of the parties sharing control. Investments in joint ventures are accounted for using the equity method. The share of earnings (loss) of joint ventures is recognized in the consolidated statement of (loss) earnings and the share of other comprehensive income (loss) of joint ventures is included in other comprehensive (loss) income. 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 Monetary assets and liabilities denominated in foreign currencies are translated at the prevailing exchange rate at the reporting date. Non-monetary assets and liabilities, and revenue and expense items denominated in foreign currencies are translated into the functional currency using the exchange rate prevailing at the dates of the respective transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in consolidated statement of (loss) earnings. Foreign exchange gains and losses are presented in the consolidated statement of (loss) earnings within “foreign exchange and derivative gain”. c) Foreign operations Assets and liabilities of subsidiaries that have a functional currency other than US dollar are translated from their functional currency to US dollars at exchange rates in effect at the reporting date. The resulting translation adjustments are included in the currency translation adjustment in other comprehensive (loss) income. Revenue and expenses are translated at the average exchange rates for the period. Segment reporting 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”. 34 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 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. Revenue from custom refining activities is recognized when services are rendered. Property, plant and equipment Property, plant and equipment are recorded at cost, net of accumulated depreciation, accumulated impairment losses and subsequent reversals, if applicable. Property, plant and equipment are depreciated using the straight-line method over their estimated useful lives, taking into account any residual values. Useful lives are as follows: Land Building Production equipment Furniture Office equipment Rolling stock Leasehold improvements Period Not depreciated 25 years 10 years 3 to 10 years 3 to 10 years 3 to 10 years Over the term of the lease However, “major overhauls and replacements” are capitalized to the consolidated statement of financial position as a separate component, with the replaced part or previous overhaul derecognized from the statement. Maintenance and repairs are charged to expense as incurred. 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. 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 (loss) earnings 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. 5N PLUS + 2015 ANNUAL REPORT 35 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible assets Intangible assets acquired separately are recorded at cost, net of accumulated amortization, accumulated impairment losses and reversals, if applicable. Intangible assets acquired through a business combination are recognized at fair value at the date of acquisition. Intangible assets are amortized on a straight-line basis over their useful lives according to the following annual terms: Customer relationships Technology Trade name and non-compete agreements Software Intellectual property Development costs Impairment of non-financial assets Period 10 years 5 years 2 to 5 years 5 years 10 years Not exceeding 10 years The carrying amounts of the Company’s non-financial assets subject to amortization are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are not yet available for use are tested for impairment annually or at any time if an indicator of impairment exists. An impairment loss is recognized if the carrying amount of an asset or a cash-generating unit (CGU) exceeds its recoverable amount. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs of disposal. The recoverable amount is determined for an individual asset; unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. In such case, the CGU’s belonging asset is used to determine the recoverable amount. Impairment losses are recognized in statement of (loss) earnings. The Company evaluates impairment losses for potential reversals at each reporting date. An impairment loss is reversed if there is any indication that the loss has decreased or no longer exists due to changes in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Such reversal is recognized in statement of (loss) earnings. Financial instruments Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. All financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on the classification of the financial instrument. At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired: 36 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS a) Financial assets at fair value through profit or loss A financial asset is classified in this category if acquired principally for the purpose of selling or repurchasing in the short term. Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the consolidated statement of (loss) earnings. Financial assets at fair value through profit or loss are classified as current assets except for the portion expected to be realized or paid beyond twelve months of the consolidated statements of financial position date, which is classified as non-current asset. 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. Loans and receivables are recognized initially at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment. Loans and receivables are included in current assets, except for instruments with maturities greater than twelve months after the end of the reporting period, which are classified as non-current assets. 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. Available-for-sale financial assets are recognized initially at fair value plus transaction costs and are subsequently carried at fair value. Gains or losses arising from changes in fair value are recognized in other comprehensive income (loss). When an available-for-sale asset is sold or impaired, the accumulated gains or losses are moved from accumulated other comprehensive income (loss) to the consolidated statement of (loss) earnings. Available-for-sale financial assets are classified as non-current assets, unless the investment matures within twelve months, or management expects to dispose of them within twelve months. d) Financial liabilities at amortized cost Financial liabilities at amortized cost are initially recognized at the amount required to be paid, less, when material, a discount to reduce the liabilities to fair value. Subsequently, they are measured at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities. 5N PLUS + 2015 ANNUAL REPORT 37 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has classified its financial instruments as follows: Category Financial instrument Financial assets and liabilities at fair value through profit and loss Derivative financial assets and liabilities Loans and receivables Financial liabilities at amortized cost Cash and cash equivalents Restricted cash Accounts receivable Loan receivable from a related party Bank indebtedness Trade and accrued liabilities Long-term debt Convertible debentures Long-term payable Transaction costs Transaction costs related to financial instruments that are not classified as assets and liabilities at fair value through profit or loss, are recognized in consolidated statement of financial position as an adjustment to the cost of the financial instrument upon initial recognition and amortized using the effective interest rate method. Fees paid on the establishment of loan facilities are recognized as deferred costs under non-current assets and are amortized over the term of the facility. Impairment of financial assets At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. A financial asset 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 initial recognition (a “loss event”) and that loss event has an impact on the estimated cash flows of the financial assets that can be reliably estimated. If such evidence exists, the Company recognizes an impairment loss, as follows: a) Financial assets carried at amortized cost The impairment loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Impairment losses as well as reversals are recognized in the consolidated statement of (loss) earnings. b) Available-for-sale financial assets The impairment loss is the difference between the original cost of the asset and its fair value at the measurement date, less any impairment losses previously recognized in the consolidated statement of (loss) earnings. This amount represents the cumulative loss in accumulated other comprehensive income that is reclassified to the consolidated statement of (loss) earnings. Impairment losses on available-for-sale financial assets may not be reversed. 38 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge). 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 twelve months and as a current asset or liability when the remaining maturity of the hedged item is less than twelve months. Trading derivatives are classified as a current asset or liability. The Company applies cash flow hedge accounting to certain foreign exchange forward contracts and cross-currency swap entered into to hedge 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 consolidated statement of (loss) earnings. The amounts recognized in other comprehensive income (loss) are reclassified in consolidated statement of (loss) earnings as a reclassification adjustment when the hedged item affects net earnings. Embedded derivatives Embedded derivatives, which include the debenture conversion option, are recorded at fair value separately from the host contract when their economic characteristics and risks are not clearly and closely related to those of the host contract. Subsequent changes in fair value are recorded in financial expenses in the consolidated statement of (loss) earnings. Cash and cash equivalents Cash and cash equivalents comprise cash on hand. Restricted cash Restricted cash represents restricted cash held to secure certain liabilities of the Company. 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 costs of completion and 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 inventory, the Company may choose to enter into long-term fixed-price sales contracts . The quantity of raw materials required to fulfill these contracts is specifically assigned, and the average cost of these raw materials is accounted for separately throughout the duration of the contract. Income taxes The tax expense for the year comprises current and deferred tax. Tax is recognized in the consolidated statement of (loss) earnings, except to the extent that it relates to items recognized in other comprehensive (loss) income or directly in equity. In which case, the tax is also recognized in other comprehensive (loss) income or directly in equity, respectively. 5N PLUS + 2015 ANNUAL REPORT 39 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS a) Current tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of the consolidated statement 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. b) Deferred tax 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 statement 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 presented to provide impact of temporary differences arising on investments in subsidiaries and joint ventures, 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 be reversed 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. Provisions A provision is recognized when the Company 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 mainly 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. Research and development expenses Research expenses are charged to the consolidated statement of (loss) earnings in the period they are incurred. Development expenses are charged to the consolidated statement of (loss) earnings, except for those that meet the following criteria and are capitalized: the feasibility of the product has been established, management intends to manufacture the product and has the capacity to use or sell it, the future economic benefits are likely to occur, the market for the product is defined, and the Company has the resources to complete the project and can reliably measure development costs. Research and development expenses charged to the consolidated statement of (loss) earnings for the year are included under other expenses. 40 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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; and  Actuarial gains and losses arising from experience adjustment and changes in actuarial assumptions are charged or credited to equity in other comprehensive (loss) income in the period in which they arise. 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 statement of (loss) earnings 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 compensation expense is calculated by multiplying the number of units expected to vest with the fair value of one unit as of grant date based on the market price of the Company’s common shares. Until the liability is settled, the Company re-mesures the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in income for the period. (Loss) earnings per share Basic (loss) earnings per share is calculated by dividing net (loss) earnings for the year attributable to equity owners of the Company by the weighted average number of common shares outstanding during the year. Diluted (loss) earnings per share assume the conversion, exercise or contingent issuance of securities only when such conversion, exercise or issuance would have a dilutive effect on the income per share. The treasury stock method is used to determine the dilutive effect of the warrants and share options and the if-converted method is used for convertible debentures. 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 + 2015 ANNUAL REPORT 41 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impairment of non-financial assets Non-financial assets are reviewed for an indication of impairment at each statement of financial position date upon the occurrence of events or changes in circumstances indicating that the carrying value of the assets may not be recoverable, which requires significant judgement. 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 of disposal and value in use. To determine fair value less cost to dispose, 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 using pricing information on metal available as at December 31, 2015. 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. Management believes that the following assumptions are the most susceptible to change and therefore could impact the valuation of the assets in the next year: metal prices which have an impact on revenues and metal margins, the discount rate, foreign exchange rates and the ability to use existing tax losses in the future. Management performed an impairment test on its non-current assets in accordance with IAS 36 “Impairment of assets”, since the market capitalization of the Company was lower than the carrying amount of the net assets. Based on this analysis, management concluded that no impairment was required on the remaining non-current assets. 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 consolidated statement of financial position date and the date of the completion of the consolidated financial statements. Net realizable value for inventory to satisfy a specific sales contract is measured at the contract price. Debenture conversion option The convertible debentures issued by the Company included conversion and early redemption options, which are considered as Level 3 financial instruments. The derivative is measured at fair value through profit or loss, and its fair value must be measured at each reporting period, with subsequent changes in fair value recorded in the consolidated statement of (loss) earnings. A derivative valuation model is used, and includes assumptions, to estimate the fair value. Detailed assumptions used in the model to determine the fair value of the embedded derivative, upon inception and as at December 31, 2015, are provided in note 13. 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. 42 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 a 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 16). NOTE 3 – CHANGES IN ACCOUNTING POLICIES AND FUTURE CHANGES IN ACCOUNTING POLICIES Future changes in accounting policies The following standards have been issued but are not yet effective: In May 2014, the IASB issued IFRS 15, “Revenues from Contracts with Customers”, to specify how and when to recognize revenue as well as requiring the provision of more information and relevant disclosure. IFRS 15 supersedes IAS 18, “Revenue”, IAS 11, “Construction Contracts”, and other revenue-related interpretations. The standard will be mandatory on January 1, 2018 for the Company with earlier adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements. In July 2014, the IASB amended IFRS 9, “Financial Instruments”, to bring together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39, “Financial Instruments: Recognition and Measurement”. The standard supersedes all previous versions of IFRS 9 and will be mandatory on January 1, 2018 for the Company with earlier application permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements. In January 2016, IASB issued IFRS 16, “Leases”, which specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The standard will be mandatory for annual periods beginning on or after January 1, 2019. The Company is currently evaluating the impact of this standard on its consolidated financial statements. In January 2016, IASB amended IAS 7, “Statement of Cash Flows”, The amendments require that the following changes in liabilities arising from financing activities are disclosed (to the extent necessary): (i) changes from financing cash flows; (ii) changes arising from obtaining or losing control of subsidiaries or other businesses; (iii) the effect of changes in foreign exchange rates; (iv) changes in fair values; and (v) other changes. One way to fulfil the new disclosure requirement is to provide a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities. Finally, the amendments state that changes in liabilities arising from financing activities must be disclosed separately from changes in other assets and liabilities. This amendment will be mandatory for reporting periods beginning on or after January 1, 2017. The Company is currently evaluating the impact of this standard on its consolidated financial statements. 5N PLUS + 2015 ANNUAL REPORT 43 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 – BUSINESS ACQUISITIONS Purchase of a subsidiary’s non-controlling interests On April 3, 2014, the Company acquired for an amount of $2,975 the remaining 33.33% ownership interest in its subsidiary, Sylarus Technologies LLC, a germanium substrate supplier, and changed its name to 5N Plus Semiconductors LLC. As a result, Sylarus became a wholly owned subsidiary of the Company. The consideration paid and the related transaction costs have been recorded in equity. Acquisition of AM&M Advanced Machine and Materials Inc. On May 5, 2014, the Company acquired all of the issued and outstanding shares in the capital of AM&M Advanced Machine and Materials Inc. (“AM&M”) for a total consideration of $2,290 (CA$2,517), mostly representing a technology. AM&M is a Kanata, Ontario based corporation specialized in manufacturing micron-sized metallic powders which can be used in a variety of electronic markets, including solder powders, silver-based powders and CIGS powders. The total consideration includes amounts outstanding to be paid up to May 2015 (paid in 2015) and a contingent consideration. NOTE 5 – ACCOUNTS RECEIVABLE Gross trade receivables Allowance for doubtful accounts (Note 25) Trade receivables Sales taxes receivable Accounts receivable from a related party (Notes 9 and 24) Other receivables, net of allowance for doubtful of $415 Total accounts receivable 2015 $ 31,469 (488) 30,981 4,081 831 1,432 37,325 2014 $ 62,537 (104) 62,433 6,319 - 3,639 72,391 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 25. Most of the accounts receivable are pledged as security for the revolving credit facility (Note 12). 44 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – INVENTORIES Raw materials Finished goods Total inventories 2015 $ 28,200 60,852 89,052 2014 $ 54,219 150,235 204,454 For the year ended December 31, 2015, a total of $316,688 of inventories was included as an expense in cost of sales (2014 – $386,025). This includes $58,327 of impairment of inventories ($28,338 for the Eco Friendly Materials segment and $29,989 for the Electronic Materials segment) (2014 – $5,251 [$4,395 for the Eco Friendly Materials segment and $856 for the Electronic Materials segment]). For the year ended December 31, 2015, a total of $32,394 previously written down was recognized as a reduction of expenses in cost of sales ($24,702 for the Eco-Friendly Materials segment and $7,692 for the Electronic Materials segment) (2014 – $6,100 [$2,160 for the Eco-Friendly Materials segment and $3,940 for the Electronic Materials segment segment]). The majority of inventories are pledged as security for the revolving credit facility (Note 12). NOTE 7 – PROPERTY, PLANT AND EQUIPMENT Net book value as at December 31, 2013* Additions Disposals Business acquisition Depreciation Effect of foreign exchange and others Net book value as at December 31, 2014* Additions Depreciation Effect of foreign exchange and others Net book value as at December 31, 2015 As at December 31, 2014 Cost* Accumulated depreciation Net book value* As at December 31, 2015 Cost Accumulated depreciation Net book value Land and buildings $ 22,604 1,346 (651) - (1,046) 78 22,331 939 (1,633) (231) 21,406 27,056 (4,725) 22,331 27,206 (5,800) 21,406 Production equipment $ 33,445 14,318 (172) 66 (5,885) (145) 41,627 11,568 (10,789) (301) 42,105 Furniture, office equipment and rolling stock $ 2,385 826 (39) - (864) 34 2,342 667 (741) (49) 2,219 54,191 (12,564) 41,627 65,596 (23,491) 42,105 4,199 (1,857) 2,342 3,428 (1,209) 2,219 Leasehold improvements $ 1,180 907 - - (162) 36 1,961 402 (472) 25 1,916 2,826 (865) 1,961 2,836 (920) 1,916 Total $ 59,614 17,397 (862) 66 (7,957) 3 68,261 13,576 (13,635) (556) 67,646 88,272 (20,011) 68,261 99,066 (31,420) 67,646 *Certain figures have been reclassified to reflect current presentation. As at December 31, 2015, property, plant and equipment that were not depreciated until ready for their intended use amounted to $5,450 (2014 ─ $9,480) (mainly production equipment). Most of the property, plant and equipment are pledged as security for the revolving credit facility (Note 12). 5N PLUS + 2015 ANNUAL REPORT 45 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 – INTANGIBLE ASSETS Customer relationships $ Technology $ Trade name and non-compete agreements $ Software, intellectual property and development costs $ Net book value as at December 31, 2013* Additions Disposals and others Business acquisition Amortization Net book value as at December 31, 2014* Additions Disposals and others Amortization(1) Net book value as at December 31, 2015 As at December 31, 2014 Cost* Accumulated amortization Net book value* As at December 31, 2015 Cost Accumulated amortization Net book value 7,582 - - - (1,040) 6,542 - - (6,542) - 10,458 (3,916) 6,542 - - - 2,606 - - 3,026 (1,164) 4,468 - - (1,442) 3,026 8,651 (4,183) 4,468 3,026 - 3,026 676 - (10) - (260) 406 - - (406) - 2,395 (1,989) 406 - - - 2,279 2,784 (24) - (727) 4,312 5,138 (20) (5,141) 4,289 7,757 (3,445) 4,312 6,517 (2,228) 4,289 Total $ 13,143 2,784 (34) 3,026 (3,191) 15,728 5,138 (20) (13,531) 7,315 29,261 (13,533) 15,728 9,543 (2,228) 7,315 *Certain figures have been reclassified to reflect current presentation. (1) During the second quarter of 2015, the Company initiated an efficiency review of its global operations, including the review of the economic life and carrying value of the Company’s intangible assets, which resulted in an accelerated amortization recorded in other expenses of $11,834 ($6,020 for customer relationships, $4,660 for intellectual property and development costs, $833 for technology and $321 for trade name and non-compete agreements). As at December 31, 2015, intangible assets that were not depreciated until ready for their intended use amounted to $6,562 (2014 ─ $2,945). 46 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 – INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Beginning of year Share of loss from joint ventures New investment End of year 2015 $ 316 (316) 310 310 2014 $ 444 (128) - 316 In 2015, the unrecognized share of loss of joint ventures for which the Company ceased to recognize when applying the equity method is $597. The following summarizes financial information of Ingal Stade GmbH (“Ingal”) and Zhuhai Gallium Industry Co., Ltd. (Zhuhai), in which the Company holds a 50% and 49% interest respectively. Total current assets Total non-current assets Total current liabilities Total non-current liabilities due to venturers Total revenues Total net loss NOTE 10 – OTHER ASSETS Deferred costs Deposit Loan receivable from a related party (Notes 9 and 24)(1) Other Total other assets 2015 $ 4,100 3,501 2,210 6,041 5,314 (1,825) 2015 $ 1,519 - - 824 2,343 2014 $ 3,918 3,554 69 6,761 6,035 (256) 2014 $ 2,426 86 3,259 864 6,635 (1) In 2015, the Company assessed that under current and foreseeable market price for gallium, its note receivable from a related party (Ingal) is not likely be reimbursed. NOTE 11 – TRADE AND ACCRUED LIABILITIES Trade payables Accrued liabilities Total trade and accrued liabilities 2015 $ 26,357 12,387 38,744 2014 $ 47,791 12,495 60,286 5N PLUS + 2015 ANNUAL REPORT 47 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 – BANK INDEBTEDNESS AND LONG-TERM DEBT a) Bank indebtedness 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 45% of the RMB base rate. Contractual Currency RMB 10,000 - 2015 Reporting Currency US$ 1,541 - Contractual Currency RMB 10,000 6,000 Facility available Amount drawn b) Long-term debt Senior secured revolving facility of $100,000 ($125,000 as at December 31, 2014) with a syndicate of banks, maturing in August 2018(1) 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(2) Other loans Less: Current portion of long-term debt 2015 $ 1,475 420 52 1,947 435 1,512 2014 Reporting Currency US$ 1,625 975 2014 $ 51,095 657 71 51,823 667 51,156 (1) In August 2014, the Company signed a senior secured multi-currency revolving credit facility of $125,000 maturing in August 2018, which was reduced to $100,000 as at June 30, 2015 and subsequently to $50,000 as at February 18, 2016. At any time, the Company has the option to request that the credit facility be expanded through the exercise of an additional $50,000 ($25,000 as at December 31, 2014) accordion feature, subject to review and approval by the lenders. This revolving credit facility can be drawn in US dollars, Canadian dollars or Hong Kong dollars. Drawings bear interest at either the Canadian prime rate, US base rate, Hong Kong base rate or LIBOR, plus a margin based on the Company’s senior consolidated debt to EBITDA ratio. Under the terms of its credit facility, the Company is required to satisfy certain restrictive covenants as to financial ratios, including a temporary drawing limit on the credit facility of maximum $25,000, which could be further reduced to $15,000 if certain conditions are not met from February 18, 2016 to December 31, 2016. As at December 31, 2015, the Company has met all covenants. In addition, in August 2014, the Company’s subsidiary in Belgium entered into a bi-lateral credit facility of 5,000 Euros, which was reduced to 2,500 Euros as at February 18, 2016. This credit facility is coterminous with the new senior secured multi-currency revolving credit facility, and guaranteed by the same security pool. This bi-lateral facility can be drawn in Euros or US dollars and bears interest at similar rates as the revolving credit facility. No amount was used as at December 31, 2015 and 2014. (2) The term loan is classified as short-term debt since these amounts could become payable on demand. In order to comply with these covenants, the Company will need to execute on its EBITDA and cash flow estimates. Management believes that the assumptions used by the Company in preparing its estimates are reasonable. 48 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 – CONVERTIBLE DEBENTURES In June 2014, the Company issued convertible unsecured subordinated debentures for CA$60,000 (US$55,266) and an additional over-allotment option for CA$6,000 (US$5,580) for a total of CA$66,000 (US$60,846). The convertible unsecured subordinated debentures bear interest at a rate of 5.75% per annum, payable semi-annually on June 30 and December 31, commencing on December 31, 2014. The convertible debentures are convertible at the holder’s option into the Company’s common shares at a conversion price of CA$6.75 per share, representing a conversion rate of 148.1 common shares per CA$1,000 principal amount of convertible debentures. The convertible debentures will mature on June 30, 2019 and may be redeemed by the Company, in certain circumstances, after June 30, 2017. The debenture conversion option was recorded as a derivative liability (Note 17). In accordance with IFRS, an obligation to issue shares for a price that is not fixed in the Company’s functional currency must be classified as a derivative liability and measured at fair value, with changes recognized in change in fair value of debenture conversion option in the consolidated statement of (loss) earnings. The fair value of the debenture conversion option, which consists of the holder’s conversion option subject to the Company’s early redemption options, was estimated based on a methodology for pricing convertible bonds using an approach based on partial differential equations or binomial lattices, with the following assumptions: average expected volatility of 40%; expected dividend per share of nil; entity-specific credit spread, and expected life of 5 years. As a result, the initial fair value of the liability representing the debenture conversion option for the two tranches of the issuance of the debenture was estimated at CA$10,484 (US$9,666). Assumptions were reviewed in the valuation as at December 31, 2015 and 2014, and have note changed substantially except for the expected life of 3.5 and 4.5 years respectively. On December 7, 2015, the Company entered into a cross-currency swap to hedge the convertible debenture denominated in Canadian dollars to US dollars (Note 17). 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 Unterst tzungseinrichtung der HEK GmbH e.V. Such promises had been made for employees with entry date of December 31, 1993 or earlier. Present value of unfunded obligations Movement in the defined benefit obligation is as follows: Beginning of year Current service cost Interest cost Effect of foreign exchange Benefits paid Actuarial (gains) losses End of year 2015 $ 13,934 2015 $ 16,928 85 303 (1,724) (620) (1,038) 13,934 2014 $ 16,928 2014 $ 15,887 81 508 (2,181) (732) 3,365 16,928 5N PLUS + 2015 ANNUAL REPORT 49 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The principal actuarial assumptions as at year ended were as follows: Discount rate Salary growth rate Pension growth rate 2015 2.4% 2.0% 1.8% 2014 2.0% 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 Change in assumption 0.50% 0.50% 0.50% Impact on defined benefit obligation Increase in assumption (6.44)% 0.56% 6.05% Decrease in assumption 7.19% (0.53)% (5.55)% Increase by 1 year in assumption 3.85% Decrease by 1 year in assumption (3.43)% The weighted average duration of the defined benefit obligation is 13.56 years (2014 – 14.47 years). Expected maturity analysis of undiscounted pension liability: 2015 $ 612 2,599 16,815 20,026 Other $ 1,000 145 (586) 559 34 (346) - 247 2014 $ 686 2,868 19,696 23,250 Total $ 1,064 15,660 (1,013) 15,711 5,996 (1,142) (162) 20,403 Less than a year Between 1 and 5 years Over 5 years Total Expected contributions to pension benefit plans for year ending December 31, 2016 are $612. NOTE 15 – OTHER LIABILITIES Long-term payable $ Deferred revenues $ - 12,821 - 12,821 2,362 - (162) 15,021 64 2,694 (427) 2,331 3,600 (796) - 5,135 As at December 31, 2013 Additions Utilized As at December 31, 2014 Additions Utilized Unutilized amounts reversed As at December 31, 2015 50 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 – INCOME TAX Current tax: Current tax for the year Adjustment in respect of prior years Total current tax Deferred tax: Recognition and reversal of temporary differences Write down of deferred tax assets Total deferred tax Income tax expense 2015 $ 2,831 824 3,655 (5,207) 7,924 2,717 6,372 A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows: (Loss) earnings before income tax Canadian statutory income tax rates Income tax on (loss) earnings at Canadian statutory rate Increase (decrease) resulting from: Unrecorded losses carried forward Write down of deferred tax assets Non-deductible expenses (non-taxable gain) for tax purposes Benefits arising from a financing structure Non-deductible (taxable) foreign exchange Effect of difference of foreign tax rates compared to Canadian tax rates Prior year adjustments Other Income tax expense 2015 $ (90,829) 26.9% (24,433) 16,112 7,924 (574) (771) 3,288 1,978 2,004 844 6,372 2014 $ 4,975 (100) 4,875 3,979 - 3,979 8,854 2014 $ 19,527 26.9% 5,253 2,658 - (207) (598) 1,832 (293) 162 47 8,854 The Company’s applicable tax rate is the Canadian combined rates applicable in the jurisdiction in which the Company operates. 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 settled within 12 months To be settled 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 (loss) income Credited to consolidated statement of (loss) earnings Business acquisition End of year 2015 $ 1,529 1,949 (54) (614) 2,810 2015 $ 7,926 (2,399) (2,717) - 2,810 2014 $ 1,666 9,371 - (3,111) 7,926 2014 $ 11,787 932 (3,979) (814) 7,926 5N PLUS + 2015 ANNUAL REPORT 51 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $ l a t o T 7 8 3 , 3 1 8 7 4 , 3 $ l a t o T 0 0 6 , 1 The principal actuarial assumptions as at year ended were as follows: $ y b t e s f f n o e i m t c a Discount rate i d s s Salary growth rate e i r h u t Pension growth rate j n i h t i O $ ) 8 3 1 , 9 ( ) 1 3 7 , 8 ( ) 7 2 7 , 9 ( $ ) 8 3 1 , 9 ( y b t e s f f O n o i t c i d s i r u j 1 1 1 , 3 ) 1 3 7 , 8 ( 8 6 6 ) 7 2 7 , 9 ( 2015 2.4% 2.0% 1.8% 2014 2.0% 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 w a change in an assumption are weighted proportionately to the total plan obligations to determine the total impact for s e c each assumption presented. n a l a b ) 1 1 1 ( ) 9 2 4 ( 7 1 1 $ - ) 7 4 4 , 1 ( 5 9 3 , 0 1 0 9 2 2 4 8 , 1 1 4 1 8 8 3 7 , 0 1 $ l a t o T 6 9 2 , 2 2 3 9 ) 9 8 6 , 3 ( ) 4 6 1 , 4 ( ) 9 9 3 , 2 ( 5 0 2 , 3 1 9 0 5 , 4 l a t o T s r e h t O 5 2 5 , 2 2 6 3 6 , 2 7 3 0 , 1 1 8 6 7 , 9 1 6 9 0 , 2 g n i t t e s f f o e h t $ t t n i f Discount rate e e m n e Salary growth rate e b r i Pension growth rate t e R n o i t a g i l b o 3 4 1 , 2 ) 3 5 3 ( 3 4 0 , 1 3 3 8 , 2 - ) 7 1 3 ( ) 6 1 5 , 2 ( $ 7 7 2 , 7 ) 5 5 6 , 1 ( - 2 2 6 , 5 ) 8 9 8 , 1 ( - 4 2 7 , 3 Life expectancy $ 0 4 8 s r e h t O $ - - e l b i t r e v n o C s e r u t n e b e d ) 4 1 3 ( 6 2 5 3 2 2 Change in assumption 0.50% 0.50% 0.50% 9 5 8 , 9 5 8 , 1 1 1 , 1 1 1 9 4 7 Impact on defined benefit obligation Increase in assumption (6.44)% 0.56% 6.05% Decrease in assumption 7.19% (0.53)% (5.55)% 0 7 9 , 2 Increase by 1 year in assumption 3.85% Decrease by 1 year in assumption (3.43)% The weighted average duration of the defined benefit obligation is 13.56 years (2014 – 14.47 years). 0 8 $ - - - 5 1 5 5 1 5 5 9 5 Expected maturity analysis of undiscounted pension liability: $ d r a w r o f y r r a c s s o L s t e s s a e l b i g n a t n I Expected contributions to pension benefit plans for year ending December 31, 2016 are $612. s t e s s a $ 4 1 8 6 7 2 , 4 4 9 2 4 8 3 , 5 4 1 8 ) 0 7 5 , 4 ( 4 1 6 , 1 - ) 5 6 4 ( 9 4 1 , 1 ) 1 3 9 ( 8 1 2 $ - 8 0 0 , 4 ) 4 8 0 , 1 ( 4 2 9 , 2 0 2 7 , 2 4 4 6 , 5 e l b i g n a t n I s e i r o t n e v n I y t r e p o r P d n a t n a l p t n e m p i u q e 3 1 3 , 2 t u o h t i w $ s e i r o Less than a year t n Between 1 and 5 years e v n Over 5 years I Total , r a e y $ , 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 7 - - 0 2 3 , 2 ) 8 1 6 ( 2 0 7 , 1 , 6 5 1 , 8 ) 4 7 7 , 1 ( - 2 8 3 , 6 ) 7 0 7 , 3 ( - 5 7 6 , 2 NOTE 15 – OTHER LIABILITIES s e i t i l i b a i l d n a Long-term payable $ Deferred revenues $ As at December 31, 2013 s Additions t n e Utilized m e As at December 31, 2014 t a t Additions s Utilized Unutilized amounts reversed As at December 31, 2015 : s w o l l o f e m o c n i ) s s o l ( e v i s n e h e r p m o c o t ) d e g r a h c ( d e t i d e r C 4 1 0 2 , 1 3 r e b m e c e D t a s A 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 s g n i n r a e ) s s o l ( f o ) d e g r a h C ( e m o c n i ) s s o l ( e v i s n e h e r p m o c o t ) d e g r a h c ( d e t i d e r C 5 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 - s 12,821 t n e - m e 12,821 t a t 2,362 s - (162) 15,021 d e t a d i l o s n o c 3 1 0 2 , 1 3 r e b m e c e D t a s A n o i t i s i u q c a s s e n i s u b m o r F o t ) d e t i d e r c ( d e g r a h C 64 2,694 (427) 2,331 3,600 (796) - 5,135 5 1 0 2 , 1 3 r e b m e c e D t a s A 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 s g n i n r a e ) s s o l ( f o s g n i n r a e ) s s o l ( f o 4 1 0 2 , 1 3 r e b m e c e D t a s A 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 s g n i n r a e ) s s o l ( f o n i t n e m e v o m e h T s a s i , n o i t c i d s i r u j s t e s s a x a t d e r r e f e D 52 5N PLUS + 2015 ANNUAL REPORT 2015 $ 612 2,599 16,815 20,026 Other $ 1,000 145 (586) 559 34 (346) - 247 2014 $ 686 2,868 19,696 23,250 Total $ 1,064 15,660 (1,013) 15,711 5,996 (1,142) (162) 20,403 f o n o i t a r e d i s n o c o t n i g n i k a t e h t g n i r u d s t e s s a x a t e m o c n i d e r r e f e d 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 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred tax assets of $3,092 (2014 – $5,332), included in 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. There is no unremitted earnings as at December 31, 2015 (2014 – $49,691). As at December 31, 2015, the Company had the following operating tax losses available for carry forward for which no deferred tax benefit has been recorded in the accounts. United Kingdom Belgium United States Germany Hong Kong Korea China $ 48,334 46,712 19,879 3,743 14,804 1,806 10,515 Expiry No limit No limit No limit No limit No limit 2023-2025 2017-2020 As at December 31, 2015, the Company had other deductible temporary differences of $9,114 for which no deferred tax benefit has been recorded. NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is determined by reference to the available market information at the reporting date. When no active market exists for a financial instrument, the Company determines the fair value of that instrument based on valuation methodologies as discussed below. In determining assumptions required under a valuation model, the Company primarily uses external, readily observable market data inputs. Assumptions or inputs that are not based on observable market data incorporate the Company’s best estimates of market participant assumptions, and are used when external data is not available. Counterparty credit risk and the Company’s own credit risk are taken into account in estimating the fair value of all financial assets and financial liabilities. The following assumptions and valuation methodologies have been used to measure fair value of financial instruments: (i) The fair value of its short-term financial assets and financial liabilities, including cash and cash equivalents, restricted cash, accounts receivable, bank indebtedness and trade and accrued liabilities approximates their carrying value due to the short-term maturities of these instruments; (ii) The fair value of derivative instruments, which include cross-currency swap and foreign exchange forward contracts, are calculated as the present value of the estimated future cash flows using an appropriate interest rate yield curve and foreign exchange rate. Assumptions are based on market conditions prevailing at each reporting date. Derivative instrument reflect the estimated amount that the Company would receive or pay to settle the contracts at the reporting date; (iii) The fair value of the debenture conversion option, included in derivative financial liabilities, is described in Note 13; (iv) The fair value of long-term debt and a long-term payable are estimated based on discounted cash flows using current interest rate for instruments with similar terms and remaining maturities; and (v) The fair value of the convertible debentures is based on quoted prices observed in active markets. 5N PLUS + 2015 ANNUAL REPORT 53 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The carrying values and fair values of financial instruments, by class, are as follows as at December 31, 2015 and December 31, 2014: As at December 31, 2015 Carrying Value Fair value At fair value through profit or loss $ - - - - - 87 - - 87 Financial liabilities at amortized cost $ Derivative designated in a hedge relationship $ - - - 38,744 1,947 40,288 - 14,939 95,918 - - - - - - 1,443 - 1,443 Loans and receivables $ 8,816 37,325 46,141 - - - - - - Financial assets Cash and cash equivalents Accounts receivable Total Financial liabilities Trade and accrued liabilities Long-term debt Convertible debentures and debenture conversion option (included in derivative financial liabilities) Derivative financial liabilities Long-term payable (included in other liabilities) Total As at December 31, 2014 At fair value through profit or loss $ Loans and receivables $ Financial liabilities at amortized cost $ - - - 147 147 - - - 2,093 - 2,093 12,777 2,115 72,391 - 87,283 - - - - - - - - - - - 975 60,286 51,823 46,101 12,577 171,762 Financial assets Cash and cash equivalents Restricted cash Accounts receivable Derivative financial assets Total Financial liabilities Bank indebtedness Trade and accrued liabilities Long-term debt Convertible debentures and debenture conversion option (included in derivative financial liabilities) Long-term payable (included in other liabilities) Total Total $ 8,816 37,325 46,141 38,744 1,947 40,375 1,443 14,939 97,448 Carrying value Total $ 12,777 2,115 72,391 147 87,430 975 60,286 51,823 Total $ 8,816 37,325 46,141 38,744 1,947 36,175 1,443 14,804 93,113 Fair value Total $ 12,777 2,115 72,391 147 87,430 975 60,286 51,823 48,194 49,517 12,577 173,855 12,577 175,178 54 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair value hierarchy The fair value hierarchy reflects the significance of the inputs used in making the measurements and has the following levels:  Level 1:  Level 2:  Level 3: Quoted prices (unadjusted) in active markets for identical assets or liabilities; 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 Inputs for the asset or liability that are not based on observable market data (unobservable inputs). The following table presents the financial instruments, by class, which are recognized at fair value in the consolidated statements of financial position: As at December 31, 2015 Financial assets (liabilities) At fair value through profit or loss Debenture conversion option (Note 13) (1) Derivatives designated in a hedge relationship Cross-currency swap (2) Total As at December 31, 2014 Financial assets (liabilities) At fair value through profit or loss Derivative forward contracts (3) Debenture conversion option (Note 13) (1) Total Level 1 $ Level 2 $ Level 3 $ - - - - (1,443) (1,443) (87) - (87) Level 1 $ Level 2 $ Level 3 $ - - - 147 - 147 - (2,093) (2,093) (1) This instrument is classified as a Level 3 financial instrument, since the implied volatility is an unobservable input. The change in fair value of debenture conversion option of $1,840 and $7,179 was recognized in the consolidated statement of (loss) earnings for the year ended December 31, 2015 and 2014, respectively. An increase of 5% in the volatility would have increased the fair value of the debenture option by $85 and a decrease of 5% would have decreased the fair value of the debenture option by $51. (2) On December 7, 2015, the Company entered into a cross-currency swap to hedge the convertible debenture denominated in Canadian dollars with a notional amount of CA$66,000 and bearing interest at a rate of 5,75% per annum, payable semi-annually on June 30 and December 31. Under this cross-currency swap, the Company exchange interest payments and principal redemption on the same terms and designates the cross-currency as a cash flow hedge of the variability of the $US functional currency equivalent cash flows on the debt. The terms are such that on each interest payment date, the Company will receive 5.75% on a notional of CA$66,000 and pay 6.485% based on a notional of US$48,889. (3) In February 2014, the Company entered into two derivative forward contracts to sell silver at a fixed price to cover purchases of materials containing the precious metal. The first contract fixed the price at $21.83 per ounce as at August 5, 2014 and its nominal value was approximately $1,900. The second contract fixed the price at $20.86 per ounce as at February 3, 2015 and its nominal value was approximately $2,200. Gains or losses on these derivative forward contracts are recorded as part of the cost of sales. In May 2014, the Company entered into two new derivative forward contracts in opposite position in order to crystallize its gain and to neutralize the impact in the consolidated statement of earnings. As at September 30, 2014, the first contract and the contract in the opposite position matured and, as at March 31, 2015, the second contract and the contract in opposite position matured. 5N PLUS + 2015 ANNUAL REPORT 55 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 – OPERATING SEGMENTS The following tables summarize the information reviewed by the Company’s management when measuring performance: For the year ended December 31, 2015 Segment revenues(1) Adjusted EBITDA(2) (3) Interest on long-term debt, imputed interest and other interest expense Impairment of inventories (Note 6) Litigation and restructuring costs Allowance for a doubtful note receivable from related party Change in fair value of debenture conversion option Foreign exchange and derivative gain Depreciation and amortization Loss before income tax Capital expenditures Eco-Friendly Materials $ 206,747 2,839 Electronic Materials $ 104,265 10,740 - 28,338 745 - - - 4,167 (30,411) 6,674 - 29,989 240 2,991 - - 22,366 (44,846) 8,112 Corporate and unallocated $ - (9,620) Total $ 311,012 3,959 8,967 8,967 - 2,468 - (1,840) (4,276) 633 (15,572) 32 For the year ended December 31, 2014 Segment revenues(1) Adjusted EBITDA(2) (3) Interest on long-term debt, imputed interest and other interest expense Impairment of inventories (Note 6) Litigation and restructuring costs Change in fair value of debenture conversion option Foreign exchange and derivative gain (4) Gain on disposal of property, plant and equipment Depreciation and amortization Earnings (loss) before income tax Capital expenditures Eco-Friendly Materials $ 338,828 22,167 Electronic Materials $ 169,367 23,642 Corporate and unallocated $ - (10,764) - 4,395 1,109 - - (748) 2,783 14,628 9,137 - 856 652 - - (564) 8,205 14,493 4,298 8,769 - 191 (7,179) (3,111) - 160 (9,594) 176 58,327 3,453 2,991 (1,840) (4,276) 27,166 (90,829) 14,818 Total $ 508,195 35,045 8,769 5,251 1,952 (7,179) (3,111) (1,312) 11,148 19,527 13,611 As at December 31, 2015 Eco-Friendly Materials $ Electronic Materials $ Corporate and unallocated $ Total $ Total assets excluding the deferred tax asset: 104,157 108,342 4,760 217,259 As at December 31, 2014 Eco-Friendly Materials $ Electronic Materials $ Corporate and unallocated $ Total $ Total assets excluding the deferred tax asset: 187,116 193,181 8,197 388,494 (1) The total revenues of $15,508 (2014 – $37,866) from the recycling and trading of complex materials is allocated to the Eco-Friendly materials and Electronic materials segments. (2) (Loss) earnings before income tax, depreciation and amortization, allowance for a doubtful note receivable from a related party, impairment of inventories, litigation and restructuring costs, financial expense (revenues) and gain on disposal of property, plant and equipment. (3) The total adjusted EBITDA of negative $555 (2014 – adjusted EBITDA positive of $7,363) from the recycling and trading of complex materials is allocated to the Eco-Friendly materials and Electronic materials segments. (4) The foreign exchange and derivative gain excludes the loss (gain) on foreign exchange forward contracts on US$/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. 56 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The geographic distribution of the Company’s revenues based on the location of the customers for the years ended December 31, 2015 and 2014, and the identifiable non-current assets as at December 31, 2015 and 2014 are summarized as follows: Revenues Asia China Japan Other(1) Americas United States Other Europe France Germany United Kingdom Other(1) Other Total Non-current assets (other than deferred tax assets) Asia Hong Kong Other(1) United States Canada Europe Belgium Germany Other Total (1) None exceeding 10% 2015 $ 23,330 5,859 61,639 72,715 15,572 20,072 35,064 9,214 61,236 6,311 311,012 2015 $ 495 16,975 5,124 22,260 9,614 19,683 3,463 77,614 2014 $ 47,802 11,114 94,964 99,281 14,207 31,456 77,814 22,400 90,498 18,659 508,195 2014 $ 6,367 18,494 6,918 19,434 10,049 24,485 5,193 90,940 For the year ended December 31, 2015, one customer represented approximately 12% (2014 – 10.59%) of the revenues, and is included in the Electronic Materials revenues. NOTE 19 – 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 (Decrease) increase in liabilities: Trade and accrued liabilities Income tax payable Net change 2015 $ 35,767 58,347 73 1,270 (22,131) 534 73,860 2014 $ (11,765) (34,249) 5,639 921 2,285 2,404 (34,765) 5N PLUS + 2015 ANNUAL REPORT 57 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 c) Excluded a reclassification from trade and accrued liabilities to other liabilities following new agreements with a supplier NOTE 20 – SHARE CAPITAL Authorized: 2015 $ 4,181 5,423 - 2014 $ 5,423 1,637 8,941  An unlimited number of common shares, participating, with no par value, entitling the holder to one vote per share; and  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, 2015 and 2014, no preferred shares were issued. NOTE 21 – (LOSS) EARNINGS PER SHARE The following table reconciles the numerators and denominators used for the computation of basic and diluted (loss) earnings per share: Numerators Net (loss) earnings attributable to equity holders of 5N Plus Dilutive effect: Convertible debentures Net (loss) earnings attributable to equity holders of 5N Plus adjusted for dilution effect Net (loss) earnings for the period Dilutive effect: Convertible debentures Net (loss) earnings for the period adjusted for dilution effect Denominators Basic weighted average number of shares Dilutive effect: Stock options Convertible debentures Diluted weighted average number of shares 2015 $ (97,198) - (97,198) (97,201) - (97,201) 2015 2014 $ 10,812 (6,294) 4,518 10,673 (6,294) 4,379 2014 83,979,657 83,948,943 - - 83,979,657 210,242 5,258,564 89,417,749 As at December 31, 2015, a total number of 1,558,345 stock options were excluded from the diluted weighted average number of shares due to their anti-dilutive effect because of the Company’s stock price. The same applies to the convertible debentures. As at December 31, 2014, a total number of 1,042,510 stock options were excluded from the diluted weighted average number of shares due to their anti-dilutive effect because of the Company’s stock price. The same applies to the warrants which expired on June 6, 2014. 58 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 22 – SHARE-BASED COMPENSATION As at December 31, 2015, 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 Stock Option Plan may be exercised during a period not exceeding ten years from the date of grant. The stock options outstanding as at December 31, 2015 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 Plan On June 7, 2010, the Company adopted a Restricted Share Unit (“RSU”) Plan (the “Old RSU Plan”) to complement the stock option plan. Minor amendments to the Old RSU Plan were adopted by the Board of Directors in May 2013. However, on November 4, 2015, the Board of Directors terminated the Old RSU Plan and replaced it with the New RSU & PSU Plan (as defined hereinafter), thus no additional RSUs shall be credited to the accounts of participants under the Old RSU Plan. Only previously granted RSUs shall continue to vest and be settled as per the terms of the Old RSU Plan. The Old RSU Plan enabled 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, 2015, the Company granted 276,000 RSUs (2014 – 281,000), 23,612 of RSUs were paid (2014 – 12,478) and 33,043 RSUs were cancelled (2014 – 124,127). As at December 31, 2015, 606,500 RSUs were outstanding (2014 – 387,155). Restricted Share Unit and Performance Share Unit Plan On November 4, 2015, the Company adopted a new Restricted Share Unit and Performance Share Unit (“PSU”) Plan (the “New RSU & PSU Plan”) to replace the Old RSU Plan, for the purpose of enhancing the Company’s ability to attract and retain talented individuals to serve as employees, officers and executives of the Company and its affiliates and promoting a greater alignment of interests between such employees, officers and executives and the shareholders of the Company. The New RSU & PSU Plan enables the Company to award eligible participants: (i) phantom RSUs that vest no later than three years following the grant date; and (ii) phantom PSUs that vest after certain periods of time and subject to the achievement of certain performance criteria as determined by the Board of Directors. Such plan provides for the settlement of RSUs and PSUs through either cash or the issuance of common shares of the Company from treasury, for an amount equivalent to the volume weighted average of the trading price of the common shares of the Company on the TSX for the five trading days immediately preceding the applicable RSU vesting determination date or PSU vesting determination date. In the case of a participant’s termination by the Company for cause or as a result of a voluntary resignation by the participant before the end of a performance cycle, all RSUs and PSUs will be cancelled immediately as of the date on which the participant is advised of his termination or resigns. In the case of a participant’s termination by the Company other than for cause, if such participant is deemed to be on long-term disability or if such participant retires before the end of a performance cycle, the number of RSUs which will vest at such event will be pro-rated based on the number of months worked at the end of the performance cycle and all PSUs will be cancelled immediately. 5N PLUS + 2015 ANNUAL REPORT 59 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In the case of a participant’s death before the end of a performance cycle, the number of RSUs which will vest will be pro-rated based on the number of months worked at the end of the fiscal year preceding the participant’s death and all PSUs will be cancelled immediately. The maximum number of common shares which may be issued under the New RSU & PSU Plan is 5,000,000. Common shares in respect of RSUs or PSUs to be settled through the issuance of common shares but that have been forfeited, cancelled or settled in cash shall be available for RSUs or PSUs to be granted thereafter pursuant to this plan. No RSUs or PSUs to be settled through the issuance of common shares may be granted to any participant unless the number of common shares: (a) issued to "Insiders" within any one-year period; and (b) issuable to "Insiders" at any time, under the plan, or when combined with all of the Company’s other security-based compensation arrangements, could not exceed 10% of the total number of issued and outstanding common shares, respectively. For the year ended December 31, 2015, no RSU and PSU under the New RSU & PSU Plan were outstanding. Stock Appreciation Rights Plan On June 7, 2010, the Company adopted a Restricted Share Unit for Foreign Employees Plan (the “RSUFE Plan”) which was slightly amended on November 7, 2012 by the Company to become the Stock Appreciation Rights plan (the “SAR Plan”) which replaced the RSUFE Plan. The SAR Plan enables the Company to award eligible participants phantom stock options to foreign directors, officers and employees. SARs usually have a six year term and vest equally over a four-year period at an annual rate of 25% per year beginning one year following the SARs grant date. The amount of cash payout is equal to the sum of the positive differences between the volume weighted average trading price of the common shares of the Company on the TSX in the last twenty (20) trading days immediately preceding the exercise date and the grant price of each SAR redeemed. 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, 2015, the Company granted 120,000 SARs (2014 – 230,000), nil of SARs were paid (2014 – 48,197) and 7,970 SARs were cancelled (2014 – 80,000). As at December 31, 2015, 329,670 SARs were outstanding (2014 – 217,640). Deferred Share Unit Plan On May 7, 2014, the Company adopted a Deferred Share Unit (“DSU”) Plan (the “DSU Plan”) which enables the Company to provide Board directors and key officers and employees designated by the Board with phantom share units to enhance the Company’s ability to attract and retain individuals with the right combination of skills and experience to serve on the Company’s Board or as Company’s executives. DSUs vest entirely at their date of grant and become payable in cash upon termination of services of a director, designated officer or employee with the Company. The amount of cash payout is equal to the volume weighted average trading price of the common shares of the Company on the TSX of the twenty (20) trading days immediately preceding the date of payment of the DSU. For the year ended December 31, 2015, the Company granted 272,343 DSUs (2014 – 122,878 DSUs) and 17,500 DSUs were paid (2014 – nil). As at December 31, 2015, 377,721 DSUs (2014 – 122,878 DSUs) were outstanding. The following table presents information concerning all outstanding stock options: 2015 Weighted average exercise price CA$ 4.21 2.40 3.24 - 5.45 3.74 4.08 Number of options 1,702,100 232,000 (75,755) - (300,000) 1,558,345 1,024,324 2014 Weighted average exercise price CA$ 4.19 3.99 4.16 2.46 7.80 4.21 4.37 Number of options 1,637,951 352,000 (206,463) (71,388) (10,000) 1,702,100 1,192,918 Outstanding, beginning of year Granted Cancelled Exercised Expired Outstanding, end of year Exercisable, end of year 60 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The outstanding stock options as at December 31, 2015 are as follows: Maturity June 2016 June and September 2017 April and November 2018 May 2019 March to August 2020 March 2021 Exercise price High CA$ 4.91 8.64 3.61 2.20 4.29 2.40 Low CA$ 4.87 8.50 2.22 2.20 3.33 2.40 Number of options 142,697 211,401 301,497 368,750 312,000 222,000 1,558,345 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 average measurement of the fair values of the stock options at the grant date granted during the years ended December 31, 2015 and 2014: Expected stock price volatility Dividend Risk-free interest rate Expected option life Fair value – weighted average of options issued 2015 40% None 0.74% 4 years CA$0.75 2014 60% None 1.33% 4 years CA$1.88 The following table shows the share-based compensation expense recorded in the consolidated statements of earnings for the years ended December 31, 2015 and 2014: Expense Stock options SARs RSUs DSUs Total 2015 $ 165 (27) 28 234 400 2014 $ 237 26 144 261 668 The following table shows the carrying amount and the intrinsic value of the share-based compensation liabilities: Liability SARs RSUs DSUs Total 2015 $ 36 259 417 712 2014 $ 74 313 261 648 5N PLUS + 2015 ANNUAL REPORT 61 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 23 – 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: No later than 1 year Later than 1 year but no later than 5 years Later than 5 years Total 2015 $ 2,289 2,479 364 5,132 2014 $ 2,881 4,133 967 7,981 As at December 31, 2015, in the normal course of business, the Company contracted letters of credit for an amount of up to $502 (2014 – $439). 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. NOTE 24 – RELATED PARTY TRANSACTIONS The Company’s related parties are its joint ventures, 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 settled in cash. As at December 31, 2015, the Company has accounts receivable from Zhuhai of $831 (Note 5). As at December 31, 2014, the Company had a note receivable from Ingal of $3,259 (€2,684) for which an allowance for a doubtful note receivable was recorded in 2015 (Notes 10 and 27). Ingal, a 50% joint venture, supplies gallium metal to other companies of the group. During the year ended December 31, 2015, the Company purchased $2,634 worth of gallium from Ingal (2014 – $2,790). 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: 2015 $ 3,048 400 3,448 2014 $ 5,162 652 5,814 Wages and salaries Share-based compensation Total 62 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 – FINANCIAL RISK MANAGEMENT In the normal course of operations, the Company is exposed to various financial risks. These risk factors include market risk (foreign 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 or the value of financial instruments. The objective of market risk management is to mitigate exposures within acceptable limits, while maximizing returns. (i) Foreign currency risk Foreign currency risk is defined as the Company’s exposure to a gain or a loss in the value of its financial instruments as a result of fluctuations in foreign exchange rates. The Company is exposed to foreign exchange rate variability primarily in relation to certain sale commitments, expected purchase transactions and debt denominated in a foreign currency. In addition, these operations have exposure to foreign exchange rates primarily through cash and cash equivalents and other working capital accounts denominated in currencies other than their functional currencies. The following table summarizes in US dollar equivalents the Company’s major currency exposures as at December 31, 2015: Cash and cash equivalents Accounts receivable Trade and accrued liabilities Long-term debt Net financial assets (liabilities) CA$ $ 355 480 (5,798) (420) (5,383) EUR $ 3,894 8,330 (7,902) (52) 4,270 GBP $ 401 4 (1,065) - (660) RMB $ 878 7,789 (6,006) - 2,661 2015 Other $ 131 449 (674) - (94) 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, 2015 for the Company’s financial instruments denominated in non-functional currencies: 1% Strengthening Earnings before tax 1% Weakening Earnings before tax CA$ $ (54) 54 EUR $ GBP $ RMB $ Other $ 43 (43) (7) 7 27 (27) (1) 1 On December 7, 2015, the Company entered into a cross-currency swap to hedge cash flows under the CA$ convertible debentures. In addition, the Company will occasionally enter into foreign exchange forward contracts to sell US dollars in exchange for Canadian dollars and Euros. 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 are incurred in Canadian dollars and Euros. The Company may also enter into foreign exchange contracts to sell Euros for US dollars. 5N PLUS + 2015 ANNUAL REPORT 63 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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’s policy is to limit its exposure to interest rate risk fluctuation by ensuring that a reasonable portion of its bank advance, long-term debt and convertible debentures are at fixed rate. The Company is exposed to interest rate fluctuations on its revolving credit facility, which bears a floating interest rate. A 1% increase/decrease in interest rates would not have a significant impact on the Company’s net earnings. (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. Credit risk Credit risk refers to the possibility that a customer or counterparty will fail to fulfill its obligations under a contract and, as a result, create a financial loss for the Company. The Company has a credit policy that defines standard credit practice. This policy dictates that all new customer accounts be reviewed prior to approval and establishes the maximum amount of credit exposure per customer. The creditworthiness and financial well-being of the customer are monitored on an ongoing basis. The Company establishes an allowance for doubtful accounts as determined by management based on its assessment of collection; therefore, the carrying amount of accounts receivable generally represents the maximum credit exposure. As at December 31, 2015 and 2014, the Company has an allowance for doubtful accounts of $488 and $104 respectively. The provision for doubtful accounts, if any, is included in selling, general and administrative expenses in the consolidated statement of (loss) earnings, 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, 2015, 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 Total 2015 $ 7,181 917 8,098 The following table summarizes the changes in the allowance for doubtful accounts for trade receivables: Beginning of year Provision for impairment Unused amounts reversed End of year 2015 $ 104 453 (69) 488 2014 $ 23,174 738 23,912 2014 $ 218 - (114) 104 Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. 64 5N PLUS + 2015 ANNUAL REPORT 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The following table reflects the contractual maturity of the Company’s financial liabilities as at December 31, 2015: Carrying amount $ 38,744 1,947 40,288 14,939 95,918 1 year $ 38,744 534 3,170 - 42,448 2-3 years $ - 1,671 3,170 16,585 21,426 4-5 years $ - 17 50,474 - 50,491 2015 Total $ 38,744 2,222 56,814 16,585 114,365 Trade and accrued liabilities Long-term debt Convertible debentures Long-term payable (included in other liabilities) Total NOTE 26 – 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, long-term debt, convertible debentures and cross-currency swap in the consolidated statement of financial position) less cash and cash equivalents and restricted cash. Total equity is the equity attributable to equity holders of 5N Plus Inc. in the consolidated statement of financial position. Debt-to-equity ratios as at December 31, 2015 and 2014 are as follows: Bank indebtedness Long-term debt including current portion Convertible debentures Cross-currency swap (Note 17) Total debt Less: Cash and cash equivalents, and restricted cash Net debt Shareholders’ equity Debt-to-equity ratio 2015 $ - 1,947 40,288 1,443 43,678 (8,816) 34,862 96,632 36% 2014 $ 975 51,823 46,101 - 98,899 (14,892) 84,007 196,443 43% 5N PLUS + 2015 ANNUAL REPORT 65 5N PLUS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 27 – EXPENSES BY NATURE Expenses by nature Wages and salaries(1) Share-based compensation expense (Note 22) Depreciation of property, plant and equipment and amortization of intangible assets (Notes 7 and 8) Amortization of other assets Research and development, net of tax credit Litigation and restructuring costs Impairment of inventories (Note 6) Allowance for a doubtful note receivable from a related party (Note 10) (1) Includes gain on foreign exchange forward contracts related to US$/CA$ (Note 17) 2015 $ 39,942 400 27,166 1,331 2,671 3,453 58,327 2,991 2014 $ 41,200 668 11,148 732 3,343 1,952 5,251 - 66 5N PLUS + 2015 ANNUAL REPORT STOCK EXCHANGE 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 The annual shareholders meeting will be held on Wednesday, May 4, 2016 at 10:00 a.m. Club Saint-James 1145 Union Avenue Montreal, Quebec For more information, please contact: 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 5N Plus inc. 4385, rue Garand Montréal (Québec) H4R 2B4 Aussi disponible à l’adresse : www.5nplus.com 100% Printed in Canada Corporate Information5N Plus Inc. 4385 Garand Street Montreal, Quebec H4R 2B4 Canada www.5nplus.com 

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