5N Plus Annual Report 2016

Plain-text annual report

ENABLING TECHNOLOGY’S PERFORMANCE REPORT“ 2016 ANNUAL Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/Human Resources/Finance/Eco-Friendly Materials /Electronic Materials/Recycling, Refining and R&D/HumanMessage to Shareholders 1 Q&A with Arjang J. (AJ) Roshan 4 Mission & Vision 6 Human Resources 7 Finance 8 Eco-Friendly Materials 9 Electronic Materials 10 Recycling, Refining and R&D 12 Our Footprint 13 Our Specialty Products 14 s t n e t n o c Dear Shareholders, On February 24, 2016 — just nine days after I took over the helm as President & CEO of 5N Plus — we announced financial results for fiscal year 2015, with adjusted EBITDA of $4 million and operating losses of $88 million. Nearly one year later, on February 21, 2017, the Company announced financial results for fiscal year 2016, with adjusted EBITDA of $20.1 million and operating earnings of $3.4 million. Clearly, 5N Plus is moving in the right direction and, while we’re pleased with these results, we also believe there is a great deal more to achieve. Prior to joining 5N Plus, I knew the Company well, as 5N Plus and my former employer collaborated and competed in various markets. This kind of “co-opetition” is not unusual in the world of specialty metals and chemicals. Through this conduit I was able to develop an appreciation for 5N Plus. What impressed me most was the Company’s reach in various markets and positive customer sentiments for 5N Plus products, technologies and services. At the same time, the Company demonstrated a strong commitment to the highest standards of corporate responsibility. When I decided to join 5N Plus, I knew the Company was Challenge 1 going through some heavy weather. However, given my Mitigating the impact of price volatility familiarity with its pedigree and people, I also knew that Ever since the acquisition of MCP Group, 5N Plus has been sound leadership and execution, together with a solid operating a portfolio of businesses with a single focus: strategy, would get 5N Plus through the storm. Indeed, to retain market share through a collection of assets I firmly believed the Company’s best days were still ahead. stretched around the world. This required us to maintain Weathering the storm Given my confidence in 5N Plus’ fundamentals, and despite a challenging 2015, two noteworthy questions remained: where would we focus our efforts in 2016, and what would their impact be? I believe we’ve begun to answer these questions. By choosing to address three key challenges, senior management initiated a positive momentum shift in 2016. numerous months of metal inventory across the value chain. We therefore remained highly exposed to price fluctuations. While some exposure is unavoidable in our industry, the challenge was to significantly reduce bottom line volatility. My team ramped up a number of initiatives across our business units and, by the end of 2016, we had successfully reduced metal inventory by nearly 20%. In addition, we hedged a number of highly exposed downstream contracts to eliminate much of their metal-related risks. And we collaborated with business partners throughout the year to restructure a number of contracts. This yielded benefits for both parties, particularly by increasing our flexibility to further reduce earnings volatility. ANNUAL REPORT 2016 • 5N PLUS • 01Gross Margin (%) 22.4% -7.2% 2015 2016 Challenge 2 Increasing selectivity in our businesses The past year also saw us review the viability of demand for our downstream products. Comparing sales volumes across several businesses, we observed only a marginal variance in demand between a record year (2014) and a challenging one (2015). Our analysis clearly showed high variability in pricing power across our product portfolio. And so we questioned whether market share retention was the right posture for 5N Plus and whether greater The results followed: in 2016, gross margins were 22.4%, as compared to negative margins in 2015. While stable metal prices contributed significantly to these numbers, a notable portion came from selectivity and active portfolio management. Challenge 3 Optimizing our assets In 2016, we also launched formal assessments of production yields, capacity utilization, capital management, and value chain optimization — each a critical success factor in our industry. This exercise prompted us to close a jointly owned manufacturing facility in Germany and an office in France. We also consolidated production from Wellingborough, U.K. and Madison, U.S. to other sites. Moreover, given the Company’s investments in recent years, we reduced future capital expenditure and began to harvest past investments. This enabled us to close the year with capital investment at less than half of the annual rate of depreciation and well below the past several years’. Last but not least, we succeeded in improving production yields across selectivity, balancing market share against margin a number of downstream products. management, might be a better course. Digging deeper, we found that in certain sectors, especially those associated with bulk metal and low value-added activity, 5N Plus was not well positioned and therefore All these efforts culminated in cost reductions of 3% and a reduction of net working capital by more than 15 days. At the end of 2016, average return on capital employed (ROCE) stood at 3% in comparison struggled to generate returns. Conversely, 5N Plus clearly to –47.5% in 2015. We believe we can significantly differentiated itself and delivered higher returns in sectors improve ROCE in the near future. characterized by greater complexity and value-added activities. Armed with these insights, we took immediate action. In sectors contributing little to our bottom line, and where a viable path to profitability was unlikely, we reduced efforts to win market share. However, in sectors where 5N Plus did differentiate itself and was underrepresented, we took aggressive action to increase penetration. Arjang J. (AJ) Roshan President and Chief Executive Officer Luc Bertrand Chairman of the Board 02 • 5N PLUS • ANNUAL REPORT 2016After the storm: looking to the future Sustainable development remains critical Shortly after joining the Company, I began working with The Company’s performance with respect to sustainable my team on a multi-year strategic plan designed to development remains a priority for my management team. not only address recovery, but to also improve the stability This is another area where 5N Plus has earned a favorable and diversity of our earnings. Ultimately, our mission is reputation. As the new CEO, I am committed to ensuring to develop and execute a compelling plan that generates our Company continues to build on the previous healthy growth in profits while strengthening the trust management’s positive results. To cite just one example, shareholders, employees and other stakeholders place over the past several years 5N Plus has continued to in 5N Plus’ management. improve its performance with respect to Health, Safety In September, we communicated our plan — “5N21” — and began to execute it. The principal thrust of 5N21 is and the Environment (HS&E), and the past year was no exception. to selectively extract value along the current value chain Encouraging prospects ahead while also addressing emerging opportunities based on existing and non-organic competencies compatible with our corporate DNA. My management team and I are energized and encouraged by the Company’s performance in 2016. Nevertheless, we believe there is much more to achieve. Over the past In the short term, we expect the lion’s share of the plan’s year, I’ve had the opportunity to meet many of our investors value generation will come from existing businesses. In the mid-term, our efforts to selectively grow upstream and one of their most interesting questions concerns our business’s complexity and the challenge of managing so business will further enhance bottom line performance and contribute to reducing earnings volatility. And, as 5N21 continues to mature, we expect more bottom line contributions from growth activities and greater diversification in our earnings potential. OPEX Excluding Depreciation and Amortization (in thousands of USD) $103,070 $82,885 $80,358 2014 2015 2016 many moving parts. While this can be intimidating for some, I confess that I see it as a great source of opportunity. This is why I continue to believe in our mission. In a world of nearly instantaneous access to knowledge, where a competitive edge is often measured by the gap in how quickly you master complexity, ambiguity is an asset rather than a liability. With 5N21, our Company is embracing these attributes whenever they can be leveraged to competitive advantage. I would like to thank our shareholders, customers, suppliers and other stakeholders for the trust they’ve placed in 5N Plus. I would also like to thank our dedicated men and women for their contributions over the past year. I look forward to working with you to further enhance our performance over the next twelve months. Signed, Arjang J. (AJ) Roshan President and Chief Executive Officer ANNUAL REPORT 2016 • 5N PLUS • 03In our industry, upstream business benefits from higher metal prices and downstream business from lower metal prices. 5N21 strategic plan is designed to generate competitive returns in either pricing regimes... we call this “hedging our P&L”. Q&A with Arjang J. (AJ) Roshan After a year on the job, what’s your overall impression of 5N Plus? Can you share some changes you’ve instituted since arriving? What’s the essence of the 5N21 strategic plan? 5N21 is built on the Company’s strengths. Some people mistakenly associate I’ll give you three. First, the Company It aims to grow earnings while reducing 5N Plus with mining and primary metal used to focus squarely on securing risk and volatility. Our business has two production. 5N Plus is not a mining market share, which resulted in some distinct parts. Upstream, where we use company. True, we use minor metals unprofitable businesses. By contrast, metallurgical technologies to extract as active ingredients in our products. our model now balances market share metals essential to our products from But we also employ technological against risk and bottom line feeds, by-products, concentrates and know-how to transform metals into performance. If any business falls wastes, and downstream, where we use specialty chemicals and materials. short, our model’s response ranges the valorized metals from upstream Within this context, I am impressed from a measured exit to setting clear to produce high-value materials for a host by 5N Plus’ ability to consistently milestones for repositioning and of industries. We aim to grow these satisfy the needs of its diverse delivering on targets. Second, we’re value-added activities and move further customers across many industries. focusing on growth sectors where we toward technologically complex sectors, Our outstanding reputation is can be profitable and where we’re which give us more pricing power and grounded in technological underrepresented. And third, while can be entry barriers to competitors. development, customer intimacy and 5N Plus was good at innovation, it was In this bimodal approach, upstream corporate responsibility. Historically, less successful at monetizing its business benefits from higher metal there were challenges in translating advances. Our development is now prices and downstream business from these benefits into bottom line more sharply focused on fewer and lower prices. 5N21 strategic plan is performance. That’s what our 5N21 more strategic activities. We promote designed to generate competitive returns strategic plan is designed to do. cross-collaboration between technical in either pricing regimes... we call this and commercial teams to deliver not “hedging our P&L”. just technological success but also commercial triumph. 04 • 5N PLUS • ANNUAL REPORT 2016“ I find the process of taking challenged companies with sound DNA along a recovery path, and having them emerge healthy and profitable, extremely rewarding. In my experience, two ingredients are a must: the right people and the right organizational chemistry. We have both. ” Where do you see future growth coming from? Given the bimodal approach I just described, we see the biggest How will you balance management goals and shareholder expectations? Where do you expect 5N Plus to be in five years? 5N21 strategic plan provides some key financial figures for 2021, along with opportunities will come from One way is by aligning interests. guidance for two milestone years, 2017 upstream businesses, where we This is easier said than done, so maybe and 2019. Our mission is clear: to be already have most of the the balance is best achieved in relative our customers’ preferred partner; to be competencies we need. Downstream, terms. That being said, I believe our employees’ preferred employer, as we see growth opportunities in management’s actions can help to measured by their motivation and specialty semiconductor and prevent large gaps from developing. contribution; and to be trusted by electronic materials. Our unique The 12% ROCE for measuring our shareholders, as measured by their capabilities also give us an edge in performance is one example. I believe desire to participate in our future. By health care, “Internet of things,” it better aligns with shareholder 2021, if we’re able to deliver on this security and surveillance. Highly interests. We’re exercising greater mission, double our earnings and regulated and hyper-quality focused discipline and scrutiny to vet deliver 15% ROCE (assuming constant industries such as the dietary and opportunities for true value creation metal prices), I can declare that we’ve pharmaceutical sectors also align and better integration. Ultimately, the met our goals. with our DNA. Finally, we’re new management team needs to build leveraging our technologies and a track record with shareholders based know-how to seize opportunities on consistent and competitive results in electronic packaging. We’ve set relative to our industry. We’re 12% as the minimum ROCE, committed to doing exactly that. to evaluate every project and growth activity. ANNUAL REPORT 2016 • 5N PLUS • 05Meet the new team We asked the new 5N Plus management team to reflect on the challenges ahead and how the new strategic plan, 5N21, will serve shareholders. Mission Vision As a leading global material As a leading global material technology company, our mission, technology company with each & everyday, is to earn and employees and assets throughout retain the privilege to be essential the world, we are determined to our customers, preferred by our to enable and empower our people employees and trusted among in a manner which inspires them our shareholders in a quest to to perform collectively at their best enable innovation & technology and optimize resource utilization deployment based on natural so as to deliver competitive resources for the betterment financial returns. of the human race. 06 • 5NP LUS • A N N UAL R EPO RT 2 016 “ As a new member of the leadership team, I had a chance during my first months at 5N Plus to tour our sites and offices. I met with leaders and employees around the globe so I could get to know our products, processes and — most important — the people that make us different. First impressions? Our people displayed tremendous pride as they explained — to a non-technical person like me — what they do and why it’s important. Human Resources ” Evelyne Bundock Vice President, Human Resourses Our people’s minds and passions are boundless Our people care about their jobs. Their dedication to meeting customer expectations is immediately evident. > At 5N Plus, we have attracted many of the industry’s smartest and most skilled people, who work collaboratively to deliver value to our customers. So where does HR fit in to help them do a better job? > In my view, Human Resource Management is more than payroll, benefits and labour relations — although these are A plan for the future At the close of my first 90 days with 5N Plus, my executive colleagues and I have established four areas of focus for HR: > Engagement: Continue to strengthen employee engagement so our people are not only thriving in their jobs, but are also actively engaged to build our future. > Leadership development: Give current and potential leaders the tools for success, including management and coaching skills. > Talent management: Implement best practices to ensure a continuous supply of expertise and know-how in key positions. > Systems: Update HR systems to support the requirements of our strategic plan 5N21, and, more broadly, support 5N Plus’ growing business and global footprint. Our pledge Together with HR representatives from important. Our added value is across our sites, we commit to supporting our leaders and employees supporting our leaders and employees so they can grow and thrive so they can meet their goals, realize in an ever-changing environment. their potential and, ultimately, benefit Ultimately, this is good for the our clients and shareholders. employee professionally and good for the customer as well as shareholder. ANNUAL REPORT 2016 • 5N PLUS • 07“ As CFO, my job is to prepare our Company for the future — a future where the dynamics are different. This is why we’ve built a new business model based on generating shareholder value independent of metal price fluctuations. 2016 demonstrated the dynamism of 5N Plus. Despite the collapse of the Fanya Metals Exchange, we emerged with enhanced profitability and a solid balance sheet. ” Creating opportunities to succeed What gives me confidence in 5N21? It doesn’t rely on improved market conditions. Instead, it’s a series of internal actions that create value and mitigate volatility. > We therefore remain vigilant in spotting downstream and upstream growth opportunities. And we’re investing purposefully to move our products up the value chain. > Equally important, our global leadership is eager to effect change. While maintaining technical excellence is essential, we’re now also bringing on board resources to re-energize the organization, promote creativity and business success. Richard Perron Chief Financial Officer Finance Looking forward reveals opportunities During the past year, we achieved a How Finance is contributing to 5N21 Today’s markets reward only efficient number of milestones on our five-year growth, which means simultaneously plan, 5N21. We continue to right-size our growing revenues, margins and earnings. footprint, intensify cost controls and To deliver on this, my team is providing reposition operations to outperform broader perspectives and greater competitors. > We also posted improved earnings. A solid balance sheet allows us downstream visibility to navigate the future and meet profit and cash flow to keep options open for financing M&A projects, and we’re sufficiently liquid to targets. > Investors are clearly looking for fair returns and a measure of execute our footprint optimization. > Operationally, we’re now more selective, predictability. My team is providing the tools, methods and expertise to further favouring continuous improvement and improve business analytics, inspire others strategic capital expenditures over and support our mission. production volume. Our improved product mix has already yielded financial dividends and will be stepped up in 2017. Net Debt (in millions of USD) 261 137 84 58 35 DEC 2011 DEC 2012 DEC 2013 DEC 2014 DEC 2015 19 DEC 2016 08 • 5N PLUS • ANNUAL REPORT 2016Paul Tancell Executive Vice President, Eco-Friendly Materials “ When our CEO, Arjang Roshan, asked me to lead the Eco-Friendly Materials Business Unit, I was delighted to accept. 5N Plus was hardly unknown to me. The Company is a recognized world leader in this market segment. So naturally I felt privileged to be offered the opportunity to work with an exceptional global team. ” Eco-Friendly Materials My first priorities 5N21 lays out some clear goals for Implementing 5N21 The Eco-Friendly Materials business unit Eco-Friendly Materials. Foremost is is a market leader in its sector. We’re the strengthening our core business and supplier of choice for many customers, developing new, profitable growth with an excellent reputation for product initiatives. My immediate priority is to quality and service. This gives us a solid therefore develop a sound and achievable base from which to build in support of path that delivers on these objectives. > This will require input from the global 5N21’s goals. > Within our business unit this means focusing on areas where we team and I will therefore be travelling can truly differentiate ourselves. In the extensively to meet as many team pharmaceutical market, for example, members as possible. My job during 5N Plus is already a leading supplier of these visits is to listen, learn and become active ingredients. We will seek to build better acquainted with our people and business. At the same time I expect to on this position. > Looking ahead, we will work to deliver quality growth in this and challenge and, hopefully, bring new other regulated markets, where the perspectives to our discussions. barriers to entry for competitors are high and where we offer unique know-how and dedication to our customers. The Eco-Friendly Materials Business Unit largely markets bismuth, selenium ad low melting point alloys. We’re the world’s leading supplier of bismuth and bismuth chemicals, with a market share of over 60%. ANNUAL REPORT 2016 • 5N PLUS • 09 Electronic Materials “ In my new leadership role in Electronic Materials, I will continue to reorient the business according to fundamentals set out in 5N21, our five-year strategic plan. My team and I will build on targeted areas of strength, which include 5N Plus’ reputation, our unique global network, competencies and unrivalled leadership in select sectors. ” Micro Powders for electronic packaging In recent years, 5N Plus acquired and developed a potentially disruptive gas atomization technology. With two manufacturing lines in Montreal, our Micro Powders group is well positioned to enable the high-volume commercialization of metallic powders in the sub-25-micron range. > As we focus on validating this technology, we’re building partnerships with customers in the fast-moving electronics packaging market who demand ever-greater miniaturization. > This represents a strong opportunity to diversify earnings in the latter half of our strategic plan. Nicholas Audet Executive Vice President, Electronic Materials 10 • 5N PLUS • ANNUAL REPORT 2016Sunny days ahead for 5N Plus Semiconductors We’ve made great strides in our semiconductors business, positioning us to make a strong contribution to 5N21. With our unique expertise, tools and processes, we possess unmatched capabilities in high-performance materials and engineered substrates. > Customers ranging from defence and national security to space and medical imaging recognize our know-how, innovation and products worldwide. > Indeed, over the years we’ve built relationships of trust with various government agencies and will work to blossom these partnerships into supplying critical materials and technologies for their specific needs. Looking forward By optimizing our manufacturing footprint, we will more closely match assets to strategy. This will deliver cost competitiveness and operational agility, so we can rapidly respond to emerging opportunities. > Recognizing the need to diversify revenue and profit streams, we continue to promote two key growth initiatives — 5N Plus Semiconductors and 5N Plus Micro Powders. > We’re also gaining a deeper understanding of customer needs to ensure a more robust product pipeline and bottom line. > Finally, I’d like to note the pride I take in our Heath, Safety & Environmental track record, and that I am committed to sustaining these achievements for years to come. The Electronic Materials Business Unit sells high-purity metals and compounds to electronics manufacturers, who make solar cells, LEDs, wireless devices, detectors and other products. We are the leading supplier of tellurium-based products to solar cell makers. ANNUAL REPORT 2016 • 5N PLUS • 11A robust value proposition The 5N Plus value proposition in this area Assets are already in place Recycling and Refining support both our is to utilize technology in order to Electronic and Eco-Friendly businesses, transform waste streams into revenue and the assets are already in place to streams, while adequately addressing profitably grow this business within these environmental concerns. > In line with 5N21, we expect our renewed focus on segments. A combination of operational and commercial experts along with a Recycling & Refining to generate dedicated plant in Laos and support from better-balanced contributions between corporate R&D serve as the backbone of upstream and downstream activities. this activity. > By strategically deploying these assets, and adding several processing units, we will significantly enhance our flexibility and contribution to 5N21, processing a wider range of raw materials and thereby broadening and enhancing our offer to customers. Recycling, Refining and R&D R&D powers higher returns and growth As a successful technology company, our know-how has enabled commercial successes. > We benefit from a centralized R&D facility in Montreal, which employs highly skilled technical experts in key disciplines. We also deploy targeted R&D efforts supported by our R&D teams in St. George, Utah (U.S.) and Lubeck (Germany), which focus on dedicated themes within our two business segments. > This structure along with our advanced expertise gives us a competitive edge and speed-to- market, which are clear enablers in our commitment to 5N21. “ Embarking on our five-year strategic plan, 5N21, we fully intend to ramp up Recycling & Refining into a core business. We believe this will enhance our access to critical metals, reduce our exposure to metal price volatility and lower costs. ” Pascal Coursol Vice President, Recycling, Refining and Corporate R&D 12 • 5N PLUS • ANNUAL REPORT 2016Our Footprint With multiple facilities on three continents, 5N Plus is strategically situated close to resources, suppliers and customers. Our growing Asian presence includes minor metal recovery facilities in Laos and Malaysia; a bismuth chemicals manufacturing facility and an ultra-high purity gallium processing facility in China; and a partnership in South Korea for gallium chemicals production. We’re a reliable link in any supply chain. MANUFACTURING FACILITIES IN NORTH AMERICA, EUROPE AND ASIA EMPLOYEES ON THREE CONTINENTS SALES OFFICES AROUND THE WORLD ANNUAL REPORT 2016 • 5NPLUS • 13Antimony Bismuth Cadmium Sulfide Indium Sulphate Cadmium Telluride Indium Trichloride Bismuth Beta Resorcylate Cadmium Zinc Telluride Lead Chloride Bismuth Citrate Cobalt Nitrate Bismuth Hydroxide Cobalt Oxide Lead Nitrate Lithium Sulfide Bismuth Nitrate Solution Gallium Low Melting Point Alloys Bismuth Oxide Gallium Antimonide Nickel Nitrate Bismuth Oxychloride Gallium Nitrate Selenium Bismuth Sodium Tartrate Gallium Oxide Sodium Selenite Bismuth Subcarbonate Gallium Trichloride Tellurium Bismuth Subcitrate Germanium Tellurium Dioxide Bismuth Subgallate Germanium Dioxide Bismuth Subnitrate Indium Tin Zinc Bismuth Subsalicylate Indium Antimonide Zinc Selenite Bismuth Subsuccinate Indium Nitrate Zinc Telluride Cadmium Indium Oxide Visit www.5nplus.com for more details Our Specialty Products 14 • 5N P LU S • A N N UAL R EPO RT 2 016 MD&A + Consolidated Financial Statements + Notes Management’s Discussion and Analysis 16 Consolidated Financial Statements 38 Notes to Consolidated Financial Statements 46 Board of Directors & Executive Committee 85 Corporate Information 86 ANNUAL REPORT 2016 • 5NPLUS • 15Management’s Discussion and Analysis 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”, the “Group” 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, 2016. 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 21, 2017, 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 2016” and the “Q4 2015” refer to the three‐month periods ended December 31, 2016 and 2015 and the “FY 2016” and the “FY 2015” refer to the twelve‐month periods ended December 31, 2016 and 2015 respectively. All amounts in this MD&A are expressed in U.S. dollars, and all amounts in the tables are in thousands of U.S. dollars, unless otherwise indicated. All quarterly information disclosed in this MD&A is based on unaudited figures. 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 growth strategy, 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, international trade regulations, , 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 21, 2017. 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. 16 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [1] Management’s Discussion and Analysis 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. Reporting 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, compounds and wafers. 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. Vision and Strategy As a leading global material technology company with employees and assets throughout the world, we are determined to enable and empower our people in a manner which inspires them to perform collectively at their best and optimize resource utilization to deliver competitive financial returns. The Company unveiled its Strategic Plan 5N21 (“5N21”) designed to enhance profitability while reducing earnings volatility on September 12, 2016. 5N21 focuses on three major pillars: 1. Optimizing balance of contribution from upstream and downstream activities; 2. Extracting more value from core businesses and global asset; and 3. Delivering quality growth from both existing and future M&A opportunities. 1 See Non‐IFRS Measures 5N Plus Inc. [2] ANNUAL REPORT 2016 • 5N PLUS • 17 Management’s Discussion and Analysis Management’s Discussion and Analysis Highlights of Q4 2016 and Fiscal Year 2016 The Company completed a year with tangible results in numerous areas including reduction in operating expenses, in net debt and in net working capital1 including inventory, while bolstering the balance sheet and improving profit margins despite a challenging operating environment. In 2016, the Company launched various initiatives and achieved a number of milestones including concrete progress toward its renewed vision and strategic plan named 5N21.  Adjusted EBITDA1 and EBITDA1, reached $20.1 million and $15.1 million in fiscal year 2016, compared to $4.0 million and ($54.7) million in fiscal year 2015. The Adjusted EBITDA demonstrates improved profitability accommodated by moderately stable commodity prices, sustainable demand for most metals, and most importantly continued progress at improving the Company’s sales mix and reducing operating expenses.  On September 29, 2016, 5N Plus announced the consolidation of its operations at Wellingborough, United Kingdom and DeForest, Wisconsin, U.S.A. with other sites within the Group. The restructuring fees associated with these two initiatives along with the closure of redundant administrative offices, and the renegotiation of prior years’ unfavorable contracts negatively impacted the EBITDA for fiscal year 2016 by $5.9 million.  Adjusted EBITDA and EBITDA for the fourth quarter 2016 reached $4.3 million and $4.8 million compared to $0.7 million and ($26.0) million during the same period in 2015.  Revenue for fiscal year 2016 reached $231.5 million compared to $311.0 million for fiscal year 2015, impacted significantly by the decrease in the underlying commodity prices over the course of 2015, while gross margin1 for 2016 improved to 22.4% compared to a negative gross margin in 2015.  During the year 2016, net debt1 was further reduced to $19.0 million as at December 31, 2016 down from $34.9 million for the same period in 2015, positively impacted by working capital management and overall improvement in performance.  Backlog1 reached as at December 31, 2016, a level of 136 days of sales outstanding, lower than the previous quarter, resulting from restructuring of certain contracts to balance market share against profitability, as well as client activities associated with retooling and upgrading of their manufacturing footprint. Bookings in Q4 2016 reached 78 days compared to 77 days in Q3 2016 and 95 days in Q4 2015.  The Company does not expect any deviation to its most recent guidance for 2017 as per 5N21.  On January 11, 2016, Mr. Luc Bertrand was appointed as the new Chairman of the Company’s Board succeeding Mr. Jean‐ Marie Bourassa, who continues to serve on the Board and as Chair of the Audit & Risk Management Committee.  On October 5, 2016, 5N Plus announced that the Toronto Stock Exchange (“TSX”) approved 5N Plus normal course issuer bid under which, 5N Plus has the right to purchase for cancellation, from October 11, 2016 to October 10, 2017, a maximum of 600,000 common shares.  On February 20, 2017, 5N Plus announced changes to its executive management structure. Responsibilities assumed by the former functions of Chief Commercial Officer and Chief Operating Officer will be reallocated across the existing business segments (Eco‐Friendly and Electronic Materials). Mr. Nicholas Audet, formerly Chief Commercial Officer has been appointed Executive Vice President, Electronic Materials and Mr. Paul Tancell, formerly Global General Manager at Umicore, has joined 5N Plus and has been appointed Executive Vice President, Eco‐Friendly Materials. Mr. Bertrand Lessard, Chief Operating Officer of the Company since 2014, will be leaving 5N Plus to pursue other interests. 1 See Non‐IFRS Measures 18 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [3] Management’s Discussion and Analysis Management’s Discussion and Analysis After a difficult year in 2015, 2016 was a foundational year in the Company’s history. During the year, Management focused its efforts on realigning the overall cost structure, vetting investment opportunities, reducing inventory requirements, restructuring various contracts and reducing future volatility, especially due to metal prices. Furthermore, the Company adopted a new commercial approach aimed at balancing market share with quality of earnings. With the introduction of 5N21, the Company put more emphasis on growth initiatives and is invigorated by the tangible progress demonstrated by its results. The Company expects further enhancements in 2017 and as it continues to execute its plan. 5N Plus Inc. [4] ANNUAL REPORT 2016 • 5N PLUS • 19 Management’s Discussion and Analysis Management’s Discussion and Analysis Summary of Results Revenue Operating expenses* Adjusted EBITDA1 Impairment of inventory Allowance for a doubtful note receivable from a related party Litigation and restructuring costs 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 Earnings (loss) before income taxes Income tax expense (recovery) Current Deferred Net earnings (loss) Basic loss per share Diluted loss per share *Excluding litigation and restructuring costs and depreciation and amortization. Revenue by Segment and Gross Margin Q4 2016 $ 54,704 (50,373) 4,331 ‐ ‐ ‐ 14 458 4,803 1,851 2,120 832 (1,145) 1,819 674 158 $0.00 $0.00 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) 2016 $ 231,498 (211,387) 20,111 ‐ ‐ (5,945) 20 925 15,111 8,241 10,739 (3,869) 440 1,587 2,027 (5,896) ($0.07) ($0.07) Electronic Materials Eco‐Friendly Materials Total revenue Cost of sales Depreciation on property, plant and equipment (PPE) Gross margin1 Gross margin percentage1 Q4 2016 Q4 2015 Change $ 19,333 35,371 54,704 (44,802) 2,046 11,948 21.8% $ 18,833 40,534 59,367 (81,501) 7,317 (14,817) (25.0%) 3% (13%) (8%) (45%) (72%) 2016 $ 79,038 152,460 231,498 (190,037) 10,353 51,814 22.4% 2015 $ 104,265 206,747 311,012 (346,970) 13,635 (22,323) (7.2%) 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) Change (24%) (26%) (26%) (45%) (24%) During Q4 2016 and FY 2016, revenue decreased by 8% and 26% compared to the corresponding periods of 2015. These decreases were mainly due to an important decline in underlying commodity prices initiated over the course of 2015 in both segments. Although, sales volume was lower in FY 2016, gross margin1 has substantially improved reflecting the moderate price stability in metals supported by our selective approach focused on better margin products. The gross margin reached 22.4% in 2016 compared to a negative contribution in 2015. EBITDA and Adjusted EBITDA Electronic Materials Eco‐Friendly Materials Corporate Adjusted EBITDA1 EBITDA1 Q4 2016 Q4 2015 Change $ 5,111 2,544 (3,324) 4,331 4,803 $ 64 3,377 (2,767) 674 (26,000) 7,886% (25%) 20% 543% 2016 $ 19,824 13,467 (13,180) 20,111 15,111 2015 $ 10,740 2,839 (9,620) 3,959 (54,696) Change 85% 374% 37% 408% 1 See Non‐IFRS Measures 20 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [5] Management’s Discussion and Analysis Management’s Discussion and Analysis In Q4 2016, EBITDA1 reached $4.8 million compared to negative EBITDA of $26.0 million in Q4 2015. For Q4 2016, EBITDA margin1 was positively impacted by moderate price stability for most metals, resulting in no impairment charge on inventory. For the FY 2016, EBITDA reached $15.1 million compared to negative EBITDA of $54.7 million for FY 2015. In Q4 2015 and FY 2015, inventory impairment charges of $24.6 million and $58.3 million were recorded respectively which were mitigated by a foreign exchange gain of $0.3 million and $6.5 million recognized on the convertible debenture nominated in Canadian dollars which has been hedged by a cross‐currency swap contract since December 7, 2015. In Q4 2016, Adjusted EBITDA1 rose by $3.7 million to $4.3 million compared to $0.7 million in Q4 2015, driven by better realized margins and lower operating costs. Adjusted EBITDA for the Electronic Materials segment increased by $5.0 million to $5.1 million representing an Adjusted EBITDA margin of 26% compared to nil% for Q4 2015. Adjusted EBITDA for the Eco‐Friendly Materials segment decreased by $0.8 million to $2.5 million compared to $3.4 million in Q4 2015, for a similar Adjusted EBITDA margin1. The Adjusted EBITDA under Corporate for Q4 2016 compared to the same period of last year was impacted by lower other revenue of $0.2 million and higher short and long‐term incentive plans provision of $0.3 million following the appreciation of the Company share price and new issuance. For the same reasons mentioned above, Adjusted EBITDA for FY 2016 increased by $16.2 million to $20.1 million compared to $4.0 million for FY 2015. Adjusted EBITDA for the Electronic Materials segment increased by $9.1 million to $19.8 million representing an Adjusted EBITDA margin of 25% compared to 10% for the prior year. Adjusted EBITDA for the Eco‐Friendly Materials segment increased by $10.6 million to $13.5 million compared to $2.8 million in 2015. The Adjusted EBITDA under Corporate for FY 2016 decreased compared to FY 2015 due to recognition timing of R&D tax credits, as well as short and long‐term incentive plans provision. Proceeds from an insurance claim was recorded in Q2 2015 with no similar non‐recurring gain in FY 2016. Net Earnings (Loss) and Adjusted Net Earnings (Loss) Net earnings (loss) Basic loss per share Reconciling items: Impairment of inventory Accelerated amortization of intangibles assets Accelerated depreciation of tangible 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 earnings (loss)1 Basic adjusted net earnings (loss) per share1 Q4 2016 $ 158 $0.00 ‐ ‐ ‐ ‐ ‐ (14) 4 148 $0.00 Q4 2015 $ (42,615) ($0.51) 24,582 ‐ ‐ 544 2,953 ‐ 1,570 (12,966) ($0.15) 2016 $ (5,896) ($0.07) ‐ ‐ 1,804 ‐ 5,945 (20) 5 1,838 $0.02 2015 $ (97,201) ($1.16) 58,327 11,834 ‐ 2,991 3,453 (1,840) (4,779) (27,215) ($0.32) Net earnings reached $0.2 million in Q4 2016 compared to a net loss of $42.6 million in Q4 2015. In Q4 2016, Adjusted net earnings1 increased by $13.1 million and reached $0.1 million compared to Adjusted net loss1 of $13.0 million in Q4 2015. For Q4 2016, no significant items reconciling the Adjusted net earnings were identified. In FY 2016, net loss reached $5.9 million compared to $97.2 million in FY 2015. Adjusted net earnings increased by $29.1 million, from an Adjusted net loss of $27.2 million to an Adjusted net earnings of $1.8 million when compared to FY 2015. Excluding the income tax expense, the main items reconciling the Adjusted net earnings for FY 2016 were; the accelerated depreciation charge of tangible assets and the restructuring costs following the Company’s announcement in September 2016 to optimize its footprint as well as non‐recurring costs for the closure of an administrative office in Europe and the renegotiation of prior years unfavorable supply contracts. 1 See Non‐IFRS Measures 5N Plus Inc. [6] ANNUAL REPORT 2016 • 5N PLUS • 21 Management’s Discussion and Analysis Management’s Discussion and Analysis Inventory Impairment Charge Electronic Materials Eco‐Friendly Materials Total Q4 2016 Q4 2015 2016 $ ‐ ‐ ‐ $ 13,373 11,209 24,582 $ ‐ ‐ ‐ 2015 $ 29,989 28,338 58,327 Following the expected net realized value analysis as at December 31, 2016, no inventory impairment charge was recorded in Q4 2016 and FY 2016 compared to $24.6 million and $58.3 million recorded in Q4 and FY 2015 following the decline in commodity prices that impacted our industry during 2015. Bookings and Backlog Electronic Materials Eco‐Friendly Materials Total (number of days based on annualized revenues) * Electronic Materials Eco‐Friendly Materials Weighted average Q4 2016 $ 35,417 46,377 81,794 Q4 2016 167 120 136 BACKLOG1 Q3 2016 $ 40,929 49,046 89,975 BACKLOG1 Q3 2016 183 128 148 Q4 2015 Q4 2016 $ 47,225 55,714 102,939 $ 13,821 32,702 46,523 Q4 2015 Q4 2016 229 125 158 65 84 78 BOOKINGS1 Q3 2016 $ 11,570 35,281 46,851 BOOKINGS1 Q3 2016 52 92 77 Q4 2015 $ 11,093 50,645 61,738 Q4 2015 54 114 95 *Bookings and backlog are also presented in number of days to normalize the impact of commodity prices. Q4 2016 vs Q3 2016 Backlog1 reached as at December 31, 2016 a level of 136 days of sales outstanding, lower than previous quarter, resulting from restructuring of certain contracts to balance market share against profitability, as well as client activities associated with retooling and upgrading of their manufacturing footprint. The renewal pattern generally extends to the Q1. Backlog as at December 31, 2016, for the Electronic Materials segment represented 167 days of sales outstanding, a decrease of 16 days, or 9%, over the backlog ended September 30, 2016, explained by two good quarters in terms of shipments, especially for the Company’s solar sector. The backlog for the Eco‐Friendly Materials segment represented 120 days of annualized segment revenues, a decrease of 8 days or 6%, over the backlog of Q3 2016. Bookings1 for the Electronic Materials segment increased by 13 days compared to Q3 2016, higher than previous quarter also reflecting the renewal pattern of most contracts which generally occurs in the fourth quarter or the first quarter of the year. Bookings for the Eco‐Friendly Materials segment decreased by 8 days, from 92 days in Q3 2016 to 84 days in Q4 2016. Q4 2016 vs Q4 2015 Backlog as at December 31, 2016 for the Electronic Materials segment decreased by 62 days and by 5 days for the Eco‐Friendly Materials segment compared to December 31, 2015, resulting from our selective posture aimed at balancing market share against margin management, as well as recent announcement from a client to retrofit its operations. Bookings increased by 11 days for the Electronic Materials segment and decreased by 30 days for the Eco‐Friendly Materials segment compared to the previous year quarter. 1 See Non‐IFRS Measures 22 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [7] Management’s Discussion and Analysis 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 Income tax expense Total expenses Q4 2016 Q4 2015 $ 2,120 6,195 ‐ ‐ 1,379 674 10,368 $ 7,287 7,308 2,953 544 607 7,316 26,015 2016 $ 10,739 25,986 5,945 ‐ 7,296 2,027 51,993 2015 $ 27,166 28,494 3,453 2,991 2,851 6,372 71,327 Depreciation and Amortization Depreciation and amortization expenses in Q4 2016 and FY 2016 amounted to $2.1 million and $10.7 million respectively, compared to $7.3 million and $27.2 million for the same periods of 2015. The decrease in FY 2016 is mainly attributable to an accelerated amortization charge of selected intangible assets of $11.8 million recorded in the quarter ended June 30, 2015 compared to $1.8 million following the announcement in September 2016 of the Company’s decision to optimize its footprint. SG&A For Q4 2016 and FY 2016, SG&A expenses were $6.2 million and $26.0 million respectively, compared to $7.3 million and $28.5 million for the same periods of 2015. Variation is mostly explained by lower wages and other expenses as well as favourable exchange rates across most local currency denominated expenses in FY 2016. Litigation and Restructuring Costs The Company recorded a provision for litigation and restructuring costs of $5.9 million in FY 2016 compared to $3.0 million and $3.5 million, in Q4 2015 and FY 2015 respectively. Following the Company’s announcement to consolidate its operations at Wellingborough, U.K. with other sites within the Group, and its operations at DeForest, Wisconsin, U.S.A. and Fairfield, Connecticut, U.S.A. during the first half of 2017 into a newly updated and scaled facility, the Company recorded restructuring and severance costs and other facility closure costs of $3.5 million during the quarter ended September 30, 2016. The Company also recorded in the quarter ended September 30, 2016, litigation costs of $1.0 million following initiatives to renegotiate unfavourable purchasing contracts. In addition, in the quarter ended March 31, 2016, the Company recorded non‐recurring costs of $1.0 million for the closure of an administrative office in Europe as well as for the settlement of unfavorable supply contracts. In FY 2015, the Company recorded litigation and restructuring costs as provision following initiatives to reduce its operating expenses and renegotiate unfavourable purchase contracts. Allowance for a Doubtful Note Receivable from a Related Party No allowance for a doubtful note receivable from a related party was recorded in FY 2016. In FY 2015, the Company assessed that under the gallium low‐market price, its note receivable from Ingal Stade GmBh, a 50% joint venture, was 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 million respectively for Q4 2015 and FY 2015. On December 31, 2016, following the closure of its manufacturing activities earlier this year, Ingal sold its assets. Financial Expenses and Revenues Financial expenses for Q4 2016 amounted to $1.4 million compared to $0.6 million for the same period last year. The increase in financial expenses of $0.8 million is mainly due to lower unrealized foreign exchange and derivative gain. The full value of the convertible debenture is covered by a cross‐currency swap contract and accounted for as a cash flow hedge since December 7, 2015. Financial expenses for FY 2016 amounted to $7.3 million compared to $2.9 million for the same period last year. The increase in financial expenses of $4.4 million is mainly due to a lower gain related the fair value of the debenture conversion option and by lower unrealized foreign exchange and derivative gain partially mitigated by lower interest on long‐term debt. 5N Plus Inc. [8] ANNUAL REPORT 2016 • 5N PLUS • 23 Management’s Discussion and Analysis Management’s Discussion and Analysis Income Taxes The Company reported net earnings before income taxes of $0.8 million in Q4 2016 and net loss before income taxes of $3.9 million in FY 2016. Income tax expense for Q4 2016 and FY 2016 were $0.7 million and $2.0 million respectively, compared to $7.3 million and $6.4 million for the same periods last year. The Income tax expense for Q4 2016 and FY 2016 was unfavorably impacted since the Company does not record the benefit of the tax losses incurred during the year in certain jurisdictions. Liquidity and Capital Resources Funds from (used in) operations1 Net changes in non‐cash working capital items Operating activities Investing activities Financing activities Effect of foreign exchange rate changes on cash and cash equivalents related to operations Net increase (decrease) in cash and cash equivalents Q4 2016 $ 5,256 (2,048) 3,208 (2,882) 946 (218) 1,054 Q4 2015 $ (5,734) 21,866 16,132 (3,671) (11,536) (134) 791 2016 $ 12,486 10,978 23,464 (7,793) (1) (185) 15,485 2015 $ (9,851) 73,860 64,009 (18,316) (49,129) (525) (3,961) Cash provided by operating activities amounted to $3.2 million for Q4 2016 compared to $16.1 million for Q4 2015. Although the Company continued to better manage non‐cash working capital, especially inventory expressed in days, the lower impact on cash provided by operating activities was mainly due to the lower commodity pricing and its effect on the value of the Company’s products on a unit basis, with similar impact on accounts receivable. For FY 2016, cash provided by operating activities amounted to $23.5 million compared to $64.0 million for the same period last year. Better management of non‐cash working capital lead to a further reduction of $9.2 million in inventory and $6.2 million in trade accounts receivable mitigated by lower accounts payable of $1.2 million. Cash used in investing activities totalled $2.9 million in Q4 2016 and $7.8 million for FY 2016 compared to $3.7 million and $18.3 million for the corresponding periods of 2015 respectively. This decrease is explained by lower acquisition of property, plant and equipment and intangible assets. For Q4 2016 and FY 2016, cash from financing activities amounted to $0.9 million and nil compared to cash used by financing activities of $11.5 million and $49.1 million for the corresponding periods of 2015 respectively. These decreases are mainly associated with a net reduction in the amounts drawn under the revolving facility following a better management of non‐cash working capital. The Company had no drawdown of its credit facility at the end 2016 and most of the fiscal year. Working Capital Inventories Other current assets Current liabilities Working capital1 Working capital current ratio1 As at December 31, 2016 As at December 31, 2015 $ 80,309 63,750 (66,128) 77,931 2.18 $ 89,052 50,593 (45,777) 93,868 3.05 The decrease in working capital1 compared to December 31, 2015 is mainly due to a better alignment between material usage and purchase in an effort to reduce inventory and lower average commodity pricing. In addition, during 2016, the Company proceeded with a reclassification of $16.0 million from other liabilities to trade and accrued liabilities for which final settlement and payment are due in April 2017. Based on the agreement, the Company has the option to settle the majority of this amount in kind by the delivery of commercial grade metal currently available from excess and paid inventory, with no significant cash‐flow impact. This should be completed over the next 2 years. 1 See Non‐IFRS Measures 24 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [9] Management’s Discussion and Analysis Management’s Discussion and Analysis Net Debt Bank indebtedness Long‐term debt including current portion Convertible debentures Cross‐currency swap Total Debt Cash and cash equivalents Net Debt1 As at December 31, 2016 As at December 31, 2015 $ ‐ 1,947 40,288 1,443 $ ‐ 325 43,157 (189) 43,293 (24,301) 18,992 43,678 (8,816) 34,862 Total debt, including the cross‐currency swap decreased by $0.4 million to $43.3 million as at December 31, 2016, compared to $43.7 million as at December 31, 2015. Net debt1, after considering cash and cash equivalents decreased by $15.9 million, from $34.9 million as at December 31, 2015 to $19.0 million as at December 31, 2016. On December 7, 2015, the Company entered into a cross‐currency swap to hedge the convertible debenture denominated in Canadian dollars to US dollars. 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, 2016 $ 24,301 1,438 52,635 78,374 As at December 31, 2015 $ 8,816 1,541 103,969 114,326 In August 2014, the Company signed a senior secured multi‐currency revolving credit facility of $125.0 million maturing in August 2018, which was reduced to $100.0 million as at June 30, 2015 and subsequently to $50.0 million 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 $50.0 million 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 $25.0 million until the financial statements of the first quarter of 2017 are published. During the first quarter of 2016, an amount of deferred costs of $0.9 million was expensed and recorded in imputed interest and other interest expense. As at December 31, 2016, the Company had met all covenants. In August 2014, the Company’s subsidiary in Belgium entered into a bi‐lateral credit facility of 5.0 million Euros, which was reduced to 2.5 million 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, 2016 and 2015. 1 See Non‐IFRS Measures 5N Plus Inc. [10] ANNUAL REPORT 2016 • 5N PLUS • 25 Management’s Discussion and Analysis Management’s Discussion and Analysis Funds from Operations Funds from (used in) operations1 Net acquisition of PPE and intangible assets Working capital changes Repurchase of common shares Others Total movement in net debt1 Net debt1, beginning of period Net debt1, end of period Q4 2016 Q4 2015 $ 5,256 (2,882) (2,048) (252) 1,061 (4,121) 1,135 (20,127) (18,992) $ (5,734) (3,308) 21,866 ‐ (994) 17,564 11,830 (46,692) (34,862) 2016 $ 12,486 (7,693) 10,978 (252) 351 3,384 15,870 (34,862) (18,992) 2015 $ (9,851) (19,956) 73,860 ‐ 5,092 58,996 49,145 (84,007) (34,862) Funds from operations1 increased by $11.0 million to $5.3 million in Q4 2016 and by $22.3 million to $12.5 million in FY 2016 compared to funds used in operations1 of $5.7 million and $9.9 million for the corresponding periods of 2015 respectively. This increase was further supported by lower acquisition of PPE and intangible assets, offsetting the negative variance from the lower positive impact in working capital changes compared to the same periods last year. Share Information Issued and outstanding shares Stock options potentially issuable Convertible debentures potentially issuable As at February 21, 2017 83,599,133 2,860,648 9,777,777 As at December 31, 2016 83,778,557 2,860,648 9,777,777 On October 5, 2016, the Toronto Stock Exchange has approved the Company’s normal course issuer bid. Under this normal course issuer bid, the Company has the right to purchase for cancellation, from October 11, 2016 to October 10, 2017, a maximum of 600,000 common shares. At the end of December 31, 2016, the Company has repurchased and cancelled 201,100 common shares at an average price of $1.26 for a total amount of $0.3 million. An amount of $0.9 million has been applied against share capital, and a negative amount of $0.6 million has been applied against the deficit. The acquired common shares have been cancelled. Stock Option Plan On April 11, 2011, the Company adopted a new stock option plan under which a maximum number of options granted cannot exceed 5,000,000. 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, 2016 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 beneficiary ceases to be an employee, director or officer and one year for retired directors. 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”). 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, not exceeding three years, 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. For the year ended December 31, 2016, the Company granted 1,245,000 New RSUs (2015 – nil) and 20,000 New RSUs were cancelled (2015 – nil). As at December 31, 2016, 1,225,000 New RSUs were outstanding (2015 – nil). 1 See Non‐IFRS Measures 26 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [11] Management’s Discussion and Analysis Management’s Discussion and Analysis For the year ended December 31, 2016, the Company granted 500,000 PSUs (2015 – nil) and, as at December 31, 2016, 500,000 PSUs were outstanding (2015 – nil). The following table presents information concerning all outstanding stock options: Outstanding, beginning of year Granted Cancelled Expired Outstanding, end of year Exercisable, end of year Number of options 1,558,345 1,445,000 ‐ (142,697) 2,860,648 1,311,898 2016 Weighted average exercise price CA$ 3.74 1.65 ‐ 4.90 2.63 3.39 Number of options 1,702,100 232,000 (75,755) (300,000) 1,558,345 1,024,324 2015 Weighted average exercise price CA$ 4.21 2.40 3.24 5.45 3.74 4.08 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 16 and 24 of the audited consolidated financial statements for the year ended December 31, 2016. The following table reflects the contractual maturity of the Company’s financial liabilities as at December 31, 2016: Trade and accrued liabilities (1) Long‐term debt Convertible debentures Total (1) Carrying amount 1 year 2 years 3 years $ 57,381 325 43,157 100,863 $ 57,381 325 3,170 60,876 $ ‐ ‐ 3,170 3,170 $ ‐ ‐ 50,474 Total $ 57,381 325 56,814 50,474 114,520 In 2016, the Company proceeded with a reclassification of $16.04 million from other liabilities to trade and accrued liabilities, for which final settlement is due in April 2017. Based on the agreement, the Company has the option to settle the majority of this amount in kind by the delivery of commercial grade metal currently available from excess and paid inventory, with no significant cashflow impact. 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 2016 $ 2,044 4,367 ‐ 6,411 2015 $ 2,289 2,479 364 5,132 As at December 31, 2016, in the normal course of business, the Company contracted letters of credit for an amount of up to $0.7 million and $0.5 million as at December 31, 2015. 5N Plus Inc. [12] ANNUAL REPORT 2016 • 5N PLUS • 27 Management’s Discussion and Analysis Management’s Discussion and Analysis 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 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 the fiscal year ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Accounting Policies and Changes The Company established its accounting policies and methods used in the preparation of its audited consolidated financial statements for the fiscal year 2016 in accordance with IFRS. The Company’s significant accounting policies are described in Note 2 of the audited consolidated financial statements for the year ended December 31, 2016. 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, 2015. 28 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [13] Management’s Discussion and Analysis Management’s Discussion and Analysis 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. Significant Management Estimation and Judgment in Applying Accounting Policies The following are significant management judgments used in applying the accounting policies of the Company that have the most significant effect on the consolidated financial statements. Estimation uncertainty When preparing the consolidated financial statements, management undertakes a number of judgments, estimates and assumptions about recognition and measurement of assets, liabilities, revenues and expenses. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about the significant judgments, estimates and assumptions that have the most significant effect on the recognition and measurement of assets, liabilities, revenues and expenses are discussed below. Impairment of non‐financial assets 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 cash‐generating unit’s carrying amount exceeds its recoverable amount, which is the higher of fair value less cost of disposal and value in use. An intangible asset and related equipment that are not yet available for intended use are tested for impairment at least annually, which requires also significant judgement. To determine value in use, management estimates expected future cash flows from each asset 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 the forecasted prices obtained from various sources on the market, and based on the public information on metal available as at December 31, 2016. These assumptions relate to future events and circumstances. The actual results may vary and may cause adjustments to the Company’s intangible assets in future periods. 5N Plus Inc. [14] ANNUAL REPORT 2016 • 5N PLUS • 29 Management’s Discussion and Analysis Management’s Discussion and Analysis In most cases, determining the applicable discount rate involves estimating the appropriate adjustment to market risk and to asset‐specific risk factors. Assets not yet available for intended use have a higher estimation uncertainty, since they depend on future market information, and the Company’s ability to finish the project and realize the budgeted earnings. 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 and the discount rate. By their nature, assets not yet available for intended use have a higher estimation uncertainty, as they depend on future market development and the Company’s ability to commercialize and manufacture new products to realize forecasted earnings. For example, new manufacturing processes may not be scalable to industrial level within expected timeframe and new products might not receive sufficient market penetration. Management believes that the following assumptions are the most susceptible to change and impact the valuation of these assets in time: a) expected significant growth of the market for different metal products (demand), b) selling prices which have an impact on revenues and metal margins (pricing), and c) the discount rate associated with new processes and products (after considering a premium over the Company’s weighted average cost of capital (WACC) to reflect the additional uncertainty). 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, 2016, are provided in note 12 of the 2016 consolidated financial statements of the Company. 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. 30 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [15] Management’s Discussion and Analysis Management’s Discussion and Analysis 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 8, 23 and 26 in the 2016 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 16 – Fair Value of Financial Instruments in the 2016 consolidated financial statements of the Company. The fair value of the derivatives financial instruments was as follows: Debenture conversion option Cross‐currency swap 2016 $ (68) 189 2015 $ (87) (1,443) 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 24 of the 2016 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 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. 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. 5N Plus Inc. [16] ANNUAL REPORT 2016 • 5N PLUS • 31 Management’s Discussion and Analysis Management’s Discussion and Analysis The following table summarizes December 31, 2016: in US dollar equivalents the Company’s major currency exposures as at Cash and cash equivalents Accounts receivable Trade and accrued liabilities Long‐term debt Net financial assets (liabilities) CA$ $ 498 520 (6,618) (325) (5,925) EUR $ 1,556 7,733 (9,941) ‐ (652) GBP $ 448 743 RMB $ 652 3,428 Other $ 395 1,101 (3,506) (4,127) (1,084) ‐ (2,315) ‐ (47) ‐ 412 The following table shows the impact on earnings before income tax of a five‐percentage point strengthening or weakening of foreign currencies against the US dollar as at December 31, 2016 for the Company’s financial instruments denominated in non‐functional currencies: 5% Strengthening 5% Weakening CA$ $ (296) 296 EUR $ (33) 33 GBP $ (116) 116 RMB $ (2) 2 Other $ 21 (21) 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 recoverability; therefore, the carrying amount of accounts receivable generally represents the maximum credit exposure. As at December 31, 2016 and 2015, the Company has an allowance for doubtful accounts of $0.1 million and $0.5 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. Risk and Uncertainties We are subject to a number of risk factors which may limit our ability to execute our strategy and achieve our long‐term growth objectives. Management analyses these risks and implements strategies in order to minimize their impact on the Company's performance. 32 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [17] Management’s Discussion and Analysis Management’s Discussion and Analysis Risks Associated with our Growth Strategy 5N Plus’ strategic plan is designed to enhance profitability while reducing earnings volatility and is founded on three pillars of growth: first, optimizing balance of contribution from upstream and downstream activities; second, extracting more value from core businesses and global asset; and third, delivering quality growth from both existing and future M&A opportunities. 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. 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 and tax systems, the potential for volatile economic and labor conditions, political instability, foreign exchange, expropriation, changes in taxes, 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. International Trade Regulations We do business in a number of countries from various locations, as such, face risks associated with changes to International trade regulations and policies. Such risks, included but are not limited to, barriers to or restrictions on free trade, changes in taxes, tariffs and other regulatory costs. Although we operate primarily in countries, with proximity to our clients and suppliers, and with relatively stable economic and political climates, there can be no assurance that our business will not be adversely affected by the risks inherent to the changing international political landscape and its impact on global trade. 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. 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. 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. 5N Plus Inc. [18] ANNUAL REPORT 2016 • 5N PLUS • 33 Management’s Discussion and Analysis Management’s Discussion and Analysis 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 We monitor the risks associated with the value of our inventories in relation to the market price of such inventories. Because of the highly illiquid nature of many of our 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 We rely on the expertise and know‐how of its personnel to conduct our operations. The loss of any member of our senior management team could have a material adverse effect on us. Our future success also depends on our ability to retain and attract our key employees, train, retain and successfully integrate new talent into our management and technical teams. Recruiting and retaining talented personnel, particularly those with expertise in the specialty metals industry and refining technology is vital to our success and may prove difficult. We cannot provide assurance that we will be able to attract and retain qualified personnel when needed. Collective Agreements A portion of our workforce is unionized and we are party to collective agreements that are due to expire at various times in the future. If we are unable to renew these collective agreements on similar terms as they become subject to renegotiation from time to time, this could result in work stoppages or other labour disturbances, such as strikes, walkouts or lock‐outs, potentially affecting our performance. Risks Associated with Public Issuer Status Our shares are publicly traded and, as such, we are 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. Another risk associated with a public issuer status is the disclosure of key Company information as compared to privately owned competitors. 34 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [19] Management’s Discussion and Analysis Management’s Discussion and Analysis 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. 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. Gross margin is a measure we use to monitor the sales contribution after paying cost of sales excluding depreciation of property, plant and equipment. We also expressed this measure in percentage of revenues by dividing the gross margin value by the total revenue. 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. 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. 5N Plus Inc. [20] ANNUAL REPORT 2016 • 5N PLUS • 35 Management’s Discussion and Analysis Management’s Discussion and Analysis 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 (in U.S. dollars per kilo) 36 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N Plus Inc. [21] Management’s Discussion and Analysis Management’s Discussion and Analysis Selected Quarterly Financial Information As at and for the three months ended:1 (in thousands of United States dollars except per share amounts) Revenue EBITDA1 Adjusted EBITDA1 Net (loss) earnings attributable to equity holders of 5N Plus Basic loss per share attributable to equity holders of 5N Plus Net (loss) earnings Basic loss per share Diluted loss per share Adjusted net (loss) earnings1 Basic adjusted net loss per share1 Funds from operations1 Backlog1 Dec. 31, 2016 $ 54,704 4,803 4,331 158 $‐ 158 $‐ $‐ 148 $‐ 5,256 136 days Sept. 30, 2016 $ 55,491 2,066 6,816 (4,232) ($0.05) (4,232) ($0.05) ($0.05) 2,298 $0.03 238 148 days June 30, 2016 $ 57,435 5,358 4,714 86 $‐ 87 $‐ $‐ 45 $‐ 4,521 157 days Mar. 31, 2016 $ 63,868 2,884 4,250 Dec. 31, 2015 $ 59,367 (26,000) 674 (1,907) (42,615) Sept. 30, 2015 $ 68,732 (26,136) 1,052 (32,171) June 30, 2015 $ 87,250 (5,966) 1,963 (20,463) Mar. 31, 2015 $ 95,663 3,406 270 (1,949) ($0.02) ($0.51) ($0.38) ($0.24) ($0.02) (1,909) ($0.02) ($0.02) (653) ($0.01) 2,471 145 days (42,615) ($0.51) ($0.51) (12,966) ($0.15) (5,734) 158 days (32,171) ($0.38) ($0.38) (5,652) ($0.07) (620) 134 days (20,464) ($0.24) ($0.24) (6,125) ($0.07) (1,482) 137 days (1,951) ($0.02) ($0.05) (2,472) ($0.03) (2,015) 142 days Selected Yearly Financial Information As at and for the years ended December 31 (in thousands of United States dollars except per share amounts) Revenue EBITDA Adjusted EBITDA Net (loss) earnings attributable to equity holders of 5N Plus Basic (loss) earnings per share attributable to equity holders of 5N Plus Net (loss) earnings Basic (loss) per share Diluted loss per share Adjusted net (loss) earnings Basic adjusted net loss per share Funds from operations Backlog Balance Sheet Total assets Total non‐current liabilities Net debt1 Shareholders’ equity 2016 $ 231,498 15,111 20,011 (5,895) ($0.07) (5,896) ($0.07) ($0.07) 1,838 $0.02 12,486 136 days 219,057 64,415 18,992 88,522 2015 $ 311,012 (54,696) 3,959 (97,198) ($1.16) (97,201) ($1.16) ($1.16) (27,215) ($0.32) (9,851) 158 days 220,737 78,335 34,862 96,632 2014 $ 508,195 39,444 35,045 10,812 $0.13 10,673 $0.13 $0.05 10,636 $0.13 17,592 122 days 399,531 135,100 84,007 196,443 1 See Non‐IFRS Measures 5N Plus Inc. [22] ANNUAL REPORT 2016 • 5N PLUS • 37 Management’s Report to the Shareholders of 5N Plus Inc. 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 21, 2017 5N Plus + Consolidated Financial Statements 2 38 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 February 21, 2017 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 as at December 31, 2016 and 2015 and the consolidated statements of loss, 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. ANNUAL REPORT 2016 • 5N PLUS • 39 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, 2016 and 2015 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.1 1 CPA auditor, CA, public accountancy permit No. A116853 40 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Consolidated Statements of Financial Position (in thousands of United States dollars) Consolidated Statements of Financial Position (in thousands of United States dollars) Assets Current Cash and cash equivalents Accounts receivable Inventories Income tax receivable Other current assets Total current assets Property, plant and equipment Intangible assets Deferred tax assets Investment accounted for using the equity method Derivative financial assets Other assets Total non‐current assets Total assets Liabilities Current Trade and accrued liabilities Income tax payable Current portion of long‐term debt Total current liabilities Long‐term debt Convertible debentures Deferred tax liabilities Employee benefit plan obligation Derivative financial liabilities Other liabilities Total non‐current liabilities Total liabilities Equity Equity holders of 5N Plus Inc. Non‐controlling interest Total equity Total liabilities and equity Commitments and contingencies (Note 22) The accompanying notes are an integral part of these consolidated financial statements. Notes December 31 2016 $ December 31 2015 $ 4 5 6 7 15 8 16 9 10 11 11 12 15 13 16 14,18 24,301 29,799 80,309 6,819 2,831 144,059 59,945 11,109 1,883 779 189 1,093 74,998 219,057 57,381 8,422 325 66,128 ‐ 43,157 715 14,813 68 5,662 64,415 130,543 88,522 (8) 88,514 219,057 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 5N Plus + Consolidated Financial Statements 5 ANNUAL REPORT 2016 • 5N PLUS • 41 5N PLUS INC. Consolidated Statements of Loss Consolidated Statements of Loss Years ended December 31 Years ended December 31 (in thousands of United States dollars, except per share information) (in thousands of United States dollars, except per share information) Revenue Cost of sales Selling, general and administrative expenses Other expenses Share of (gain) loss from joint ventures Operating earnings (loss) Financial expenses 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 before income taxes Income tax expense Current Deferred Net loss Attributable to: Equity holders of 5N Plus Inc. Non‐controlling interest Loss per share attributable to equity holders of 5N Plus Inc. Basic loss per share Diluted loss per share The accompanying notes are an integral part of these consolidated financial statements. Notes 26 26 26 8 16 15 15 20 20 20 2016 $ 231,498 190,036 25,986 12,072 (23) 228,071 3,427 3,429 4,812 (20) (925) 7,296 (3,869) 440 1,587 2,027 (5,896) (5,895) (1) (5,896) (0.07) (0.07) (0.07) 2015 $ 311,012 346,970 28,494 23,210 316 398,990 (87,978) 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) 5N Plus + Consolidated Financial Statements 6 42 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Consolidated Statements of Comprehensive Loss Years ended December 31 (Figures in thousands of United States dollars) Consolidated Statements of Comprehensive Loss Years ended December 31 (Figures in thousands of United States dollars) Net loss Other comprehensive loss Items that may be reclassified subsequently to net loss Net changes in cash flow hedges Notes 2016 $ 2015 $ (5,896) (97,201) Effective portion of changes in fair value of cash flow hedges 16 Reclassification to net loss Income taxes Currency translation adjustment Items that will not be reclassified subsequently to net loss Remeasurement of employee benefit plan obligation Income taxes 13 Other comprehensive loss Comprehensive loss Attributable to equity holders of 5N Plus Inc. Attributable to non‐controlling interest The accompanying notes are an integral part of these consolidated financial statements. 1,632 (1,221) (55) 356 (1,193) (837) (1,643) ‐ (1,643) (354) (262) 117 (499) (801) (1,300) 1,038 (2,516) (1,478) (2,480) (2,778) (8,376) (8,375) (1) (99,979) (99,976) (3) 5N Plus + Consolidated Financial Statements 7 ANNUAL REPORT 2016 • 5N PLUS • 43 Consolidated Statements of Changes in Equity Years ended December 31 (in thousands of United States dollars, except per share information) $ l a t o T y t i u q e 5 2 6 , 6 9 ) 6 9 8 , 5 ( 6 5 3 ) 3 9 1 , 1 ( ) 3 4 6 , 1 ( ) 6 7 3 , 8 ( ) 2 5 2 ( 7 1 5 4 1 5 , 8 8 $ 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 , $ ) 7 ( ) 1 ( ‐ ‐ ‐ ) 1 ( ‐ ) 8 ( ‐ n o N ‐ n o N t s e r e t n i g n i l l o r t n o c g n i l l o r t n o c $ ) 4 ( ) 3 ( ‐ ‐ ) 3 ( ‐ ) 7 ( t s e r e t n i $ y t i u q e 2 3 6 , 6 9 ) 5 9 8 , 5 ( 6 5 3 ) 3 9 1 , 1 ( ) 3 4 6 , 1 ( ) 5 7 3 , 8 ( ) 2 5 2 ( 7 1 5 l a t o T l ’ s r e d o h e r a h s y n a p m o C e h t 2 2 5 , 8 8 ) 1 3 8 , 9 4 2 ( ) 7 2 9 , 8 ( ) 5 9 8 , 5 ( ‐ ‐ ‐ ‐ ‐ 0 7 5 ) 5 9 8 , 5 ( 6 5 3 ) 3 9 1 , 1 ( ) 3 4 6 , 1 ( ) 0 8 4 , 2 ( ‐ ‐ ‐ ‐ ‐ ‐ ‐ 7 1 5 6 9 5 , 4 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ) 2 2 8 ( ‐ ) 0 0 1 , 1 0 2 ( n o i t a g i l l l b o n a p t i f e n e b e e y o p m e f o t n e m e r u s a e m e R ) 9 1 e t o N ( d e l l e c n a c d n a d e s a h c r u p e r s e r a h s n o m m o C n o i t a s n e p m o c d e s a b ‐ e r a h S s s o l e v i s n e h e r p m o c l a t o T 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 j t s u 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 4 8 6 , 2 4 3 7 5 5 , 8 7 7 , 3 8 r a e y f o d n e t a s e c n a l a B $ y t i u q e 3 4 4 6 9 1 , l a t o T l ’ s r e d o h e r a h s y n a p m o C e h t l f o s r e d o h y t i u q e o t e b a t u b i r t t A l $ t i c i f e D $ s s o l ) 8 0 3 7 4 1 ( , ) 9 6 6 3 ( , $ 4 1 9 3 , l s u p r u S r e h t o l d e t a 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 $ e r a h S l a t i p a c , 6 0 5 3 4 3 ) 8 9 1 7 9 ( , ) 8 9 1 7 9 ( , ‐ ) 9 9 4 ( ) 1 0 8 ( ) 8 7 4 1 ( , ) 6 7 9 9 9 ( , ‐ ‐ ‐ ) 8 9 1 7 9 ( , ) 9 9 4 ( ) 1 0 8 ( ) 8 7 4 1 ( , ) 8 7 7 2 ( , 5 6 1 ‐ ‐ 2 3 6 6 9 , ) 6 0 5 4 4 2 ( , ) 7 4 4 6 ( , ‐ ‐ ‐ ‐ ‐ 5 6 1 9 7 0 4 , ‐ ‐ ‐ ‐ ‐ ‐ , 6 0 5 3 4 3 r e b m u N s e r a h s f o 5 1 0 2 , 7 5 6 9 7 9 3 8 , r a e y i i f o g n n n g e b t a s e c n a a B l ‐ ‐ ‐ ‐ ‐ ‐ n o i t a g i l l l b o n a p t i f e n e b e y o p m e 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 j t s u 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 , 7 5 6 9 7 9 3 8 , . 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 r a e y f o d n e t a s e c n a a B l 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 l f o s r e d o h y t i u q e o t e b a t u b i r t t A l $ t i c i f e D $ s s o l ) 6 0 5 , 4 4 2 ( ) 7 4 4 , 6 ( $ 9 7 0 , 4 l s u p r u s r e h t o l d e t a 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 $ e r a h S l a t i p a c r e b m u N s e r a h s f o ) n o i t a m r o f n i e r a h s r e p 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 ( 6 1 0 2 6 0 5 , 3 4 3 7 5 6 , 9 7 9 , 3 8 i r a e y f o g n n n i g e b t a s e c n a l a B 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 1 3 r e b m e c e D d e d n e s r a e Y . C N I S U L P N 5 44 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 8 s t n e m e t a t S l i a i c n a n F d e t a d i l o s n o C + s u P N 5 l 5N PLUS INC. Consolidated Statements of Cash Flows Years ended December 31 (Figures in thousands of United States dollars) Consolidated Statements of Cash Flows Years ended December 31 (Figures in thousands of United States dollars) Operating activities Net loss Adjustments to reconcile net loss 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 (Reversal) allowance for doubtful accounts receivable Allowance for a doubtful note receivable from a related party Share‐based compensation expense Deferred income taxes Share of gain (loss) from joint ventures Imputed interest Employee benefit plan obligation Change in fair value of debenture conversion option Loss on disposal of property, plant and equipment Unrealized loss on non‐hedge financial instruments Unrealized foreign exchange gain on assets and liabilities Funds from (used in) operations before the following Net change in non‐cash working capital balances Cash from operating activities Investing activities Additions to property, plant and equipment Additions of intangible assets Investment in a joint venture Restricted cash Cash used in investing activities Financing activities Repayment of long‐term debt Proceeds from issuing long‐term debt Long‐term debt issuance costs Net decrease in bank indebtedness Common shares repurchased Financial instruments – net Increase in other liabilities Cash used in financing activities Effect of foreign exchange rate changes on cash and cash equivalents Net increase (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 Interest paid Notes 2016 $ 2015 $ (5,896) (97,201) 14 5 4, 24 26 21 15 8 13 16 18 6, 18 7 8 19 10,739 1,277 (187) ‐ (362) ‐ 2,246 1,587 (23) 3,266 (252) (20) 142 ‐ (31) 12,486 10,978 23,464 (3,510) (4,183) (100) ‐ (7,793) (3,143) 1,505 (111) ‐ (252) ‐ 2,000 (1) (185) 15,485 8,816 24,301 2,433 3,285 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 (14,818) (5,138) (310) 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 (1) Amounts paid 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. 5N Plus + Consolidated Financial Statements 9 ANNUAL REPORT 2016 • 5N PLUS • 45 5N PLUS INC. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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 21, 2017. 2. Summary of Principal Accouting 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 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. 5N Plus + Consolidated Financial Statements 10 46 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) The following table includes the principal subsidiaries which significantly impact the results or assets of the Company: 5N Plus Inc. 5N PV GmbH 5N Plus Lübeck GmbH 5N Plus UK Limited 5N Plus Belgium SA 5N Plus Asia Limited 5N Plus Wisconsin Inc Country of incorporation % Equity interest 2016 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% 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”. 5N Plus + Consolidated Financial Statements 11 ANNUAL REPORT 2016 • 5N PLUS • 47 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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, compounds and wafers. The Eco‐Friendly Materials segment mainly 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 expenses (revenues) have been regrouped under the heading “Corporate and unallocated”. 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. Cash payments received or advances due pursuant to contractual arrangements are recorded as deferred revenue until all of the foregoing conditions of revenue recognition have been met. 5N Plus + Consolidated Financial Statements 12 48 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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 overhaul and replacement are capitalized in 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 the 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 + Consolidated Financial Statements 13 ANNUAL REPORT 2016 • 5N PLUS • 49 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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: 5N Plus + Consolidated Financial Statements 14 50 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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 + Consolidated Financial Statements 15 ANNUAL REPORT 2016 • 5N PLUS • 51 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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 Transaction costs Cash and cash equivalents Accounts receivable Loan receivable from a related party Bank indebtedness Trade and accrued liabilities Long‐term debt Convertible debentures Long‐term payable 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. 5N Plus + Consolidated Financial Statements 16 52 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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. 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 16. 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. 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. 5N Plus + Consolidated Financial Statements 17 ANNUAL REPORT 2016 • 5N PLUS • 53 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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, 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 expense is also recognized in other comprehensive (loss) income or directly in equity, respectively. 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. 5N Plus + Consolidated Financial Statements 18 54 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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. Restructuring provisions, consisting of severance and other related costs to closures sites, are recognized when a detailed formal plan identifies the business or part of the business concerned, the location and number of employees affected, a detailed estimates of the associated costs, an appropriate timelines which has been communicated to those affected by it. Research and development expenses Research expenses are charged to the consolidated statement of (loss) earnings in the period they are incurred and are included under other expenses. Development expenses which are directly attributable expenses, either internal or external, are charged to the consolidated statement of (loss) earnings, except if the Company can demonstrate all of the following (in that case capitalised as an intangible assets – development costs):       The technical feasibility of completing the intangible asset so that it will be available for use or sale; Its intention to complete the intangible asset and use or sell it; Its ability to use or sell the intangible asset; How the intangible asset will generate probable future economic benefits. Among other things, the Company can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; Its ability to measure reliably the expenditure attributable to the intangible asset during its development. 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. 5N Plus + Consolidated Financial Statements 19 ANNUAL REPORT 2016 • 5N PLUS • 55 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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 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 + Consolidated Financial Statements 20 56 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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. An intangible asset and related equipment that are not yet available for their intended use are tested for impairment at least annually, which also requires significant judgement. To determine the recoverable amount (fair value less cost to dispose of these assets), management estimates expected future cash flows from the assets 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 the estimated forecasted prices obtained from various market sources including publically available metals information as at December 31, 2016. These key assumptions relate to future events and circumstances. The actual results will vary and may cause adjustments to the Company’s intangible and tangible 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. By their nature, assets not yet available for intended use have a higher estimation uncertainty, as they depend on future market development and the Company’s ability to commercialize and manufacture new products to realize forecasted earnings. For example new manufacturing processes may not be scalable to industrial level within expected timeframe and new products might not receive sufficient market penetration. Management believes that the following assumptions are the most susceptible to change and impact the valuation of these assets in time: a) expected significant growth of the market for different metal products (demand), b) selling prices which have an impact on revenues and metal margins (pricing), and c) the discount rate associated with new processes and products (after considering a premium over the Company’s weighted average cost of capital (WACC) to reflect the additional uncertainty). 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, 2016, are provided in note 12. 5N Plus + Consolidated Financial Statements 21 ANNUAL REPORT 2016 • 5N PLUS • 57 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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 (Note 15). 3. Changes in Accounting Policies and Futures 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. 5N Plus + Consolidated Financial Statements 22 58 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 4. Accounts Receivable Gross trade receivables Allowance for doubtful accounts (Note 24) Trade receivables Sales taxes receivable Accounts receivable from a related party (Note 23) Other receivables (2015 ‐ net of allowance for doubtful of $415) Total accounts receivable 2016 $ 25,095 (126) 24,969 3,643 ‐ 1,187 29,799 2015 $ 31,469 (488) 30,981 4,081 831 1,432 37,325 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 24. Most of the accounts receivable are pledged as security for the revolving credit facility (Note 11). 5. Inventories Raw materials Finished goods Total inventories 2016 $ 24,436 55,873 80,309 2015 $ 28,200 60,852 89,052 For the year ended December 31, 2016, a total of $150,400 of inventories was included as an expense in cost of sales (2015 – $316,688). For the year ended December 31, 2015, these include $58,327 of impairment of inventories ($28,338 for the Eco Friendly Materials segment and $29,989 for the Electronic Materials segment). For the year ended December 31, 2016, a total of $23,642 previously written down was recognized as a reduction of expenses in cost of sales ($8,089 for the Eco‐Friendly Materials segment and $15,553 for the Electronic Materials segment) (2015 – $32,394 [$24,702 for the Eco‐Friendly Materials segment and $7,692 for the Electronic Materials segment]). The majority of inventories are pledged as security for the revolving credit facility (Note 11). 5N Plus + Consolidated Financial Statements 23 ANNUAL REPORT 2016 • 5N PLUS • 59 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 6. Property, Plant and Equipment Net book value as at December 31, 2014 Additions Depreciation Effect of foreign exchange and others Net book value as at December 31, 2015 Additions Disposals Depreciation (Note 26) Effect of foreign exchange and others Net book value as at December 31, 2016 As at December 31, 2015 Cost Accumulated depreciation Net book value As at December 31, 2016 Cost Accumulated depreciation Net book value Land and buildings $ 22,331 939 (1,633) (231) 21,406 738 ‐ (1,459) (194) 20,491 27,206 (5,800) 21,406 27,526 (7,035) 20,491 Production equipment $ 41,627 11,568 (10,789) (301) 42,105 1,409 (96) (7,812) (20) 35,586 Furniture, office equipment and rolling stock $ 2,342 667 (741) (49) 2,219 516 (46) (947) (20) 1,722 Leasehold improvements $ 1,961 402 (472) 25 1,916 407 ‐ (135) (42) 2,146 65,596 (23,491) 42,105 57,775 (22,189) 35,586 3,428 (1,209) 2,219 2,307 (585) 1,722 2,836 (920) 1,916 3,185 (1,039) 2,146 Total $ 68,261 13,576 (13,635) (556) 67,646 3,070 (142) (10,353) (276) 59,945 99,066 (31,420) 67,646 90,793 (30,848) 59,945 As at December 31, 2016, property, plant and equipment that were not depreciated until ready for their intended use amounted to $5,874 (2015 ─ $5,450) (mainly production equipment). Most of the property, plant and equipment are pledged as security for the revolving credit facility (Note 11). 5N Plus + Consolidated Financial Statements 24 60 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 7. Intangible Assets Customer relationships $ Technology $ Trade name and non‐compete agreements $ Software, intellectual property and development costs $ Net book value as at December 31, 2014 Additions Disposals and others Amortization(1) Net book value as at December 31, 2015 Additions Disposals and others Amortization Net book value as at December 31, 2016 As at December 31, 2015 Cost Accumulated amortization Net book value As at December 31, 2016 Cost Accumulated amortization Net book value 6,542 ‐ ‐ (6,542) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 4,468 ‐ ‐ (1,442) 3,026 ‐ ‐ ‐ 3,026 3,026 ‐ 3,026 3,026 ‐ 3,026 406 ‐ ‐ (406) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 4,312 5,138 (20) (5,141) 4,289 4,183 (3) (386) 8,083 6,517 (2,228) 4,289 10,267 (2,184) 8,083 Total $ 15,728 5,138 (20) (13,531) 7,315 4,183 (3) (386) 11,109 9,543 (2,228) 7,315 13,293 (2,184) 11,109 (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, 2016, intangible assets that were not depreciated until ready for their intended use amounted to $10,401 (2015 ─ $6,562). The categorie of development costs which includes capitalized costs of $7,350 (2015 ‐ $3,537), primarily consist of internally generated intangible assets. 5N Plus + Consolidated Financial Statements 25 ANNUAL REPORT 2016 • 5N PLUS • 61 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 8. Investments Accounted for Using the Equity Method Beginning of year Share of gain (loss) from joint ventures New investment End of year 2016 $ 310 23 446 779 2015 $ 316 (316) 310 310 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 2016 $ 1,568 625 560 5,651 2,474 (5,170) 2015 $ 4,100 3,501 2,210 6,041 5,314 (1,825) On December 31, 2016, following the closure of its manufacturing activities earlier this year, Ingal sold its assets. In 2016, the unrecognized share of loss of this joint venture for which the Company ceased to recognize when applying the equity method is $2,873 (2015 ─ $597). 9. Other Assets Deferred costs Other Total other assets 10. Trade and Accrued Liabilities Trade payables(1) Accrued liabilities(2) Total trade and accrued liabilities 2016 $ 353 740 1,093 2016 $ 41,266 16,115 57,381 2015 $ 1,519 824 2,343 2015 $ 26,357 12,387 38,744 (1) (2) In 2016, the Company proceeded with a reclassification of $16,038 from other liabilities to trade and accrued liabilities, for which final settlement is due in April 2017. Based on the agreement, the Company has the option to settle the majority of this amount in kind by the delivery of commercial grade metal currently available from excess and paid inventory, with no significant cashflow impact. As at December 31, 2016, an amount of $781 was still outstanding in respect of the $1,521 provision outstanding as at December 31, 2015. 5N Plus + Consolidated Financial Statements 26 62 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 11. Bank Indebtedness and Long‐Term Debt a) Bank indebtedness The Company has a Chinese renminbi (“RMB”) credit line with a financial institutions in China. This credit line is guaranteed by certain assets of the Company in China. The credit line bears interest at RMB base rate plus 2% to 4%. Contractual Currency RMB 10,000 ‐ 2016 Reporting Currency US$ 1,438 ‐ Contractual Currency RMB 10,000 ‐ 2015 Reporting Currency US$ 1,541 ‐ Facility available Amount drawn b) Long‐term debt Senior secured revolving facility of $50,000 ($100,000 as at December 31, 2015) 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 2016 $ 2015 $ ‐ 1,475 325 ‐ 325 325 ‐ 420 52 1,947 435 1,512 (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 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 until the first quarter 2017 financial statements are published. During the first quarter of 2016, an amount of deferred costs of $897 was expensed and recorded in Imputed interest and other interest expense. As at December 31, 2016, 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, 2016 and 2015. (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. 5N Plus + Consolidated Financial Statements 27 ANNUAL REPORT 2016 • 5N PLUS • 63 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 12. 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 16). 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. 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, 2016 and 2015, and have note changed substantially except for the expected life of 2.5 and 3.5 years respectively and for average expected volatility of 43.1% as at December 31 , 2016. 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 16). 13. Employee Benefit Plan Obligation The Company operates a defined pension plan in Germany based on employee pensionable earnings and length of service. Former general and senior managers had been provided with direct benefit commitments. Employees had been provided with indirect benefit commitments via the Unterstützungseinrichtung der HEK GmbH e.V. Such promises had been made for employees with entry date of December 31, 1993 or earlier. Present value of unfunded obligations Movement in the defined benefit obligation is as follows: Beginning of year Current service cost Interest cost Effect of foreign exchange Benefits paid Actuarial losses (gains) End of year 5N Plus + Consolidated Financial Statements 64 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 2016 $ 14,813 2016 $ 13,934 70 331 (512) (653) 1,643 14,813 2015 $ 13,934 2015 $ 16,928 85 303 (1,724) (620) (1,038) 13,934 28 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) The principal actuarial assumptions as at year ended were as follows: Discount rate Salary growth rate Pension growth rate 2016 1.7% 2.0% 1.8% 2015 2.4% 2.0% 1.8% Assumptions regarding mortality are based on mortality tables “Richttafeln 2005 G” by Prof. Dr. Klaus Heubeck as biometrical basis in accordance with age of earliest retirement by law RV‐Altersgrenzenanpassungsgesetz, dated April 20, 2007. 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 (6.64)% 0.58% 5.71% Decrease in assumption 7.44% (0.56)% (5.24)% Increase by 1 year in assumption 4.13% Decrease by 1 year in assumption (3.66)% The weighted average duration of the defined benefit obligation is 14 years (2015 – 13.56 years). Expected maturity analysis of undiscounted pension liability: Less than a year Between 1 and 5 years Over 5 years Total 2016 $ 628 2,649 15,882 19,159 2015 $ 612 2,599 16,815 20,026 Expected contributions to pension benefit plans for year ending December 31, 2017 are $628. 5N Plus + Consolidated Financial Statements 29 ANNUAL REPORT 2016 • 5N PLUS • 65 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 14. Other Liabilities As at December 31, 2014 Additions Utilized Unutilized amounts reversed As at December 31, 2015 Additions Utilized Reclassified to current liabilities (Notes 10 et 18) As at December 31, 2016 15. Income Taxes Current tax: Current tax for the year Adjustment in respect of prior years Total current tax Deferred tax: Recognition and reversal of temporary differences Change in tax rate Write down of deferred tax assets Total deferred tax Income tax expense Long‐term payable $ Deferred revenues $ 12,821 2,362 ‐ (162) 15,021 1,017 ‐ (16,038) ‐ 2,331 3,600 (796) ‐ 5,135 471 (187) ‐ 5,419 Other $ 559 34 (346) ‐ 247 ‐ (4) ‐ 243 2016 $ 175 265 440 1,538 49 ‐ 1,587 2,027 A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows: Loss before income tax Canadian statutory income tax rates Income tax on loss at Canadian statutory rate Increase (decrease) resulting from: Unrecorded losses carried forward Write down of deferred tax assets (Non‐taxable gain) non‐deductible expenses 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 2016 $ (3,869) 26.9% (1,041) 2,408 ‐ (478) (773) 510 855 265 281 2,027 Total $ 15,711 5,996 (1,142) (162) 20,403 1,488 (191) (16,038) 5,662 2015 $ 2,831 824 3,655 (5,207) ‐ 7,924 2,717 6,372 2015 $ (90,829) 26.9% (24,433) 16,112 7,924 (574) (771) 3,288 1,978 2,004 844 6,372 The Company’s applicable tax rate is the Canadian combined rates applicable in the jurisdiction in which the Company operates. 5N Plus + Consolidated Financial Statements 30 66 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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 Credited to consolidated statement of loss End of year 2016 $ 1,016 867 (90) (625) 1,168 2016 $ 2,810 (55) (1,587) 1,168 2015 $ 1,529 1,949 (54) (614) 2,810 2015 $ 7,926 (2,399) (2,717) 2,810 5N Plus + Consolidated Financial Statements 31 ANNUAL REPORT 2016 • 5N PLUS • 67 Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) e m a s e h t n i h t i w s e c n a l a b f o g n i t t e s f f o e h t n o i t a r e d i s n o c o t n i g n i k a t t u o h t i w , r a e y e h t g n i r u d s e i t i l i b a i l d n a s t e s s a x a t e m o c n i d e r r e f e d n i t n e m e v o m e h T ) d e t a c i d n i e s i w r e h t o s s e n u l , 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 t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N 1 3 r e b m e c e D d e d n e s r a e Y . C N I S U L P N 5 t i f e n e b n o i t a g i l b o t n e m e r i t e R d r a w r o f y r r a c s s o L s t e s s a l e 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 p l t n e m p u q e i : s w o l l o f s a s i , n o i t c i d s i r u j s t e s s a x a t d e r r e f e D $ l a t o T $ y b t e s f f O n o i t c i d s i r u j $ $ l a t o T s r e h t O 7 3 0 1 1 , ) 1 3 7 8 ( , 8 6 7 9 1 , 6 9 0 2 , 8 7 4 , 3 ) 7 2 7 , 9 ( 5 0 2 , 3 1 9 0 5 , 4 ) 4 6 1 4 ( , ) 9 9 3 2 ( , 7 1 1 6 9 2 2 , 3 8 8 , 1 ) 9 2 6 , 6 ( ) 5 5 ( 2 1 5 , 8 ) 5 5 ( 3 3 6 ) 8 3 6 4 ( , ) 1 2 8 3 ( , y b t e s f f O 1 1 1 3 , ) 1 3 7 8 ( , 2 4 8 1 1 , 6 2 5 $ $ $ $ l a t o T n o i t c i d s i r u j l a t o T s r e h t O 8 6 6 ) 7 2 7 , 9 ( 5 1 7 ) 9 2 6 , 6 ( ) 7 4 4 1 ( , 5 9 3 , 0 1 1 5 0 3 ( , 4 4 3 , 7 3 2 2 9 4 7 0 2 4 9 6 1 , 1 $ 3 3 8 2 , ) 7 1 3 ( ) 6 1 5 2 ( , ‐ ‐ ‐ ‐ $ 2 2 6 5 , ) 8 9 8 1 ( , ‐ 4 2 7 , 3 ‐ 5 3 4 9 5 1 , 4 $ 5 1 5 ‐ 0 8 5 9 5 ‐ 8 6 3 6 6 $ 0 2 3 2 , ‐ ) 8 1 6 ( 2 0 7 , 1 ‐ 8 3 1 0 4 8 , 1 $ 2 8 3 6 , ) 7 0 7 3 ( , ‐ 5 7 6 , 2 ) 8 5 4 1 ( , ‐ 7 1 2 , 1 , y t r e p o r P d n a t n a p l 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 ( 4 1 0 2 , 1 3 r e b m e c e D t a s A s s o l f o s t n e m e t a t s d e t a d i l o s n o c o t d e t i d e r c ) d e g r a h C ( 5 1 0 2 , 1 3 r e b m e c e D t a s A s s o l f o 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 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 6 1 0 2 , 1 3 r e b m e c e D t a s A l e b i t r e v n o C s e r u t n e b e d s t e s s a l e b i g n a t n I $ 9 5 8 1 , 1 1 1 1 , 0 7 9 , 2 5 3 1 5 0 1 , 3 $ 4 8 3 5 , ) 0 7 5 4 ( , 4 1 8 ‐ 4 1 8 $ 9 4 1 1 , ) 1 3 9 ( 8 1 2 2 3 1 0 5 3 $ 4 2 9 2 , 0 2 7 2 , 4 4 6 , 5 ) 8 3 7 3 ( , 6 0 9 , 1 s t n e m e t a t s d e t a d i l o s n o c o t s s o l f o ) d e t i d e r c ( d e g r a h C 4 1 0 2 , 1 3 r e b m e c e D t a s A 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 s o l f o 6 1 0 2 , 1 3 r e b m e c e D t a s A s e i r o t n e v n I t n e m p u q e i s e i t i l i b a i l x a t d e r r e f e D 68 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 2 3 s t n e m e t a t S l i a i c n a n F d e t a d i l o s n o C + s u P N 5 l 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Deferred tax assets of $1,883 (2015 – $3,092), 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, 2016 and 2015. As at December 31, 2016, 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 $ 49,668 46,510 26,611 3,838 17,882 1,491 6,276 Expiry No limit No limit No limit No limit No limit 2023‐2026 2017‐2021 As at December 31, 2016, the Company had other deductible temporary differences of $10,508 for which no deferred tax benefit has been recorded (2015 – $9,114). 16. 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, accounts receivable 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 includes cross‐currency swap, is 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 12; (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 + Consolidated Financial Statements 33 ANNUAL REPORT 2016 • 5N PLUS • 69 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) The carrying values and fair values of financial instruments, by class, are as follows as at December 31, 2016 and December 31, 2015: As at December 31, 2016 Financial assets Cash and cash equivalents Accounts receivable Derivative financial assets Total Financial liabilities Trade and accrued liabilities Long‐term debt Convertible debentures and debenture conversion option (included in derivative financial liabilities) Total As at December 31, 2015 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 At fair value through profit or loss $ Loans and receivables $ Financial liabilities at amortized cost $ Derivative designated in a hedge relationship $ ‐ ‐ ‐ ‐ ‐ ‐ 68 68 24,301 29,799 ‐ 54,100 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 57,381 325 43,157 100,863 ‐ ‐ 189 189 ‐ ‐ ‐ ‐ At fair value through profit or loss $ Loans and receivables $ Financial liabilities at amortized cost $ Derivative designated in a hedge relationship $ ‐ ‐ ‐ ‐ ‐ 87 ‐ ‐ 87 8,816 37,325 46,141 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 38,744 1,947 40,288 ‐ 14,939 95,918 ‐ ‐ ‐ ‐ ‐ ‐ 1,443 ‐ 1,443 Carrying Value Total $ 24,301 29,799 189 54,289 57,381 325 43,225 100,931 Carrying value Total $ 8,816 37,325 46,141 38,744 1,947 40,375 1,443 14,939 97,448 Fair value Total $ 24,301 29,799 189 54,289 57,381 325 44,421 102,127 Fair value Total $ 8,816 37,325 46,141 38,744 1,947 36,175 1,443 14,804 93,113 5N Plus + Consolidated Financial Statements 34 70 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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: 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  Level 3: 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, 2016 Financial assets (liabilities) At fair value through profit or loss Debenture conversion option (Note 12) (1) Derivatives designated in a hedge relationship Cross‐currency swap (2) Total As at December 31, 2015 Financial assets (liabilities) At fair value through profit or loss Debenture conversion option (Note 12) (1) Derivatives designated in a hedge relationship Cross‐currency swap (2) Total Level 1 $ Level 2 $ Level 3 $ ‐ ‐ ‐ ‐ 189 189 (68) ‐ (68) Level 1 $ Level 2 $ Level 3 $ ‐ ‐ ‐ ‐ (1,443) (1,443) (87) ‐ (87) (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 $20 and $1,840 was recognized in the consolidated statement of loss for the year ended December 31, 2016 and 2015, respectively. An increase of 5% in the volatility would have increased the fair value of the debenture conversion option by $67 and a decrease of 5% would have decreased the fair value of the debenture conversion option by $42. (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. 5N Plus + Consolidated Financial Statements 35 ANNUAL REPORT 2016 • 5N PLUS • 71 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 17. Operating Segments The following tables summarize the information reviewed by the Company’s management when measuring performance: For the year ended December 31, 2016 Eco‐Friendly Materials Electronic Materials Segment revenues(1) Adjusted EBITDA(2) (3) Interest on long‐term debt, imputed interest and other interest expense Litigation and restructuring costs (Note 26) Change in fair value of debenture conversion option Foreign exchange and derivative gain Depreciation and amortization Loss before income tax Capital expenditures $ 152,460 13,467 ‐ 2,628 ‐ ‐ 4,778 6,061 1,557 $ 79,038 19,824 ‐ 1,309 ‐ ‐ 5,711 12,804 1,953 For the year ended December 31, 2015 Eco‐Friendly Materials Electronic Materials Segment revenues(1) Adjusted EBITDA(2) (3) Interest on long‐term debt, imputed interest and other interest expense Impairment of inventories (Note 5) 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 $ 206,747 2,839 ‐ 28,338 745 ‐ ‐ ‐ 4,167 (30,411) 6,674 $ 104,265 10,740 ‐ 29,989 240 2,991 ‐ ‐ 22,366 (44,846) 8,112 Corporate and unallocated $ ‐ (13,180) (4) 8,241 2,008 (20) (925) 250 (22,734) ‐ Corporate and unallocated $ ‐ (9,620) (4) 8,967 ‐ 2,468 ‐ (1,840) (4,276) 633 (15,572) 32 Total $ 231,498 20,111 8,241 5,945 (20) (925) 10,739 (3,869) 3,510 Total $ 311,012 3,959 8,967 58,327 3,453 2,991 (1,840) (4,276) 27,166 (90,829) 14,818 (1) The total revenues of $14,422 (2015 – $15,508) from the recycling and trading of complex materials is allocated to the Eco‐Friendly materials and Electronic materials segments. (2) Loss before income tax, depreciation and amortization, allowance for a doubtful note receivable from a related party, impairment of inventories, litigation and restructuring costs and financial expense (revenues). (3) The total adjusted EBITDA of $1,641 (2015 – adjusted EBITDA negative of $555) from the recycling and trading of complex materials is allocated to the Eco‐Friendly materials and Electronic materials segments. (4) The total share‐based compensation expense is included in Corporate and unallocated (Note 26). 5N Plus + Consolidated Financial Statements 36 72 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) As at December 31, 2016 Eco‐Friendly Materials $ Electronic Materials $ Corporate and unallocated $ Total $ Total assets excluding the deferred tax asset: 95,835 109,013 12,326 217,174 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 The geographic distribution of the Company’s revenues based on the location of the customers for the years ended December 31, 2016 and 2015, and the identifiable non‐current assets as at December 31, 2016 and 2015 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(1) United States Canada Europe Belgium Germany Other Total (1) None exceeding 10% 2016 $ 11,551 4,563 53,180 46,502 12,165 14,837 29,954 8,327 44,105 6,314 231,498 2016 $ 15,721 5,496 22,028 9,017 18,937 1,916 73,115 2015 $ 23,330 5,859 61,639 72,715 15,572 20,072 35,064 9,214 61,236 6,311 311,012 2015 $ 17,470 5,124 22,260 9,614 19,683 3,463 77,614 For the year ended December 31, 2016, one customer represented approximately 16% (2015 – 12%) of the revenues, and is included in the Electronic Materials revenues. 5N Plus + Consolidated Financial Statements 37 ANNUAL REPORT 2016 • 5N PLUS • 73 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 18. 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 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 2016 $ 6,238 9,226 (4,187) (927) (1,196) 1,824 10,978 2016 $ 3,741 4,181 c) Excluded a reclassification from other liabilities to trade and accrued liabilities for which final settlement and payment are due in April 2017 (Note 10) 16,038 2015 $ 35,767 58,347 73 1,270 (22,131) 534 73,860 2015 $ 4,181 5,423 ‐ 19. Share Capital Authorized:  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, 2016 and 2015, no preferred shares were issued. On October 5, 2016, the Toronto Stock Exchange has approuved the Company’s normal course issuer bid. Under this normal course issuer bid, the Company has the right to purchase for cancellation, from October 11, 2016 to October 10, 2017, a maximum of 600,000 common shares. At the end of December 31, 2016, the Company has repurchased and cancelled 201,100 common shares at an average price of $1.26 for a total amount of $252. An amount of $822 has been applied against share capital, and an negative amount of $570 has been applied against the deficit. The acquired common shares have been cancelled. 5N Plus + Consolidated Financial Statements 38 74 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 20. Loss 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 attributable to equity holders of 5N Plus Net loss for the period 2016 $ (5,895) (5,896) 2015 $ (97,198) (97,201) Denominators 2016 2015 Basic and diluted weighted average number of shares 83,977,281 83,979,657 As at December 31, 2016, a total number of 2,860,648 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, 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. 21. Share‐Based Compensation 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 3 years. 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, 2016, the Company granted nil RSUs (2015 – 276,000), 148,950 of RSUs were paid (2015 – 23,612) and 17,550 RSUs were cancelled (2015 – 33,043). As at December 31, 2016, 440,000 RSUs were outstanding (2015 – 606,500). 5N Plus + Consolidated Financial Statements 39 ANNUAL REPORT 2016 • 5N PLUS • 75 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Restricted Share Unit and Performance Share Unit Plan On November 4, 2015, the Company adopted a new Restricted Share Unit (“RSU”) 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, not exceeding three years, 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. 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, 2016, the Company granted 1,245,000 New RSUs (2015 – nil) and 20,000 New RSUs were cancelled (2015 – nil). As at December 31, 2016, 1,225,000 New RSUs were outstanding (2015 – nil). For the year ended December 31, 2016, the Company granted 500,000 PSUs (2015 – nil) and, as at December 31, 2016, 500,000 PSUs were outstanding (2015 – nil). 5N Plus + Consolidated Financial Statements 40 76 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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, 2016, the Company granted 35,000 SARs (2015 – 120,000), 4,519 of SARs were expired (2015 – nil) and 95,000 SARs were cancelled (2015 – 7,970). As at December 31, 2016, 265,151 SARs were outstanding (2015 – 329,670). 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 (with the exception of the 400,000 DSUs granted to the Company’s CEO on March 2, 2016 which will vest on March 2, 2019) 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, 2016, the Company granted 745,503 DSUs (2015 – 272,343 DSUs) and 109,060 DSUs were paid (2015 – 17,500). As at December 31, 2016, 1,014,164 DSUs were outstanding (2015 – 377,721). 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, 2016 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. 5N Plus + Consolidated Financial Statements 41 ANNUAL REPORT 2016 • 5N PLUS • 77 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) The following table presents information concerning all outstanding stock options: Outstanding, beginning of year Granted Cancelled Expired Outstanding, end of year Exercisable, end of year Number of options 1,558,345 1,445,000 ‐ (142,697) 2,860,648 1,311,898 2016 Weighted average exercise price CA$ 3.74 1.65 ‐ 4.90 2.63 3.39 The outstanding stock options as at December 31, 2016 are as follows: Maturity June and September 2017 April and November 2018 May 2019 March to August 2020 March 2021 March 2022 Low CA$ 8.50 2.22 2.20 3.33 2.40 1.65 2015 Number of options Weighted average Exercise price 1,702,100 232,000 (75,755) (300,000) 1,558,345 1,024,324 Exercise price High CA$ 8.64 3.61 2.20 4.29 2.40 1.65 CA$ 4.21 2.40 3.24 5.45 3.74 4.08 Number of options 211,401 301,497 368,750 312,000 222,000 1,445,000 2,860,648 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, 2016 and 2015: Expected stock price volatility Dividend Risk‐free interest rate Expected option life Fair value – weighted average of options issued 2016 70% None 0.63% 4 years CA$0.86 2015 40% None 0.74% 4 years CA$0.75 5N Plus + Consolidated Financial Statements 42 78 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) The following table shows the share‐based compensation expense recorded in the consolidated statements of earnings for the years ended December 31, 2016 and 2015: Expense RSUs PSUs SARs DSUs Stock options Total 2016 $ 854 117 54 704 517 2,246 2015 $ 28 ‐ (27) 234 165 400 The following table shows the carrying amount and the intrinsic value of the share‐based compensation liabilities: Liability RSUs PSUs SARs DSUs Total 22. Commitments and Contigencies Commitments 2016 $ 886 113 90 960 2,049 2015 $ 259 ‐ 36 417 712 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 2016 $ 2,044 4,367 ‐ 6,411 2015 $ 2,289 2,479 364 5,132 As at December 31, 2016, in the normal course of business, the Company contracted letters of credit for an amount of up to $741 (2015 – $502). 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. 5N Plus + Consolidated Financial Statements 43 ANNUAL REPORT 2016 • 5N PLUS • 79 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 23. Related Party Transactions The Company’s related parties are its joint ventures, directors and executive members. Unless otherwise stated, none of the transactions incorporate 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 4). 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 26). Ingal, a 50% joint venture, supplies gallium metal to other companies of the group. During the year ended December 31, 2016, the Company purchased $496 worth of gallium from Ingal (2015 – $2,634). On December 31, 2016, following the closure of its manufacturing activities earlier this year, Ingal sold its assets. 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: Wages and salaries Share‐based compensation Total 24. Financial Risk Management 2016 $ 2,649 2,005 4,654 2015 $ 3,048 400 3,448 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, certain local operating expenses 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. 5N Plus + Consolidated Financial Statements 44 80 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) The following table summarizes in US dollar equivalents the Company’s major currency exposures as at December 31, 2016: Cash and cash equivalents Accounts receivable Trade and accrued liabilities Long‐term debt Net financial assets (liabilities) CA$ $ 498 520 (6,618) (325) (5,925) EUR $ 1,556 7,733 (9,941) ‐ (652) GBP $ 448 743 (3,506) ‐ (2,315) RMB $ 652 3,428 (4,127) ‐ (47) 2016 Other $ 395 1,101 (1,084) ‐ 412 The following table shows the impact on loss before income tax of a five‐percentage point strengthening or weakening of foreign currencies against the US dollar as at December 31, 2016 for the Company’s financial instruments denominated in non‐functional currencies: 5% Strengthening 5% Weakening CA$ $ (296) 296 EUR $ (33) 33 GBP $ (116) 116 RMB $ (2) 2 Other $ 21 (21) 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. As at December 31, 2016, the Company has no foreign exchange contracts outstanding. (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 fluctuation by ensuring that a reasonable portion of its 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. 5N Plus + Consolidated Financial Statements 45 ANNUAL REPORT 2016 • 5N PLUS • 81 Notes to Consolidated Financial Statements 5N PLUS INC. Years ended December 31 Notes to Consolidated Financial Statements (in thousands of United States dollars, unless otherwise indicated) Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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 recoverability; therefore, the carrying amount of accounts receivable generally represents the maximum credit exposure. As at December 31, 2016 and 2015, the Company has an allowance for doubtful accounts of $126 and $488 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, 2016, no financial assets were past due except for trade receivables. The aging analysis of trade receivables is as follows: Up to 3 months More than 3 months Total 2016 $ 3,414 91 3,505 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 2016 $ 488 73 (435) 126 2015 $ 7,181 917 8,098 2015 $ 104 453 (69) 488 Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. 5N Plus + Consolidated Financial Statements 46 82 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 5N PLUS INC. Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) Notes to Consolidated Financial Statements Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) 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, 2016: Carrying amount $ 57,381 325 43,157 100,863 1 year $ 57,381 325 3,170 60,876 2 year $ ‐ ‐ 3,170 3,170 3 year $ ‐ ‐ 50,474 50,474 2016 Total $ 57,381 325 56,814 114,520 Trade and accrued liabilities (Note 10) Long‐term debt Convertible debentures Total 25. 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 long‐term debt, convertible debentures and cross‐ currency swap in the consolidated statement of financial position) less cash and cash equivalents. 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, 2016 and 2015 are as follows: Long‐term debt including current portion Convertible debentures Cross‐currency swap (Note 16) Total debt Less: Cash and cash equivalents Net debt Shareholders’ equity Debt‐to‐equity ratio 5N Plus + Consolidated Financial Statements 2016 $ 325 43,157 (189) 43,293 (24,301) 18,992 88,522 21% 2015 $ 1,947 40,288 1,443 43,678 (8,816) 34,862 96,632 36% 47 ANNUAL REPORT 2016 • 5N PLUS • 83 5N PLUS INC. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Years ended December 31 Years ended December 31 (in thousands of United States dollars, unless otherwise indicated) (in thousands of United States dollars, unless otherwise indicated) 26. Expenses by Nature Expenses by nature Wages and salaries Share‐based compensation expense (included in Corporate and unallocated)(Note 21) Depreciation of property, plant and equipment and amortization of intangible assets (Notes 6 and 7) (1) Amortization of other assets Research and development, net of tax credit Litigation and restructuring costs (1) Impairment of inventories (Note 5) Allowance for a doubtful note receivable from a related party (Note 23) 2016 $ 37,383 2,246 10,739 1,277 3,212 5,945 ‐ ‐ 2015 $ 39,942 400 27,166 1,331 2,671 3,453 58,327 2,991 (1) On September 29, 2016, the Company announced its intention to consolidate the Company’s operations at Wellingborough, U.K. with other sites within the Group, as well as consolidate the operations of DeForest‐Wisconsin, U.S.A. and Fairfield‐Connecticut, U.S.A. during the first half of 2017 into a newly updated and scaled facility, located in the state of Connecticut, more precisely in the City of Trumbull. Therefore, during the third quarter of 2016, the Company recorded a provision for restructuring costs in accordance with IAS 37 “Provision, contingent liabilities and contingent assets” for an amount of $3,500 which consist mainly of severances and other related costs to closures sites. As at December 31, 2016, an amount of $155 was paid. In addition, the Company recorded an accelerated depreciation of $1,804 following the review of the economic life and carrying value of its property, plant and equipment of these sites. 5N Plus + Consolidated Financial Statements 48 84 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 Board of Directors 1 Arjang J. (AJ) Roshan President and Chief Executive Officer 2 Luc Bertrand Chairman of the Board 4 6 5 2 3 1 3 Jean-Marie Bourassa Chairman of the Audit and Risk Management Committee 4 James T. Fahey Member of the Governance and Compensation Committee – 5 Jennie S. Hwang Member of the Governance and Compensation Committee – Member Audit and Risk Management 6 Nathalie Le Prohon Chair of the Governance and Member Audit and Risk Management Compensation Committee Executive Committee 5 6 3 1 2 4 1 Arjang J. (AJ) Roshan 3 Nicholas Audet President and Chief Executive Officer Executive Vice President, 2 Richard Perron Chief Financial Officer Electronic Materials 4 Paul Tancell Executive Vice President, Eco-Friendly Materials 5 Evelyne Bundock Vice President, Human Resources 6 Pascal Coursol Vice President, Recycling, Refining and Corporate R&D ANNUAL REPORT 2016 • 5N PLUS • 85 STOCK EXCHANGE For more information, please contact: 5N Plus is listed on the Toronto INVESTOR RELATIONS Stock Exchange, under the symbol VNP. 5N Plus Inc. TRANSFER AGENT AND REGISTRAR Computershare Investor Services Inc. AUDITORS PricewaterhouseCoopers LLP 4385 Garand Street Montreal, Quebec H4R 2B4 T: 514-856-0644 F: 514-856-9611 invest@5nplus.com HEAD OFFICE 4385 Garand Street Montreal, Quebec H4R 2B4 ANNUAL MEETING The annual shareholders meeting will be held on Wednesday, May 3, 2017 at 10:00 a.m. Club Saint-James 1145 Union Avenue Montreal, Quebec 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 86 • 5N P LUS • A N N UA L R EPO RT 2 0 1 6 Corporate Information 100% Printed in Canada 5N Plus Inc. 4385 Garand Street Montreal, Quebec H4R 2B4 Canada www.5nplus.com

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