OUR STRATEGIC PLAN 5N21 Reaching the Halfway Point and delivering compelling results Enabling Performance 2018 Annual Report Mission As a leading global material technology company, our mission, each and every day, is to earn and retain the privilege to be essential to our customers, preferred by our employees and trusted among our shareholders in a quest to enable innovation and technology deployment based on natural resources for the betterment of the human race. Vision 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 so as to deliver competitive financial returns. Our Footprint With multiple facilities on three continents, 5N Plus is strategically situated close to resources, suppliers and customers, making us a reliable link in any supply chain. Employees on three continents Manufacturing facilities in North America, Europe and Asia Sales offices around the world Content 1 Message to Shareholders 4 Electronic Materials 6 Eco-Friendly Materials 8 Sustainability 10 Finance 36 Consolidated Financial Statements 85 Board of Directors and Executive Committee 12 Management’s Discussion and Analysis 46 Notes to Consolidated Financial Statements 86 Corporate Information Dear Shareholders On February 26th, 2019, our company, 5N Plus, reported its third financial year under the guidance of its strategic plan 5N21. I am pleased to report yet another year of solid earnings growth, tangible progress toward 5N21 deliverables, and further advances in growth initiatives, all of which will positively transform 5N Plus. Perhaps the most notable achievement in 2018 was that 5N Plus delivered growth despite stiff headwinds from metal markets impacting key metals the company consumes in the manufacture of its products. This is in stark contrast to the company’s performance prior to the implementation of 5N21, when similar headwinds would have caused adverse earnings volatility and derailed performance. Following this highly revealing test, we are pleased to declare that one of the three key objectives under our strategic plan, namely reducing earnings volatility by 50%, has been completed one year ahead of plan. Third financial year under 5N21 was characterized by yet another 12 months of solid growth in earnings. Since 2015, Adjusted EBITDA has grown from $4 million to These awards significantly bolstered our orderbook. The over $32 million, while return on capital employed moved growth in Catalytic and Extractive Materials has been brisk from negative territory to 15% in 2018. Our upstream teams and pleasantly surprising, with strong pull from a market continued to make great progress in 2018, as they further seeking our products. We have nearly sold out our 2019 diversified our source of upstream metal-continuing feed capacity and are looking for options to address production materials, reducing our dependence on any specific region or demands while improving margins for this sector. supplier. We also initiated investments in Asia and Europe to expand capacity and capability with respect to competitively valorizing key metals from secondary streams. We believe we are positioning 5N Plus as a unique industry player — the only one to operate refining and recycling assets on three continents, while maintaining proximity to customers and key markets. This greater flexibility will enable 5N Plus to competitively procure key consumable metals from sources across the globe and enhance our ability to serve customers. Moreover, during 2018 we continued to selectively implement commercial hedging across our product portfolio to reduce volatility risks associated with minor metals. With respect to downstream activities during 2018, 5N Plus was awarded a number of sizable long-term contracts within: • Renewable Energy Materials • Catalytic & Extractive Materials • Security Aerospace Sensing & Imaging (SASI) Materials Adjusted EBITDA In millions of USD Return on Capital Employed In % 5 4 $ % 8 % 6 1 % 5 1 % 7 1 2 3 $ 0 3 $ 2 2 $ 4 $ % 4 1 - 2015 2016 2017 2018 2021 GOAL See Non-IFRS Measures 2015 2016 2017 2018 2021 GOAL 1 5N Plus 2018 Annual Report Investments to Fuel Growth During the year, we invested to double the capacity of our Higher Efficiencies and Margins In the initial phase of 5N21, management focused efforts specialty semiconductor plant on the Montreal campus, on optimizing core activities to streamline operations to keep pace with market demand for our specialty and increase efficiencies across various sites around the semiconductor materials. Also in 2018, 5N Plus initiated and globe. These efforts translated into substantial performance completed an investment to build a high-purity additive improvements, and we announced more benefits to follow, plant in Germany to support the company’s entry into the given the lag-time associated with these efficiencies. Indeed, feed additive market. By year end, this investment had been these benefits materialized in 2018, particularly in SG&A. completed on time and on budget. Value-Added Products During 2018, our downstream teams continued to expand The implementation of 5N21 and its associated new business model have also introduced some side-effects, among them an overall reduction in revenue and metal content. This reduction is owed to a substantial contraction in pass-through their reach into products with higher value-added content, metal revenue, as 5N Plus products increasingly require less thereby moving away from commodity businesses vulnerable metal. In parallel, however, the company’s value-added to earnings volatility. We therefore wound down a joint venture revenue has continued to grow, year-over-year, during the in China and a partnership in Korea, both of which were in the past three years. While the growth in value-added revenue Technical Materials sector. Instead, we concentrated efforts on has not been large enough to offset the drop in pass-through growing our Micro-Powders business, which is characterized metal revenue, the considerably higher margins explain the by a high level of value-added materials and has received substantial improvement in earnings over this period and are significant market interest, with over two dozen customer a key feature of our business model under 5N21. certification programs in various stages of completion. We are positioning this business to replace and revitalize our former activities in Technical Materials, with markedly higher profit margins to deliver greater sustainability. Products manufactured by 5N Plus today require less metal than in the past. While the growth in value-added revenue has not been large enough to offset the drop in pass-through metal revenue, the considerably higher margins explain the substantial improvement in earnings. Total Revenue Including Metal In millions of USD 1 3 2 $ 0 2 2 $ 8 1 2 $ Net Earnings In millions of USD 4 1 $ 2 1 $ 6 $ - 2016 2017 2018 2016 2017 2018 2 5N Plus 2018 Annual Report Looking Forward to 2019 In 2019, we will focus greater attention and resources on two As we close 2018, it is worthwhile noting that we are reaching priorities: • Develop 5N Plus’ three downstream growth opportunities (Semiconductors, Micro-Powders, and Feed Additives) and continue to grow upstream activities • Build financial sustainability into our core businesses by exercising margin management based on investments in process technology and efficiency enhancement With respect to new growth initiatives, we view 2019 as a staging year, as we position these businesses for the growth needed to meet our 5N21 goal by 2021. We expect a busy year of customer qualifications and product certifications across all three growth sectors. Our operations teams will focus on mass-scaling products, while our commercial teams will continue to develop the new markets. In addition to our growth priority, in 2018 our teams identified select investment opportunities in our core businesses. These are expected to enhance our competitiveness, delivering rapid payback and global leadership in key sectors. Most of the investments are in new process technology and are expected to be launched in 2019 with anticipated benefits harvested in 2020 and beyond. Our overall investment plans continue to respect the $50 million investment envelope over the five years of the plan, which is about the rate of depreciation over this time. Where we are at the Midpoint of our Strategic Plan 5N21 the midpoint of our strategic plan. All signs suggest that we are well positioned to deliver on the plan’s objectives. The next half of 5N21 requires greater contributions from growth opportunities, and we are very excited about the prospect of these businesses and the markets they will enable. That being said, timing remains a key variable, which we do not control. Nevertheless, we remain committed to ensuring that when these markets move forward, 5N Plus will be ideally positioned to benefit its shareholders, employees and other stakeholders. In the meantime, I would like to thank our shareholders and Board of Directors for their continued support and constructive feedback. I would also like to thank our employees for their dedication, commitment and drive over the past several years. As we move to the next half of 5N21, I look forward to working closely with our employees and our Board to realize the full potential of our plan and transition 5N Plus to become a leading global material technology company. Arjang J. (AJ) Roshan President and Chief Executive Officer 2021 2018 $45M 2018 Achieved 2021 2018 17% 15% $32M 2015 $4M 2015 Negative Deliver $45M Adjusted EBITDA Reduce Earnings Volatility by 50% Deliver 17% Return on Capital Employed 5N Plus 2018 Annual Report 3 Electronic Materials The 5N21 strategic plan has been a rewarding and eventful journey for the Electronics Materials business unit, setting the stage for several high- potential developments between now and the end of 2021. Medical imaging is experiencing surging demand for scanners based on new detector technologies, enabled by 5N Plus products, that emit far less radiation and provide enhanced resolution for more accurate diagnoses. SASI Semiconductor Materials (Security, Aerospace, Sensing and Imaging) capacity at our specialty semiconductor plant In this sector, our semiconductor products are integral to next-generation detectors for medical on the Montreal campus, securing our position imaging, high eff iciency solar cells for space as the only viable and global large-scale supplier satellites, and focal plane array cameras for infrared of semiconductor ultra-purity compounds. We imaging. The SASI semiconductor business is have expanded our role as a strategic partner to growing, and we have successfully captured a the United States government and won a multi- number of long-term contracts. To support this year contract to support key national security business, we have invested to double production programs. 4 5N Plus 2018 Annual Report Micro-Powders We have made great strides in replacing our former activities in the Technical Renewable Energy We secured a series of multi-year supply Materials sector with our high value-added and high-growth Micro-Powders and service contracts in Renewable business. 5N Plus micro-powders are based on a unique process technology Energy, as we continue to streamline that enables the cost-effective production of various complex powdered alloys operations, expand capabilities and that meet stringent specification requirements for markets of the future. As one increase eff iciencies to sustainably of the very few companies capable of producing, at scale, high quality powders support this business for years to come. in the 1-to-10-micron range, we are eliciting impressive market interest with a number of potential customers certifying our products for their future product development road-map. Looking Forward We are encouraged by prospects in the second half of 5N21, particularly for our two growth businesses, SASI and Micro-Powders. We expect SASI semiconductor materials to see a significant increase in the size of its addressable market. Medical imaging is experiencing surging demand for scanners based on new detector technologies, enabled by 5N Plus products, that emit far less radiation and enhanced resolution for more accurate diagnoses. In aerospace, our recent contract awards positions us well for the duration of the plan. Given the need to periodically replace satellites, and the number of constellation programs in various stages of development, we anticipate healthy and prolonged demand growth. Finally, infrared imaging is undergoing increased demand for more sensitive and higher-definition detectors and imaging technologies. These are enabled by the engineered materials for which 5N Plus products offer unmatched performance. As for our Micro-Powders business, we anticipate even stronger demand. Global macro- trends such as miniaturization, additive manufacturing and heat management will drive the need for 5N Plus micro-powders, which feature high sphericity, high purity, and ultrafine and customizable particle size distribution. In the electronics industry, advanced solder paste dispensing and jetting systems, increased functionality in smart phones and wearable devices, and new interconnect paradigms for next generation components such as micro-LEDs, will sharpen interest in our unique products. We also believe our powders will play a key role in the high-growth 3D printing sector, which will require varied combinations of alloys in much finer particle sizes, specific morphologies and higher purity levels. Everything is therefore in place for the Electronic Materials business unit to successfully deliver on its 5N21 goals. In the electronics industry, increased functionality in smart phones and wearable devices will sharpen interest in our unique products. 5 5N Plus 2018 Annual Report Eco-Friendly Materials At the midpoint of our five-year 5N21 strategic plan, the Eco-Friendly Materials business unit has already achieved a great deal. All the elements are now in place to meet our strategic goals. Health and Pharmaceuticals We remain committed to growing this business and consolidating our position as a leading global supplier of active pharmaceutical ingredient to the pharma industry. Indeed, we have achieved both ambitions. Our outstanding product quality and Industrial Materials We’re now taking a more selective approach to market opportunities, prioritizing product margins over market share. Going forward, margins in this sector will further benefit from substantial investments aimed at improving production efficiencies and ratcheting up operational capacity reliability of supply continue to create a compelling and flexibility. value proposition for customers. Some of our products in the Industrial Materials are used as alternatives to Lead to produce environmentally friendly yellow pigments. 6 5N Plus 2018 Annual Report Catalytic and Extractive Materials We have seen year-on-year increased demand for these products, which are used by the mining and petrochemical industries, and fully expect this positive trend to continue. New Growth Initiative Moving into the next phase of our 5N21 plan, we look forward to growth Our entry into the feed additive market is an exciting new initiatives driving the business forward. One exciting development development. The 5N Plus is our entry into the feed additive market and the production of pre-mixes containing trace elements essential for good human and animal health. Our state-of-the-art production facility in Germany is now fully commissioned and has begun to produce high-purity additives, marketed under the brand name Nutritive. We believe our product quality, consistency and purity will enable our growth in this area and we look forward to this journey, as it has already attracted keen interest from the market. Looking to 2019 and beyond, the Eco-Friendly business unit is well positioned to deliver on its 5N21 commitments. state-of-the-art production facility in Germany is now fully commissioned. 7 5N Plus 2018 Annual Report Sustainability As a leading global materials technology company committed to sustainability, 5N Plus uses process technologies to recycle and recover valuable resources from waste, by-products and secondary streams generated both in its own plants and from other sources. In addition, 5N Plus continues to diversify the source of its feed material. Throughout, the company uses best industry practices in addition to respecting local laws in order to manage the by-products generated from its own refining activity. 5N Plus also provides resource management All of this enables 5N Plus to sustainably procure and recycling services to its customers. 5N Plus is and recycle vital metals essential for its business uniquely positioned and qualified to lead in this and its customers, which ultimately paves the area, as the company has assets, capabilities and way for financial sustainability and responsible essential permits on three continents to refine corporate citizenship. and recycle key metals. Its customers therefore keenly rely on 5N Plus’ expertise and service. Lübeck (Germany) Tilly (Belgium) Eisenhüttenstadt (Germany) HEAD OFFICE Montréal (Canada) St. George (USA) Trumbull (USA) Shangyu (China) Hong Kong (China) Vientiane (Laos) Kulim (Malaysia) Santiago (Chile) 700 employees on 3 continents Commercial Activities Manufacturing Research & Development 8 5N Plus 2018 Annual Report We encourage every member of our team to embody the 5N Plus mission statement in everything we do. Earn and retain the privilege to be: • essential to our customers • preferred by our employees • trusted among our shareholders Conflict-free Procurement 5N Plus complies with all national and applicable laws and regulations related to its business and scope of activity. Through its actions, the company promotes initiatives for managing resources in a responsible manner. Waste Water Treatment 5N Plus sites around the globe continue to invest in Environment Health and Safety 5N Plus has allocated resources from both local and corporate functions to promote, monitor and advance the company’s Environmental, Health & Safety practices. The company continues to invest in this area and treats these files with utmost priority — ahead of all other issues. At 5N Plus, we believe good performance in EHS can translate new process development and employ advanced to financial sustainability. The company views technologies to minimize water consumption. compliance with local laws and regulations as a These sites have been investing in assets and minimum requirement and often strives to exceed processes to treat waste water and minimize these measures. discharges, often ahead of local standards. Moreover, our sites engage with local communities and actively work with them for the benefit of the environment. Within its 5N21 strategic plan, 5N Plus has allocated sizable investments to further reduce discharges over the next several years. Ethical Conduct 5N Plus has published and institutionalized a Code of Ethics. Strict ethical standards are enshrined in the Code, and adherence is obligatory, covering everyone within the company regardless of their position or tenure. The management of the company promotes a safe environment in which violation of the Code can be disclosed and the matter dealt with in a responsible manner. Sound Governance 5N Plus adheres to the highest standards of governance. Six out of seven members of our Board of Directors are independent. We actively encourage diversity across the organization and on our Board of Directors. 9 5N Plus 2018 Annual Report Finance Our strategic plan, 5N21, has never been more vital to the company and its prospects. In 2018 we addressed fresh opportunities and challenges requiring financial leadership to execute over multiple time horizons. By year end, we had made significant progress in realizing key internal growth initiatives and increasing the share of high added-value products — both critical to our transformation. Among key success factors: our ability to align long-term strategic options while managing the impact of volatility in our industry. By leveraging these realities into effective tactical and strategic actions, since 2016 we have improved gross margin by more than 17% to 26.1%, and adjusted EBITDA margin by 54% to 14.8%. Where We Stand In absolute terms, f inancial results continued to trend A Solid Balance Sheet Determined to keep all options open to finance growth, positively over 2017, with adjusted EBITDA reaching we have transformed the balance sheet, supported by a $32.4 million versus $29.6 million a year ago. This performance competitive senior credit facility renewed in April 2018, and reflects robust demand, improved product mix, higher asset a subordinated term loan raised in February 2019. This gives utilization, and delivery on business improvement initiatives. us additional flexibility. While we favour deploying surplus Indeed, it’s now fair to say the strategic mindset behind 5N21 cash to fund internal growth initiatives, we are investing with differentiates us from our peers. We’re seeing increased focus and discipline to improve future shareholder returns. evidence of this in return on capital employed, now reaching In the absence of further working capital investment for 15.1%, and in a sharper focus on generating sustainable value commercial hedging purposes, we will continue to prioritize independent of metal prices and production volumes. a low net debt target and expect to accelerate progress in Strategically, management is looking beyond the near term to anticipate opportunities and risks, without distracting us from our course. this regard. In 2019, we will continue to invest in projects that support our transition toward higher added-value products and those that will significantly enhance the cost structure of our operations. Adjusted EBITDA In millions of USD ROCE In % 4 . 2 3 $ 6 . 9 2 $ 3 . 2 2 $ % 7 . 8 % 2 . 8 % 2 . 6 % 2 . 8 % 1 . 4 1 - % 6 . 5 1 % 1 . 5 1 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 See Non-IFRS Measures Good Reasons for Optimism While there is still much to do, we remain optimistic that our progress is sustainable. Our strategy to drive structurally higher returns through the delivery of 5N21 remains sound. We now operate from a more efficient, resized footprint on three continents, and are well positioned to deliver sustainable value to shareholders. Given the improved performance and market outlook, the company has resumed its normal course issuer bid (NCIB) and is committed to increasing capital returns to shareholders while maintaining growth investments. 10 5N Plus 2018 Annual Report Content 12 Management’s Discussion and Analysis 36 Management’s Report to the Shareholders of 5N Plus Inc. 41 Consolidated Statements of Financial Position 42 Consolidated Statements of Earnings 43 Consolidated Statements of Comprehensive Income 45 Consolidated Statements of Cash Flows 85 Board of Directors and Executive Committee 44 Consolidated Statements of Changes in Equity 46 Notes to Consolidated Financial Statements 86 Corporate Information 5N Plus 2018 Annual Report 11 MANAGEMENT’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” 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, 2018. 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 26, 2019, 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. “Q4 2018” and “Q4 2017” refer to the three‐month periods ended December 31, 2018 and 2017 respectively, and “FY 2018” and “FY 2017” refer to the years ended December 31, 2018 and 2017 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. Restatement of Comparatives Results Certain comparative results in this MD&A have been restated to reflect a change in our definition of Adjusted Operating Expenses, Adjusted EBITDA and Adjusted Net Earnings. Please refer to the “Selected Quarterly Financial Information” and “Selected Yearly Financial Information” sections. 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 associated with our growth strategy, credit, liquidity, interest rate, litigation, 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 including China, 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 26, 2019. 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. 12 5N Plus 2018 Annual Report 5N Plus + Management’s Discussion and Analysis 1 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS Overview 5N Plus is a leading global producer of engineered materials and specialty chemicals with integrated recycling and refining assets to manage the sustainability of its business model. The Company is headquartered in Montreal, Québec, Canada and operates R&D, manufacturing and commercial centers 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 as enabling precursors by its customers in a number of advanced electronics, optoelectronics, pharmaceutical, health, renewable energy and industrial applications. Many of the materials produced by 5N Plus are critical for the functionality and performance of the products and systems produced by its customers, many of whom are leaders within their industry. 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, financial information and 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 products which are used in a number of applications such as security, aerospace, sensing, imaging, renewable energy and various technical industries. Typical end markets include photovoltaics (terrestrial and spatial solar energy), advance electronics, optoelectronics, electronic packaging, medical imaging and thermoelectric. 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. The Eco‐Friendly Materials segment is so labelled because it is mainly associated with bismuth, one of the very few heavy metals which has no detrimental effect on either human health or in the environment. The Eco‐Friendly Materials segment operates in North America, Europe and Asia. The Eco‐Friendly Materials segment manufactures and sells products which are used in a number of applications such as pharmaceutical, healthcare, animal feed additive, catalytic and extractive, as well as various industrial materials. Main products are sold either in elemental or alloyed form but mostly in the form of specialized chemicals. Revenues and earnings associated with recycling services and activities provided to customers of the Eco‐Friendly Materials segment are also included in the Eco‐Friendly Materials segment. 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 materials 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. Extracting more value from core businesses and global assets; 2. Optimizing balance of contribution from upstream and downstream activities; and 3. Delivering quality growth from both existing growth initiatives and future M&A opportunities. 1 See Non‐IFRS Measures 5N Plus + Management’s Discussion and Analysis 5N Plus 2018 Annual Report 2 13 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis Management’s Discussion and Analysis Summary of Results Highlights of Q4 2018 and Fiscal Year 2018 Reaching midpoint of 5N21 and delivering results ahead of plan FY 2017 $ 219,916 (190,329) 29,587 ‐ (4,470) 2,953 1,887 (3,100) 85 (79) 26,863 During the year, Adjusted EBITDA1 and EBITDA1 reached $32.4 million and $29.0 million, compared to $29.6 6,097 8,226 million and $26.9 million in 2017. This performance reflects strong demand for our products, improved product 12,540 mix and tangible reduction in earnings volatility. Fiscal year 2018 was the third year in which 5N Plus grew its earnings. This performance was delivered despite unfavorable Revenue movement of metal notations associated with the Company’s business throughout 2018 as compared to stable or Adjusted operating expenses1 * favorable movement of the same notations in 2016 and 2017. The Company’s performance in 2018 is a clear proof that Adjusted EBITDA1 the new business model is delivering on its commitments and the Company is well on track to deliver 5N21 targets. Impairment of inventory Share‐based compensation expense During 2018, the demand for the Company’s products remained strong and the diversity of the markets in which 5N Plus Litigation and restructuring (costs) income participates remained an asset. During the same period, the Company continued to invest on its growth initiatives which Gain on disposal of property, plant and equipment (PPE) aim to further improve quality and sustainability of the Company’s earnings. Moreover, in 2018, 5N Plus remained Impairment of non‐current assets somewhat unaffected by the trade and tariff related themes mainly due to the positioning of its assets, with emphasis on Change in fair value of debenture conversion option Foreign exchange and derivative gain (loss) local entities supporting local markets and optimizing the Company’s supply chain to become more diverse and agile. EBITDA1 Interest on long‐term debt, imputed interest and other interest expense Depreciation and amortization Earnings before income taxes Income tax (recovery) expense Q4 2017 $ 52,492 (45,729) 6,763 ‐ (712) (415) 1,497 (3,100) 67 320 4,420 1,372 2,434 614 FY 2018 $ 217,995 (185,645) 32,350 ‐ (3,298) (316) 510 ‐ ‐ (225) 29,021 6,295 8,810 13,916 Q4 2018 $ 47,710 (40,798) 6,912 ‐ (721) (766) ‐ ‐ ‐ 164 5,589 886 2,469 2,234 Current Deferred Net earnings The Adjusted EBITDA and EBITDA for the fourth quarter reached $6.9 million and $5.6 million in 2018 compared 3,595 (3,068) to $6.8 million and $4.4 million in 2017. The fourth quarter results are historically marked by cyclical pattern. 527 12,013 Net earnings for the year 2018 reached $14.0 million or $0.17 per share, compared to $12.0 million or $0.14 per share for the year 2017, the highest level reached in recent years. 243 (1,851) (1,608) 2,222 848 (904) (56) 13,972 (2,955) 1,143 (1,812) 4,046 Change $0.17 $0.17 $0.05 $0.05 $0.03 $0.03 $0.14 $0.14 Q4 2018 $ 19,368 28,342 47,710 (37,916) Revenue by Segment and Gross Margin Electronic Materials Eco‐Friendly Materials Total revenue Cost of sales Depreciation on PPE Gross margin1 Gross margin percentage1 Basic earnings per share Diluted earnings per share *Excluding share‐based compensation expense, litigation and restructuring income, gain on disposal of property, plant and equipment, impairment of non‐current assets and depreciation and amortization. Revenue in 2018 reached $218.0 million compared to $220.0 million in 2017. The lower sales figure is mainly driven by the lower sales of lower margin products with high content of metal and lower pass‐through revenue from metals which are used as consumables in the Company’s products. Consistent with the Company’s strategic plan, over the past three years, the amount of metals utilized in the Company’s products have reduced markedly which in turn has reduced earnings volatility considerably. Q4 2017 Return on Capital Employed (ROCE) 1 reached 15.1% in 2018, similar to 2017, while compared to 8.2% in 2016 $ reflecting the overall margin expansion associated with the Company’s products and services, and better 10% 17,917 management of capital employed. (6%) 34,575 (1%) 52,492 Net debt1 stood at $22.2 million as at December 31, 2018 from $11.4 million for the same period last year, (1%) (41,035) impacted by working capital, more specifically due to a decrease in trade and accrued liabilities and an increase 2,363 in inventory aimed at hedging commercial positions. 13,820 26.3% Backlog1 reached as at December 31, 2018 a level of 217 days of sales outstanding, higher than previous quarter, and last year ending at a level of 187 days. Bookings1 in Q4 2018 reached 105 days compared to 86 days in Q3 During Q4 2018 and FY 2018, revenue decreased by 9% and 1% respectively compared to the same periods of 2017. Gross 2018 and 108 days in Q4 2017. margin reached 25.3% in Q4 2018 compared to 26.3% in Q4 2017, tracking an average gross margin of 26.1% for both years, or $56.9 million in 2018 compared to $57.3 million in 2017. Both revenue and gross margin were negatively In Q4 2018, 5N Plus completed the construction of its high purity additive plant in Germany on time and in line impacted by adverse movements in the underlying metal notations, especially in the second half of 2018. The stability of with the budget envelop of its strategic plan. During the same period, the commissioning of the plant began with revenue and gross margin in 2018, despite adverse impacts from the commodity markets, is congruent with the the aim to commence certification and qualification campaigns in early 2019. Company’s new business model under its strategic plan to reduce earnings volatility from notable movements in the metal notations. On April 11, 2018, 5N Plus announced expansion of capacity and capability in its upstream activities across South East Asia and Europe to further enhance the Company’s competitive access to specialty metals. FY 2018 $ 81,014 136,981 217,995 (169,061) FY 2017 $ 73,448 146,468 219,916 (170,514) 8% (18%) (9%) (8%) 7,908 57,310 26.1% 2,256 12,050 25.3% 7,962 56,896 26.1% (5%) (13%) 1% (1%) Change On April 24, 2018, 5N Plus announced the closing of a $79.0 million senior secured multi‐currency revolving syndicated credit facility. Subject to lenders’ approval, 5N Plus can exercise its option to request an expansion of the credit facility through a $30.0 million accordion feature which would increase the total size of the facility to $109.0 million. 1 See Non‐IFRS Measures 1 See Non‐IFRS Measures 5N Plus + Management’s Discussion and Analysis 5N Plus + Management’s Discussion and Analysis 14 5N Plus 2018 Annual Report 5 3 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS On April 30, 2018, 5N Plus announced that it has secured a series of multi‐year contracts for the supply of semiconductor materials and ancillary services associated with the manufacturing of thin film photovoltaic (PV) modules by First Solar, Inc. On May 2, 2018, 5N Plus announced the nomination of Mr. Donald F. Osborne with over 30 years of experience in Satellite Communications, Space and Defence, as a Director of 5N Plus. On July 3, 2018, 5N Plus announced partial redemption of its 5.75% convertible unsecured subordinated debentures maturing on June 30, 2019, redeeming debentures in an aggregate principal amount of CA$40.0 million. On July 31, 2018, 5N Plus announced that it is doubling the capacity of its ultra‐high purity Semiconductor plant located on its Montreal campus to enable its Electronic Materials division to satisfy the growing demand for the Company’s specialty semiconductor materials. On February 6, 2019, 5N Plus announced the closing of a $25.0 million unsecured subordinated term loan with Investissement Québec. On February 11, 2019, 5N Plus announced that at a special meeting of its shareholders held in Montreal, Quebec, shareholders approved that the stated capital of the common shares of 5N Plus be reduced to $5.0 million and the amount of the reduction be added to the contributed surplus of the Company pursuant to Section 38(1) of the Canada Business Corporation Act, providing more flexibility to pay dividends and repurchase common shares. On February 20, 2019, 5N Plus announced that its U.S. based subsidiary, 5N Plus Semiconductors, has been awarded a multi‐year program to supply opto‐electronic semiconductor substrates to Albuquerque, New Mexico based SolAero Technologies. The substrates are intended for use in satellite solar arrays for a number of applications, including powering a constellation of several hundred low‐orbit broadband satellites being manufactured by Airbus OneWeb Satellites. This network of satellites will provide global, persistent, low latency internet access that promises to bridge the digital divide. On February 25, 2019, 5N Plus announced that it has exercised its right to redeem all of its outstanding 5.75% convertible unsecured subordinated debentures maturing on June 30, 2019. On March 28, 2019 the Company will redeem the debentures in an aggregate principal amount of CA$26 million. With the closing of 2018 fiscal year, the Company has reached the midpoint milestone of its strategic plan 5N21. The basic premise of this plan has been to significantly reduce 5N Plus’ earnings volatility attributed to the fluctuations in commodity markets while growing the Company’s profitability and enhancing return on capital employed. Over the past two years, Adjusted EBITDA1 has grown by 45% while return on capital employed has nearly doubled. Moreover, 2018 provided an opportunity to test the Company’s progress with respect to reducing earnings volatility stemmed from adverse changes in the metal markets. During the year, nearly all notations associated with metals utilized by 5N Plus as consumables experienced unfavorable movement. Accounting for this and the fact that the same notations moved favorably in 2017, the growth in Adjusted EBITDA as compared to 2017 is a clear sign that the new business model is working. Also, these results confirm that 5N Plus is well on track to deliver two of the three goals defined by its strategic plan, namely $45.0 million Adjusted EBITDA and 17% ROCE by 2021. As with the third goal of reducing earnings volatility by 50%, the Company has achieved this objective nearly a year earlier than anticipated. 1 See Non‐IFRS Measures 5N Plus + Management’s Discussion and Analysis 5N Plus 2018 Annual Report 4 15 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis Summary of Results Revenue Adjusted operating expenses1 * Adjusted EBITDA1 Impairment of inventory Share‐based compensation expense Litigation and restructuring (costs) income Gain on disposal of property, plant and equipment (PPE) Impairment of non‐current assets Change in fair value of debenture conversion option Foreign exchange and derivative gain (loss) EBITDA1 Interest on long‐term debt, imputed interest and other interest expense Depreciation and amortization Earnings before income taxes Income tax (recovery) expense Current Deferred Net earnings Q4 2018 $ 47,710 (40,798) 6,912 ‐ (721) (766) ‐ ‐ ‐ 164 5,589 886 2,469 2,234 (2,955) 1,143 (1,812) 4,046 Q4 2017 $ 52,492 (45,729) 6,763 ‐ (712) (415) 1,497 (3,100) 67 320 4,420 1,372 2,434 614 243 (1,851) (1,608) 2,222 FY 2018 $ 217,995 (185,645) 32,350 ‐ (3,298) (316) 510 ‐ ‐ (225) 29,021 6,295 8,810 13,916 848 (904) (56) 13,972 FY 2017 $ 219,916 (190,329) 29,587 ‐ (4,470) 2,953 1,887 (3,100) 85 (79) 26,863 6,097 8,226 12,540 3,595 (3,068) 527 12,013 Basic earnings per share Diluted earnings per share *Excluding share‐based compensation expense, litigation and restructuring income, gain on disposal of property, plant and equipment, impairment of non‐current assets and depreciation and amortization. $0.03 $0.03 $0.17 $0.17 $0.05 $0.05 $0.14 $0.14 Revenue by Segment and Gross Margin Electronic Materials Eco‐Friendly Materials Total revenue Cost of sales Depreciation on PPE Gross margin1 Gross margin percentage1 Q4 2018 $ 19,368 28,342 47,710 (37,916) 2,256 12,050 25.3% Q4 2017 $ 17,917 34,575 52,492 (41,035) 2,363 13,820 26.3% Change 8% (18%) (9%) (8%) (5%) (13%) FY 2018 $ 81,014 136,981 217,995 (169,061) 7,962 56,896 26.1% FY 2017 $ 73,448 146,468 219,916 (170,514) 7,908 57,310 26.1% Change 10% (6%) (1%) (1%) 1% (1%) During Q4 2018 and FY 2018, revenue decreased by 9% and 1% respectively compared to the same periods of 2017. Gross margin reached 25.3% in Q4 2018 compared to 26.3% in Q4 2017, tracking an average gross margin of 26.1% for both years, or $56.9 million in 2018 compared to $57.3 million in 2017. Both revenue and gross margin were negatively impacted by adverse movements in the underlying metal notations, especially in the second half of 2018. The stability of revenue and gross margin in 2018, despite adverse impacts from the commodity markets, is congruent with the Company’s new business model under its strategic plan to reduce earnings volatility from notable movements in the metal notations. 1 See Non‐IFRS Measures 5N Plus + Management’s Discussion and Analysis 16 5N Plus 2018 Annual Report 5 Management’s Discussion and Analysis Operating earnings, EBITDA and Adjusted EBITDA MANAGEMENT’S DISCUSSION AND ANALYSIS Electronic Materials Eco‐Friendly Materials Corporate Adjusted EBITDA1 EBITDA1 Operating earnings Q4 2018 Q4 2017 Change FY 2018 FY 2017 Change $ 7,142 1,115 (1,345) 6,912 5,589 2,956 $ 5,642 3,667 (2,546) 6,763 4,420 1,599 27% (70%) 47% 2% 26% 85% $ 29,226 12,517 (9,393) 32,350 29,021 20,436 $ 24,835 14,976 (10,224) 29,587 26,863 18,631 18% (16%) 8% 9% 8% 10% In Q4 2018, Adjusted EBITDA1 was $6.9 million compared to $6.8 million in Q4 2017. In FY 2018, Adjusted EBITDA increased by $2.8 million, from $29.6 million in FY 2017 to $32.4 million, supported by a favorable sales mix, strong product demand and overall performance of operating activities. In Q4 2018, EBITDA1 was $5.6 million compared to $4.4 million in Q4 2017. In FY 2018, EBITDA was $29.0 million compared to $26.9 million in FY 2017. The improvement in FY 2018 is mainly due to the increase in Adjusted EBITDA mentioned above combined with lower shared‐based compensation expense and less significant one‐time items recorded in the current period. Operating earnings in Q4 2018 were $3.0 million compared to $1.6 million in Q4 2017 and $20.4 million in FY 2018 compared to $18.6 million in FY 2017. Electronic Materials Segment Adjusted EBITDA in Q4 2018 increased by $1.5 million to $7.1 million representing an Adjusted EBITDA margin1 of 37% compared to 31% in Q4 2017. Adjusted EBITDA increased by $4.4 million to $29.2 million in FY 2018 representing an Adjusted EBITDA margin of 36% compared to 34% in FY 2017. Eco‐Friendly Materials Segment Adjusted EBITDA decreased by $2.6 million representing an Adjusted EBITDA margin of 4% in Q4 2018 compared to 11% in Q4 2017. Adjusted EBITDA decreased by $2.5 million representing an Adjusted EBITDA margin of 9% in FY 2018 compared to 10% in FY 2017. The figures in both periods were adversely impacted by the decrease in the underlying metal notations. The Company’s strategic plan has significantly reduced the impact of earnings volatility due to fluctuations in the metal markets. The structure of contracts in this segment makes it nearly impossible to completely eliminate such volatility. Net Earnings and Adjusted Net Earnings Net earnings Basic earnings per share Reconciling items: Share‐based compensation expense Accelerated imputed interest Litigation and restructuring costs (income) Gain on disposal of PPE Impairment of non‐current assets Change in fair value of debenture conversion option Income tax expense on taxable items above Adjusted net earnings 1 Basic adjusted net earnings per share1 1 See Non‐IFRS Measures 5N Plus + Management’s Discussion and Analysis Q4 2018 Q4 2017 $ 4,046 $0.05 721 ‐ 766 ‐ ‐ ‐ (126) 5,407 $0.06 $ 2,222 $0.03 712 ‐ 415 (1,497) 3,100 (67) (1,001) 3,884 $0.05 FY 2018 $ 13,972 $0.17 3,298 1,490 316 (510) ‐ ‐ (1,082) 17,484 $0.21 FY 2017 $ 12,013 $0.14 4,470 ‐ (2,953) (1,887) 3,100 (85) (769) 13,889 $0.17 5N Plus 2018 Annual Report 6 17 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis Net earnings reached $4.0 million or $0.05 per share in Q4 2018 compared to $2.2 million or $0.03 per share in Q4 2017. Adjusted net earnings1 increased by $1.5 million and reached $5.4 million in Q4 2018, compared to $3.9 million in Q4 2017. Excluding the income tax expense, the main items reconciling the Adjusted net earnings in Q4 2018 are the share‐based compensation expense and litigation and restructuring costs. In FY 2018, net earnings reached $14.0 million or $0.17 per share compared to $12.0 million or $0.14 per share in FY 2017. Adjusted net earnings increased by $3.6 million and reached $17.5 million compared to $13.9 million in FY 2017. Excluding the income tax expense, the main items reconciling the Adjusted net earnings in FY 2018 are the share‐based compensation expense, the litigation and restructuring costs, the gain on the disposal of a redundant PPE as well as the accelerated imputed interest recognized as an expense following the early redemption of the CA$40.0 million convertible debentures in June 2018. Bookings and Backlog Electronic Materials Eco‐Friendly Materials Total Q4 2018 $ 61,771 51,493 BACKLOG1 Q3 2018 $ 62,175 43,830 113,264 106,005 107,386 Q4 2017 Q4 2018 $ 59,705 47,681 $ 18,964 36,005 54,969 (number of days based on annualized revenues) * Electronic Materials Eco‐Friendly Materials Weighted average Q4 2018 291 166 217 BACKLOG1 Q3 2018 289 118 181 Q4 2017 Q4 2018 304 126 187 89 116 105 *Bookings and backlog are also presented in number of days to normalize the impact of commodity prices. BOOKINGS1 Q3 2018 $ 22,409 28,060 50,469 BOOKINGS1 Q3 2018 104 76 86 Q4 2017 $ 20,032 41,922 61,954 Q4 2017 102 111 108 Q4 2018 vs Q3 2018 Backlog1 as at December 31, 2018 reached a level of 217 days of annualized revenue, representing an increase of 36 days compared to the previous quarter. Backlog as at December 31, 2018 for the Electronic Materials segment represented 291 days of annualized segment revenue, an increase of 2 days over the backlog ended September 30, 2018. The backlog for the Eco‐Friendly Materials segment represented 166 days of annualized segment revenue, an increase of 48 days or 41% over the backlog ended September 30, 2018. Bookings1 for the Electronic Materials segment decreased by 15 days, from 104 days in Q3 2018 to 89 days in Q4 2018. Bookings for the Eco‐Friendly Materials segment increased by 40 days, from 76 days in Q3 2018 to 116 days in Q4 2018. Q4 2018 vs Q4 2017 Backlog as at December 31, 2018 for the Electronic Materials segment decreased by 13 days and increased by 40 days for the Eco‐Friendly Materials segment compared to December 31, 2017. Bookings decreased by 13 days for the Electronic Materials segment and increased by 5 days for the Eco‐Friendly Materials segment compared to the previous year quarter. 1 See Non‐IFRS Measures 5N Plus + Management’s Discussion and Analysis 18 5N Plus 2018 Annual Report 7 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS Expenses Depreciation and amortization SG&A Share‐based compensation expense Litigation and restructuring costs (income) Impairment of non‐current assets Financial expenses Income tax (recovery) expense Total expenses Q4 2018 $ 2,469 4,713 721 766 ‐ 722 (1,812) 7,579 Q4 2017 $ 2,434 6,678 712 415 3,100 985 (1,608) 12,716 FY 2018 $ 8,810 23,940 3,298 316 ‐ 6,520 (56) 42,828 FY 2017 $ 8,226 26,220 4,470 (2,953) 3,100 6,091 527 45,681 Depreciation and Amortization Depreciation and amortization expenses in Q4 2018 and FY 2018 amounted to $2.5 million and $8.8 million respectively, compared to $2.4 million and $8.2 million for the same periods of 2017. The increase is primarily attributable to the completion of specific capital expenditures late 2017 and early 2018. SG&A For Q4 2018 and FY 2018, SG&A expenses were $4.7 million and $23.9 million respectively, compared to $6.7 million and $26.2 million for the same periods of 2017, positively impacted by various initiatives to control the overhead expenses. Share‐Based Compensation Expense Share‐based compensation expense in Q4 2018 and FY 2018 amounted to $0.7 million and $3.3 million, compared to $0.7 million and $4.5 million for the same periods of 2017. The decrease in FY 2018 is mainly due to the important rise in the Company’s share price during the second and third quarter of 2017. Litigation and Restructuring Costs (Income) In Q4 2018, the Company recorded litigation and restructuring costs of $0.8 million related to severance costs associated with workforce optimization initiatives implemented throughout the year, in line with our strategic plan. In addition, in Q3 2018, the Company sold its participation in the joint venture, Zhuhai Gallium Industry Co. for an amount of $0.4 million and recognized a loss of $0.3 million which was partially mitigated by an amount received of $0.2 million following the liquidation of its other joint venture, Ingal Stade GmbH which had closed its manufacturing activities in 2016. In Q1 2018, the Company recorded an income from litigation and restructuring of $0.6 million representing a non‐recurring income relating to an amount receivable from an inactive legal entity for which no receivable had been recorded given the uncertainty. In Q4 2017, the Company recorded litigation and restructuring costs of $0.4 million related to an incident delaying the consolidation of US operations into a new updated and scaled facility, an initiative announced in 2016. The Company recognized in Q1 2017, an income resulting from contract amendments for securing higher margins in the short term versus higher market share in the downstream business mitigated by costs related to the termination of non‐core commercial activities in the upstream business activities, for a net income of $3.0 million. Impairment of non‐current assets No impairment of non‐current assets was recognized in Q4 2018 and for FY 2018. In Q4 2017, the Company recorded an impairment charge on non‐current assets of $3.1 million ($1.1 million for production equipment, $0.8 million for technology and $1.1 million for development costs), included in the Electronic Materials segment, reflecting recent development to assumptions used in assessing the carrying value of specific product development assets. The change in assumptions was from an active decision to alter the market penetration strategy, other factors remaining constant. It was motivated by intentional delays in increasing production level in order to prioritize products with higher premiums in niche applications requiring longer market development cycle compared to other products. A discount rate of 17.5% was used to determine the recoverable amount of these non‐current assets. 5N Plus + Management’s Discussion and Analysis 5N Plus 2018 Annual Report 8 19 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis Financial Expenses Financial expenses for Q4 2018 amounted to $0.7 million compared to $1.0 million for the same period last year. The decrease in financial expenses of $0.3 million is mainly due to the favorable cost of gross debt resulting from the partial redemption of the convertible unsecured subordinated debentures in Q2 2018 using the Company’s senior credit facility. Financial expenses in FY 2018 amounted to $6.5 million compared to $6.1 million in the same period last year. The increase in financial expenses of $0.4 million is mainly due to the accelerated imputed interest of $1.5 million recognized as a non‐cash expense following the early redemption of the CA$40.0 million convertible debentures in June 2018 mitigated by the lower cost associated with the drawdown on the senior credit facility as well as lower imputed interest on the outstanding debentures during Q3 and Q4 2018. In FY 2018, no charge related to the fair value of the debenture conversion option was recognized while in FY 2017 a minimal favorable charge was recognized. Income Taxes The Company reported earnings before income taxes of $2.2 million in Q4 2018 and $13.9 million in FY 2018. Income tax recovery in Q4 2018 was $1.8 million and $0.1 million in FY 2018 compared to $1.6 million and an income tax expense of $0.5 million in the same periods last year. These amounts were favorably impacted by deferred tax assets applicable in certain jurisdictions as well as adjustment in respect of prior years where the outcome was different than initially estimated. Liquidity and Capital Resources Funds from operations1 Net changes in non‐cash working capital items Operating activities Investing activities Financing activities Effect of foreign exchange rate changes on cash and cash equivalents Net (decrease) increase in cash and cash equivalents Q4 2018 $ Q4 2017 $ 8,641 (5,374) 3,267 (3,085) (26) (231) (75) 5,398 (7,511) (2,113) 137 807 129 (1,040) FY 2018 $ 28,643 (26,448) 2,195 (9,754) 693 (434) (7,300) FY 2017 $ 26,336 (13,226) 13,110 (4,788) 884 517 9,723 Cash generated by operating activities amounted to $3.3 million in Q4 2018 compared to cash used of $2.1 million in Q4 2017. In FY 2018, cash provided by operating activities amounted to $2.2 million compared to $13.1 million in FY 2017. The negative change in non‐cash working capital in FY 2018 resulted mainly from a decrease in trade and accrued liabilities of $21.3 million combined with an increase of $6.2 million in inventory aimed at hedging commercial positions. In Q4 2018, cash used in investing activities totaled $3.1 million compared to cash generated of $0.1 million in Q4 2017. This decrease is mainly explained by proceeds from the disposal of redundant PPE in Q4 2017. In FY 2018, cash used in investing activities increased by $5.0 million explained by higher investment in PPE and less proceeds from disposal of redundant PPE. No net cash was generated or used from financing activities in Q4 2018 compared to cash provided of $0.8 million in Q4 2017. In FY 2018, cash provided by financing activities amounted to $0.7 million compared to $0.9 million in FY 2017. The decrease is associated with the timing of contributions from a product development partnership program combined with the impact of the drawdown on the Company’s senior credit facility to partially redeem the debentures in Q2 2018 mitigated by more cash from issuance of common share, while in YTD 2017, the Company had repurchased a certain number of shares under the common share repurchase program which ended in October 2017. 1 See Non‐IFRS Measures 5N Plus + Management’s Discussion and Analysis 20 5N Plus 2018 Annual Report 9 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS Working Capital Inventories Other current assets Current liabilities Working capital1 Working capital current ratio1 As at December 31, 2018 As at December 31, 2017 $ 96,889 62,396 (65,924) 93,361 2.42 $ 90,647 74,581 (68,653) 96,575 2.41 The decrease in working capital1 compared to December 31, 2017 was mainly attributable to decrease in cash and cash equivalents mitigated by higher inventory, as the Company is protecting specific commercial positions. 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, 2018 $ ‐ 30,175 18,571 197 As at December 31, 2017 $ ‐ 271 48,768 (3,602) 48,943 (26,724) 22,219 45,437 (34,024) 11,413 Total debt, including the cross‐currency swap, increased by $3.5 million to $48.9 million as at December 31, 2018, compared to $45.4 million as at December 31, 2017. Net debt1, after considering cash and cash equivalents, increased by $10.8 million, from $11.4 million as at December 31, 2017 to $22.2 million as at December 31, 2018, mostly impacted by non‐cash working capital requirements. On June 28, 2018, the Company partially redeemed its 5.75% convertible unsecured subordinated debentures maturing on June 30, 2019 for an aggregate principal amount of CA$40.0 million. On the same day, the Company completed a drawdown on its senior credit facility of US$30.0 million to partially redeem the debentures on favorable terms reducing the current cost of gross debt. As at December 31, 2018, the aggregate principal amount of debentures currently outstanding was CA$26.0 million. Consequently, during the second quarter of 2018, the Company de‐designated CA$40.0 million of the nominal amount of the associated cross‐currency swap and reclassified the net gain of $0.1 million, representing the accumulated net changes in cash flow hedges, from accumulated other comprehensive loss to realized gain on de‐designation within the condensed interim consolidated statement of earnings. Following the early redemption of the CA$40.0 million convertible debentures, an accelerated imputed interest of $1.5 million was recognized during Q2 2018 as an expense in the condensed interim consolidated statement of earnings. Available Short‐Term Capital Resources Cash and cash equivalents Available bank indebtedness Available revolving credit facility Available short‐term capital resources 1 See Non‐IFRS Measures 5N Plus + Management’s Discussion and Analysis As at December 31, 2018 $ 26,724 1,454 As at December 31, 2017 $ 34,024 1,530 49,000 77,178 52,998 88,552 5N Plus 2018 Annual Report 10 21 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS In April 2018, the Company signed a senior secured multi‐currency revolving credit facility of $79.0 million maturing in April 2022 to replace its existing $50.0 million senior secured revolving facility maturing in August 2018. At any time, the Company has the option to request that the credit facility be expanded through the exercise of an additional $30.0 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 (up to $4.0 million). 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 net debt to consolidated EBITDA ratio. Under the terms of its credit facility, the Company is required to satisfy certain restrictive covenants as to financial ratios. As at December 31, 2018, the Company has met all covenants. On February 6, 2019, 5N Plus announced the closing of a $25.0 million unsecured subordinated term loan with Investissement Québec. As 5N Plus nears the halfway point of its strategic plan, more emphasis will be placed on the development of its growth initiatives along with further investment in efficiency gains from its core businesses. To that end, it is expected that the proceeds from the unsecured term loan will be utilized to support these programs along with the repayment of the balance of the unsecured convertible debentures issued by the Company in 2014; which will mature on June 30, 2019. The new loan has a five‐year term and will be disbursed in two tranches: the first tranche of $5.0 million was disbursed on February 6, 2019 and the second tranche of $20.0 million will be disbursed by no later than March 29, 2019. The new term loan will bear an interest equivalent to the 5‐year US dollar swap rate plus a margin of 4.19%. Share Information Issued and outstanding shares Stock options potentially issuable Convertible debentures potentially issuable As at February 26, 2019 84,622,291 1,478,041 3,851,851 As at December 31, 2018 84,609,791 1,490,541 3,851,851 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. In FY 2018, the Company granted 393,897 New RSUs, 28,361 New RSUs were paid and 67,370 New RSUs were forfeited. In FY 2017, the Company granted 368,360 New RSUs, none were paid and 37,500 were forfeited. As at December 31, 2018, 1,854,026 New RSUs were outstanding compared to 1,555,860 as at December 31, 2017. No PSUs were granted in FY 2018 and FY 2017 and 500,000 PSUs were outstanding as at December 31, 2018 and 2017. 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, 2018 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. 5N Plus + Management’s Discussion and Analysis 22 5N Plus 2018 Annual Report 11 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS The following table presents information concerning all outstanding stock options: Outstanding, beginning of year Granted Exercised Forfeited Expired Outstanding, end of year Exercisable, end of year Number of options 2,224,747 143,335 (708,750) (137,704) (31,087) 1,490,541 726,750 2018 Weighted average exercise price CA$ 2.20 2.71 1.92 2.54 3.61 2.32 2.75 Number of options 2017 Weighted average exercise price CA$ 2,860,648 288,000 (597,500) (116,476) (209,925) 2,224,747 1,001,497 2.63 1.75 1.75 2.50 8.59 2.20 2.59 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, 2018. The following table reflects the contractual maturity of the Company’s financial liabilities as at December 31, 2018: Trade and accrued liabilities Long‐term debt Convertible debentures Total Carrying amount $ 39,249 30,175 18,571 87,995 1 year $ 39,249 1,394 19,884 60,527 2 years $ ‐ 1,219 ‐ 1,219 3 years $ ‐ 1,219 ‐ 1,219 4 years $ ‐ 31,219 ‐ 31,219 Total $ 39,249 35,051 19,884 94,184 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 2018 $ 1,598 2,635 61 4,294 As at December 31, 2018, in the normal course of business, the Company contracted letters of credit for an amount of $0.4 million and $0.4 million as at December 31, 2017. 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 + Management’s Discussion and Analysis 5N Plus 2018 Annual Report 12 23 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis Subsequent events On February 6, 2019, the Company announced the closing of a $25.0 million unsecured subordinated term loan with Investissement Québec. The new loan has a five‐year term and will be disbursed in two tranches: the first tranche of $5.0 million was disbursed on February 6, 2019 and the second tranche of $20.0 million will be disbursed by no later than March 29, 2019. The new term loan will bear an interest equivalent to the 5‐year US dollar swap rate plus a margin of 4.19%. On February 11, 2019, the Company’ shareholders voted to approve a special resolution by which the stated capital of the common shares of the Company be reduced to $5.0 million and the amount of the reduction be added to the contributed surplus of the Company pursuant to Section 38(1) of the Canada Business Corporation Act. The reduction of stated capital will not result in any change to shareholders' equity. On February 25, 2019, 5N Plus announced that it has exercised its right to redeem all of its 5.75% convertible unsecured subordinated debentures maturing on June 30, 2019. On March 28, 2019 the Company will redeem its convertible debentures in an aggregate principal amount of CA$26 million. Following the redemption, no outstanding convertible debentures will remain. 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, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 5N Plus + Management’s Discussion and Analysis 24 5N Plus 2018 Annual Report 13 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS Accounting Policies and Changes The Company established its accounting policies and methods used in the preparation of its audited consolidated financial statements for the fiscal year 2018 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, 2018. Changes in accounting policies IFRS 15 – Revenues from Contracts with Customers On January 1, 2018, the Company has adopted the new accounting standard IFRS 15 to all contracts using the modified retrospective approach. The adoption of IFRS 15 did not result in significant changes in the accounting for revenue from contracts with customers and the Company has concluded that there was no significant impact on its consolidated financial statements nor would there have been any significant effect on the 2018 consolidated statement of earnings had the prior accounting policies continued to be applied. IFRS 9 – Financial Instruments On January 1, 2018, the Company has also adopted the new accounting standard IFRS 9 and elected to apply prospectively. The adoption of the new classification requirements under IFRS 9 did not result in a change in the carrying value of any of Company's financial instruments on the transition date. Future changes in accounting policies The following standards have been issued but are not yet effective: IFRS 16 – Leases 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. Effective January 1, 2019, the Company will adopt IFRS 16 using the modified retrospective approach and will chose the option under which the amount of the right‐of‐use assets will be equal to the amount of the lease liabilities. The expected impact in the consolidated statement of financial position of this new standard is noted below. For contracts entered into before January 1, 2019, the Company determined whether the arrangement contained a lease under IAS 17 and IFRIC 4. Prior to the adoption of IFRS 16, these leases were classified as operating or finance leases based on an assessment of whether the lease transferred significantly all the risks and rewards of ownership of the underlying asset. The Company leases production and warehouse locations, production equipment and furniture, office equipment and rolling stock. On transition, the Company will elect to apply the practical expedient to grandfather the determination of which contract is or contains a lease and will apply IFRS 16 to those contracts that were previously identified as leases. Upon transition to the new standard, right‐of‐use assets and lease liabilities will be measured at the present value of the remaining lease payments discounted by the Company's incremental borrowing rate as at January 1, 2019. At transition, right‐of‐use assets and lease liabilities of approximately $7.0 million will be recognized in the consolidated statement of financial position. The Company will elect not to recognize right‐of‐use assets and lease liabilities for leases with a lease term of less than 12 months and low value assets and will continue to recognize the lease payments associated with these leases as an expense on a straight‐line basis over the lease term, as permitted by IFRS 16. 5N Plus + Management’s Discussion and Analysis 5N Plus 2018 Annual Report 14 25 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis IFRIC 23 – Uncertainty over Income Tax Treatments In June 2017, the IFRS Interpretations Committee of the IASB issued IFRIC 23, Uncertainty over Income Tax Treatments (IFRIC 23). The interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The interpretation is effective for the annual period beginning on January 1, 2019. The Company has concluded that no impact will result from the application of IFRIC 23 on its 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 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 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 estimated forecasted prices obtained from various market sources including publicly available metals information as at December 31, 2018. 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. 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). 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. 5N Plus + Management’s Discussion and Analysis 26 5N Plus 2018 Annual Report 15 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS 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 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 are provided in note 12 of the 2018 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. Refer to note 15 of the 2018 consolidated financial statements of the Company. Related Party Transactions The Company’s related parties are its joint ventures, directors and executive members. Transactions with these related parties are described in Notes 8 and 23 in the 2018 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 2018 consolidated financial statements of the Company. The fair value of the derivative financial instruments was as follows: Debenture conversion option Cross‐currency swap Equity swap agreement 2018 $ ‐ (197) 5,835 2017 $ ‐ 3,602 6,141 5N Plus + Management’s Discussion and Analysis 5N Plus 2018 Annual Report 16 27 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis Financial Risk Management For a detailed description of the nature and extent of risks arising from financial instruments, and their related risk management, refer to Note 24 of the 2018 consolidated financial statements of the Company. Interest Rate 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, made of subordinated debts, currently as 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 have an impact of approximately $0.2 million on the Company’s net earnings on a twelve‐month horizon based on the balance outstanding on December 31, 2018. Foreign Currency The Company’s sales are primarily denominated in U.S. dollars whereas a portion of its operating costs are realized in local currencies, such as Euros and Canadian dollars. Even though the purchases of raw materials are denominated in U.S. dollars, which reduce to some extent exchange rate fluctuations, we are subject to currency translation risk which can negatively impact our results. Management has implemented a policy for managing foreign exchange risk against the relevant functional currency. On December 7, 2015, the Company entered into cross‐currency swap to hedge cash flows under the CA$ 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 may also enter into foreign exchange contracts to sell Euros for US dollars. As at December 31, 2018, the Company has no foreign exchange contracts outstanding. The following table summarizes December 31, 2018: in US dollar equivalents the Company’s major currency exposures as at Cash and cash equivalents Accounts receivable Other current assets Trade and accrued liabilities Long‐term debt Net financial assets (liabilities) CA$ $ 3,462 196 5,835 (11,703) (175) (2,385) EUR $ 3,555 6,197 ‐ (8,726) ‐ 1,026 GBP $ 1,126 170 ‐ ‐ ‐ 1,296 RMB $ 652 1,169 ‐ (659) ‐ 1,162 MYR $ 582 ‐ ‐ (407) ‐ 175 Other $ 433 754 ‐ (566) ‐ 621 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, 2018 for the Company’s financial instruments denominated in non‐functional currencies: 5% Strengthening 5% Weakening CA$ $ (119) 119 EUR $ 51 (51) GBP $ 65 (65) RMB $ 58 (58) MRY $ 9 (9) Other $ 31 (31) Credit 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. 5N Plus + Management’s Discussion and Analysis 28 5N Plus 2018 Annual Report 17 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS The Company applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss allowance for trade receivables. The expected loss rates are based on the Company’s historical credit losses experienced over the three‐year period prior to the period end. The historical loss rates are then adjusted for current and forward‐looking information on macroeconomic factors affecting the Company’s customers. As at December 31, 2018 and 2017, the Company had a loss allowance of $0.1 million. The loss allowance is included in selling, general and administrative expenses in the consolidated statement of earnings and is net of any recoveries that were provided for in prior periods. Liquidity 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. 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 growth initiatives 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, Laos and Malaysia, 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. The following conditions or events could disrupt our supply chain, interrupt production at our facilities or those of our suppliers or customers, increase our cost of sales and other operating expenses, result in material asset losses, or require additional capital expenditures to be incurred: fires, pandemics, extraordinary weather conditions, or natural disasters, such as hurricanes, tornadoes, floods, tsunamis, typhoons, and earthquakes; political instability, social and labour unrest, war, or terrorism; disruptions in port activities, shipping and freight forwarding services; and interruptions in the availability of basic services and infrastructure, including power and water shortages. 5N Plus + Management’s Discussion and Analysis 5N Plus 2018 Annual Report 18 29 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis Our insurance programs do not cover every potential loss associated with our operations, including potential damage to assets, lost profits, and liability that could result from the aforementioned conditions or events. In addition, our insurance may not fully cover the consequences resulting from a loss event, due to insurance limits, sub‐limits, or policy exclusions. Any occurrence not fully covered by insurance could have a negative effect on our business. Risks Related to China The legal system in mainland China is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. The legal system in mainland China evolves rapidly, and the interpretations of many laws, regulations and rules may contain inconsistencies and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us. In addition, the company cannot predict the effect of future developments in the mainland Chinese legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the pre‐emption of local regulations by national laws. Such unpredictability towards the company's contractual, property (including intellectual property) and procedural rights could adversely affect the company's business and impede its ability to continue operations. Furthermore, any litigation in mainland China may be protracted and result in substantial costs and diversion of resources and management attention. The mainland Chinese government exercises significant control over mainland China's economic growth through strategically allocating resources, controlling the payment of foreign currency‐denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Any growth in the Chinese economy may not continue and any slowdown may have a negative effect on our business. Any adverse changes in economic conditions in mainland China, in the policies of the mainland Chinese government, or in the laws and regulations in mainland China, could have a material adverse effect on the overall economic growth of mainland China. Such developments could adversely affect the company's businesses, lead to reduction in demand for its products and adversely affect the company's competitive position. 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 include, but are not limited to, barriers to or restrictions on free trade, changes in taxes, tariffs and other regulatory costs. The current global political environment, including the stated positions of the U.S. administration (expressed through its withdrawal from the Trans‐Pacific Partnership Agreement and the renegotiation of the North American Free Trade Agreement) and the 2016 vote in favour of the exit of the United Kingdom from the European Union, appear to favour increasing restrictions on trade. Such restrictions could have a negative effect on our business if they were to limit our ability to export our products to markets in which we currently do business or to import raw materials from our current suppliers. Conversely, it is possible that they could have a favourable effect on our business if they were to inhibit competition in markets in which we do business without having an adverse effect on our operations. Although we operate primarily in countries with proximity to our customers 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. Failure to comply with such laws, regulations and permits can have serious consequences, including damage to our reputation; stopping us from pursuing operations at one of our facilities; being subject to substantial fines, penalties, criminal proceedings, third party property damage or personal injury claims, clean‐ up costs or other costs; increasing the costs of development or production and litigation or regulatory action against us, and materially adversely affecting our business, results of operations or financial condition. Future changes in applicable environmental and health and safety laws and regulations could substantially increase costs and burdens to achieve compliance or otherwise have an adverse impact on our business, results of operations or financial condition. 5N Plus + Management’s Discussion and Analysis 30 5N Plus 2018 Annual Report 19 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS We have incurred and will continue to incur capital expenditures in order to comply with environmental laws and regulations. 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 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 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. These fluctuations can be unpredictable and can occur over short periods of time. To the extent that we are not able to pass on any increases, our business, financial condition, results of operations and cash flows may be materially adversely affected. Sources of Supply We may not be able to secure the critical raw material feedstock on which we depend for our operations. We currently procure our raw materials from a number of suppliers with whom we have had long‐term commercial relationships. The loss of any one of these suppliers or a reduction in the level of deliveries to us may reduce our production capacity and impact our deliveries to customers. This would in turn negatively impact our sales, net margins and may lead to liabilities with respect to some of our supply contracts. Protection of Intellectual Property Protection of our proprietary processes, methods and other technologies is important to our business. We rely almost exclusively on a combination of trade secrets and employee confidentiality agreements to safeguard our intellectual property. We have deliberately chosen to limit our patent position to avoid disclosing valuable information. Failure to protect and monitor the use of our existing intellectual property rights could result in the loss of valuable technologies and processes. There can be no assurance that our confidentiality agreements will provide meaningful protection for our intellectual property rights or other proprietary information in the event of any unauthorized use or disclosure or that we will be able to meaningfully protect our trade secrets. Inventory Price 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. 5N Plus + Management’s Discussion and Analysis 5N Plus 2018 Annual Report 20 31 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis 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. Litigation Risks We may be subject to a variety of civil or other legal proceedings, with or without merit. 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. 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, share‐based compensation expense, impairment of non‐current assets, litigation and restructuring costs (income), 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 certain expenses. 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 operating expenses means operating charges before shared‐based compensation expense, impairment of non‐ current assets, litigation and restructuring costs (income), gain on disposal on property, plant and equipment and depreciation and amortization. We use adjusted operating expenses to calculate the Adjusted EBITDA. We believe it is a meaningful measure of the operating performance of our ongoing business. The definition of this non‐IFRS measure used by the Company may differ from that used by other companies. 5N Plus + Management’s Discussion and Analysis 32 5N Plus 2018 Annual Report 21 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS Adjusted net earnings means the net earnings (loss) before the effect of charge of impairment related to inventory, PPE and intangible assets, share‐based compensation expense, litigation and restructuring costs (income), gain on disposal of property, plant and equipment, 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, share‐based compensation expense, litigation and restructuring costs (income), gain on disposal of property, plant and equipment 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, share‐based compensation expense, litigation and restructuring costs (income), gain on disposal of property, plant and equipment 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 and impairment inventory charge. 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. Return on Capital Employed (ROCE) is a non‐IFRS financial measure, calculated by dividing the annualized Adjusted EBIT by capital employed at the end of the period. Adjusted EBIT is calculated as the Adjusted EBITDA less depreciation and amortization (adjusted for accelerated depreciation charge, if any). Capital employed is the sum of the accounts receivable, the inventory, the PPE, the goodwill and intangibles less trade and accrued liabilities (adjusted for exceptional items). We use ROCE to measure the return on capital employed, whether the financing is through equity or debt. In our view, this measure provides useful information to determine if capital invested in the Company yields competitive returns. The usefulness of ROCE is limited by the fact that it is a ratio and not providing information as to the absolute amount of our net income, debt or equity. It also excludes certain items from the calculation and other companies may use a similar measure but calculate it differently. Working capital is a measure of liquid assets that is calculated by taking current assets and subtracting current liabilities. Given that the Company is currently indebted, we use it as an indicator of our financial efficiency and aim to maintain it at the lowest possible level. Working capital ratio is calculated by dividing current assets by current liabilities. Additional Information Our common shares trade on the Toronto Stock Exchange (TSX) under the ticker symbol VNP. Additional information relating to the Company, including the Company’s annual information form is available under the Company’s profile on SEDAR at www.sedar.com. 5N Plus + Management’s Discussion and Analysis 5N Plus 2018 Annual Report 22 33 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis Selected Quarterly Financial Information (in thousands of United States dollars except per share amounts) Revenue EBITDA1 Adjusted EBITDA1 Net earnings attributable to equity holders of 5N Plus Basic earnings per share attributable to equity holders of 5N Plus Net earnings Basic earnings per share Diluted earnings per share Adjusted net earnings1 Basic adjusted net earnings per share1 Funds from operations1 Backlog1 Dec. 31, 2018 $ 47,710 5,589 6,912 4,046 $0.05 4,046 $0.05 $0.05 5,407 $0.06 Sept. 30, 2018 $ 53,379 7,772 8,581 3,457 $0.04 3,458 $0.04 $0.04 3,919 $0.05 June 30, 2018 $ 58,359 7,860 8,972 3,417 $0.04 3,420 $0.04 $0.04 5,344 $0.06 March 31, 2018 $ 58,547 7,800 7,885 3,051 $0.04 3,048 $0.04 $0.04 2,814 $0.03 Dec. 31, 2017 $ 52,492 4,420 6,763 2,229 $0.03 2,222 $0.03 $0.03 3,884 $0.05 Sept. 30, 2017 $ 50,325 6,427 6,942 2,224 $0.03 2,223 $0.03 $0.03 2,572 $0.03 June 30, 2017 $ 56,229 6,341 9,236 3,416 $0.04 3,415 $0.04 $0.04 5,409 $0.06 March 31, 2017 $ 60,870 9,675 6,646 4,154 $0.05 4,153 $0.05 $0.05 2,024 $0.02 8,641 217 days 6,582 181 days 7,194 170 days 6,226 172 days 5,398 187 days 4,263 178 days 7,945 135 days 8,730 128 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 earnings (loss) attributable to equity holders of 5N Plus Basic earnings(loss) per share attributable to equity holders of 5N Plus Net earnings (loss) Basic earnings (loss) per share Diluted earnings (loss) per share Adjusted net earnings Basic adjusted net earnings per share Funds from operations Backlog Balance Sheet Total assets Total non‐current liabilities Net debt1 Shareholders’ equity 2018 $ 217,995 29,021 32,350 13,972 $0.17 13,972 $0.17 $0.17 17,484 $0.21 28,643 217 days 237,057 51,430 22,219 119,703 2017 $ 219,916 26,863 29,587 12,023 $0.14 12,013 $0.14 $0.14 13,889 $0.17 26,336 187 days 244,932 70,851 11,413 105,446 (in thousands of United States dollars) Adjusted operating expenses – previous definition Share‐based compensation expense Adjusted operating expenses1 – current definition (in thousands of United States dollars) Adjusted EBITDA – previous definition Share‐based compensation expense Adjusted EBITDA1 – current definition (in thousands of United States dollars, except per share amounts) Adjusted net earnings – previous definition Basic adjusted net earnings per share –previous definition Share‐based compensation expense Income tax expense on taxable items above Adjusted net earnings1 – current definition Basic adjusted net earnings per share1 – current definition 2017 $ 194,799 (4,470) 190,329 2017 $ 25,117 4,470 29,587 2017 $ 10,604 $0.13 4,470 (1,185) 13,889 $0.17 Dec. 31, 2017 $ 46,441 (712) 45,729 Dec. 31, 2017 $ 6,051 712 6,763 Dec. 31, 2017 $ 3,361 $0.04 712 (189) 3,884 $0.05 Sept. 30, 2017 $ 44,170 (787) 43,383 Sept. 30, 2017 $ 6,155 787 6,942 Sept. 30, 2017 $ 1,994 $0.02 787 (209) 2,572 $0.03 June 30, 2017 $ 49,390 (2,397) 46,993 June 30, 2017 $ 6,839 2,397 9,236 June 30, 2017 $ 3,647 $0.04 2,397 (635) 5,409 $0.06 March 31, 2017 $ 54,798 (574) 545,224 March 31, 2017 $ 6,072 574 6,646 March 31, 2017 $ 1,602 $0.02 574 (152) 2,024 $0.02 2016 $ 231,498 15,111 22,323 (5,895) ($0.07) (5,896) ($0.07) ($0.07) 3,454 $0.04 12,486 136 days 219,057 64,415 18,992 88,522 2016 $ 211,387 (2,212) 209,175 2016 $ 20,111 2,212 22,323 2016 $ 1,838 $0.02 2,212 (596) 3,454 $0.04 Management’s Discussion and Analysis Metal Prices (in U.S. dollars per kilo) Bismuth Bismuth $22.49 $22.49 $9.04 $9.04 $10.03 $11.24 $11.46 $10.03 $9.92 $10.25 $9.48 $11.24 $8.82 $11.24 $7.50 Gallium Gallium $230 $230 $230 $190 $200 $165 $155 $140 $150 $150 $155 $120 $120 $125 $110 DEC 2014 DEC 2015 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 DEC 2014 DEC 2015 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 Germanium Germanium $1,900 $1,900 $1,300 $1,300 $1,170 $970 $870 $870 $1,680 $1,560 $1,280 $1,300 $1,050 $1,100 $1,170 DEC 2014 DEC 2015 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 Indium Indium $630 $630 $230 $190 $250 $330 $280 $240 $230 $230 DEC 2015 DEC 2014 $190 $190 $180 $190 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 $250 Selenium Selenium $49 $49 $29 $29 $15 $15 $52 $39 $40 $39 $39 $33 $34 $32 $26 Tellurium Tellurium $110 $110 $20 $20 DEC 2015 $90 $60 $60 $60 $40 $32 $38 $28 $28 $38 $30 DEC 2014 DEC 2015 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 DEC 2014 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 1 See Non‐IFRS Measures 5N Plus + Management’s Discussion and Analysis 34 5N Plus 2018 Annual Report 23 5N Plus + Management’s Discussion and Analysis 24 Source : Low Metal Bulletin Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS Metal Prices (in U.S. dollars per kilo) Bismuth Bismuth $22.49 $22.49 $9.04 $9.04 $10.03 $11.24 $11.46 $10.03 $9.92 $10.25 $9.48 $11.24 $8.82 Gallium Gallium $230 $230 $11.24 $7.50 $230 $190 $200 $120 $120 $150 $150 $155 $125 $110 $165 $155 $140 DEC 2014 DEC 2015 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 DEC 2014 DEC 2015 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 Germanium Germanium $1,900 $1,900 $1,680 $1,560 $1,300 $1,300 $1,170 $970 $870 $870 $1,280 $1,300 $1,050 $1,100 $1,170 DEC 2014 DEC 2015 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 Indium Indium $630 $630 $230 $190 $250 $330 $280 $240 $230 $230 DEC 2015 $190 DEC 2016 DEC 2014 $250 $190 $180 $190 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 Selenium Selenium $49 $49 $29 $29 $15 $15 $52 $39 $40 $39 $33 $34 $39 $32 $26 Tellurium Tellurium $110 $110 DEC 2014 DEC 2015 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 DEC 2014 $90 $60 $60 $60 $40 $32 $38 $28 $28 $38 $30 DEC 2016 DEC 2017 MARCH 2018 JUNE 2018 SEPT 2018 DEC 2018 $20 $20 DEC 2015 Source : Low Metal Bulletin 5N Plus + Management’s Discussion and Analysis 5N Plus 2018 Annual Report 24 35 Management’s Report to the Shareholders of 5N Plus Inc. MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING Independent auditor’s report The consolidated financial statements and related notes have been prepared by management in conformity with generally accepted accounting principles in Canada which incorporate International Financial Reporting Standards. Management is responsible for the selection of accounting policies and making significant accounting judgements and estimates. Management is also responsible for all other information included in the management’s discussion and analysis and for ensuring that this information is consistent with the information contained in the consolidated financial statements. Management is responsible for establishing and maintaining adequate internal control over financial reporting which includes those policies and procedures that provide reasonable assurance over the safeguarding of assets and over the completeness, fairness and accuracy of the consolidated financial statements. The Audit and Risk Management Committee, which is comprised entirely of independent directors, reviews the quality and integrity of the Corporation’s financial reporting and provides its recommendations, in respect of the approval of the financial statements, to the Board of Directors; oversees management’s responsibilities as to the adequacy of the supporting systems of internal controls; provides oversight of the independence, qualifications, and appointment of the external auditor; and, review audit, audit‐related, and non‐audit fees and expenses. The Board of Directors approves the Corporation’s consolidated financial statements and management’s discussion and analysis disclosures prior to their release. The Audit and Risk Management Committee meets with management, the internal auditors and external auditors at least four times each year to review and discuss financial reporting, disclosures, auditing and other matters. The external auditors, PricewaterhouseCoopers LLP, conduct an independent audit of the consolidated financial statements in accordance with Canadian generally accepted auditing standards and express their opinion thereon. Those standards require that the audit is planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The external auditors have unlimited access to the Audit and Risk Management Committee and meet with the Committee on a regular basis. (signed) Arjang J. Arjang J. Roshan President and Chief Executive Officer (signed) Richard Perron Richard Perron Chief Financial Officer Montréal, Canada February 26, 2019 To the Shareholders of 5N Plus Inc. Our opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of 5N Plus Inc. and its subsidiaries (together, the Company) as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with IFRS as issued by the IASB (IFRS). What we have audited The Company’s consolidated financial statements comprise: the consolidated statements of financial position as at December 31, 2018 and 2017; the consolidated statements of earnings for the years then ended; the consolidated statements of comprehensive income for the years then ended; the consolidated statements of changes in equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. Basis for opinion opinion. Independence We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. 36 5N Plus 2018 Annual Report PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. 1250 René-Lévesque Boulevard West, Suite 2500, Montréal, Québec, Canada H3B 4Y1 T: +1 514 205 5000, F: +1 514 876 1502 “PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership. Independent auditor’s report We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related To the Shareholders of safeguards. 5N Plus Inc. Our opinion The engagement partner on the audit resulting in this independent auditor’s report is Marc-Stéphane Pennee. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of 5N Plus Inc. and its subsidiaries (together, the Company) as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with IFRS as issued by the IASB (IFRS). What we have audited The Company’s consolidated financial statements comprise: Montréal, Quebec February 26, 2019 the consolidated statements of financial position as at December 31, 2018 and 2017; the consolidated statements of earnings for the years then ended; the consolidated statements of comprehensive income for the years then ended; the consolidated statements of changes in equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. 1 CPA auditor, CA, public accountancy permit No. A123642 PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. 1250 René-Lévesque Boulevard West, Suite 2500, Montréal, Québec, Canada H3B 4Y1 T: +1 514 205 5000, F: +1 514 876 1502 “PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership. 5N Plus 2018 Annual Report 37 We also provide those charged with governance with a statement that we have complied with relevant Other information ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date. The engagement partner on the audit resulting in this independent auditor’s report is Marc-Stéphane Pennee. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Montréal, Quebec February 26, 2019 If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. 1 CPA auditor, CA, public accountancy permit No. A123642 38 5N Plus 2018 Annual Report Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant Auditor’s responsibilities for the audit of the consolidated financial statements ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always The engagement partner on the audit resulting in this independent auditor’s report is Marc-Stéphane detect a material misstatement when it exists. Misstatements can arise from fraud or error and are Pennee. considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Montréal, Quebec February 26, 2019 Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 1 CPA auditor, CA, public accountancy permit No. A123642 5N Plus 2018 Annual Report 39 We also provide those charged with governance with a statement that we have complied with relevant We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Marc-Stéphane Pennee. The engagement partner on the audit resulting in this independent auditor’s report is Marc-Stéphane Pennee. Montréal, Quebec Montréal, Quebec February 26, 2019 February 26, 2019 1 CPA auditor, CA, public accountancy permit No. A123642 1 CPA auditor, CA, public accountancy permit No. A123642 40 5N Plus 2018 Annual Report 5N PLUS INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands of United States dollars) (in thousands of United States dollars) Notes December 31 2018 $ December 31 2017 $ 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 Derivative financial liabilities Current portion of long‐term debt Current portion of convertible debentures Total current liabilities Long‐term debt Convertible debentures Deferred tax liabilities Employee benefit plan obligation 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. 4 5 15 16 6, 26 7, 26 15 8 16 9 10 15 16 11 12 11 12 15 13 14 26,724 22,984 96,889 4,891 7,797 159,285 57,297 11,199 7,872 ‐ ‐ 1,404 77,772 237,057 39,249 7,732 197 175 18,571 65,924 30,000 ‐ 266 14,619 6,545 51,430 117,354 119,703 ‐ 119,703 237,057 34,024 25,639 90,647 6,145 8,773 165,228 56,607 10,856 6,891 718 3,602 1,030 79,704 244,932 57,043 11,339 ‐ 271 ‐ 68,653 ‐ 48,768 251 15,396 6,436 70,851 139,504 105,446 (18) 105,428 244,932 5N Plus 2018 Annual Report 41 5N PLUS INC. CONSOLIDATED STATEMENTS OF EARNINGS CONSOLIDATED STATEMENTS OF EARNINGS 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 (income), net Share of loss from joint ventures Operating earnings 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 loss Earnings before income taxes Income tax expense (recovery) Current Deferred Net earnings Attributable to: Equity holders of 5N Plus Inc. Non‐controlling interest Earnings per share attributable to equity holders of 5N Plus Inc. Basic earnings per share Diluted earnings per share The accompanying notes are an integral part of these consolidated financial statements. Notes 26 26 26 8 12 16 15 15 20 20 20 2018 $ 217,995 169,061 23,940 4,536 22 197,559 20,436 2,873 3,422 ‐ 225 6,520 13,916 848 (904) (56) 13,972 13,972 ‐ 13,972 0.17 0.17 0.17 2017 $ 219,916 170,514 26,220 4,441 110 201,285 18,631 3,261 2,836 (85) 79 6,091 12,540 3,595 (3,068) 527 12,013 12,023 (10) 12,013 0.14 0.14 0.14 42 5N Plus 2018 Annual Report 5N PLUS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31 Years ended December 31 (Figures in thousands of United States dollars) (in thousands of United States dollars) Net earnings Other comprehensive (loss) income Items that may be reclassified subsequently to net earnings Net changes in cash flow hedges Effective portion of changes in fair value of cash flow hedges Reclassification to net earnings De‐designation of cash flow hedges Income taxes Currency translation adjustment Items that will not be reclassified subsequently to net earnings Remeasurement of employee benefit plan obligation Income taxes Other comprehensive (loss) income Comprehensive income 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. Notes 2018 $ 13,972 2017 $ 12,013 16 12 13 (2,384) 2,461 (79) (1) (3) (964) (967) (200) 63 (137) 3,413 (3,643) ‐ 30 (200) 1,121 921 1,062 2,374 3,436 (1,104) 4,357 12,868 12,868 ‐ 16,370 16,380 (10) 5N Plus 2018 Annual Report 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 8 2 4 , 5 0 1 2 7 9 , 3 1 ) 3 ( ) 4 6 9 ( ) 7 3 1 ( 8 6 8 , 2 1 8 1 5 4 3 4 4 0 , 1 3 0 7 , 9 1 1 $ l a t o T y t i u q e 4 1 5 8 8 , 3 1 0 2 1 , ) 0 0 2 ( 1 2 1 1 , 6 3 4 3 , 0 7 3 6 1 , ) 4 5 6 ( 2 1 8 6 8 3 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 8 1 ‐ n o N g n i l l o r t n o c , 8 2 4 5 0 1 ) 8 1 ( 6 4 4 5 0 1 , ) 9 1 5 6 3 2 ( , ) 0 7 5 4 ( , 6 8 5 4 , , 9 4 9 1 4 3 , 1 4 0 1 0 9 3 8 , $ ) 8 ( ) 0 1 ( ‐ ‐ ‐ ) 0 1 ( ‐ ‐ ‐ t s e r e t n i $ y t i u q e 2 2 5 8 8 , 3 2 0 2 1 , ) 0 0 2 ( 1 2 1 1 , 6 3 4 3 , 0 8 3 6 1 , ) 4 5 6 ( 2 1 8 6 8 3 3 2 0 2 1 , ‐ $ t i c i f e D $ s s o l ) 1 3 8 9 4 2 ( , ) 7 2 9 8 ( , ‐ ‐ ‐ ‐ ‐ 3 2 0 2 1 , 9 8 2 1 , ) 0 0 2 ( 1 2 1 1 , 6 3 4 3 , 7 5 3 4 , ‐ ‐ ‐ $ 6 9 5 4 , l s u p r u s ‐ ‐ ‐ ‐ ‐ ‐ ) 6 9 3 ( 6 8 3 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 l a t o T l ’ s r e d o h e r a h 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 , 4 8 6 2 4 3 ‐ ‐ ‐ ‐ ‐ ‐ ) 3 4 9 1 ( , 8 0 2 1 , ‐ ) 6 1 0 5 7 4 ( , 0 0 5 7 9 5 , ) 9 1 e t o N ( d e l l l l 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 t e N 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 m o c n i e v i s n e h e r p m o c r e h t O r a e y e h t r o f ) s s o l ( i s g n n r a e t e N 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 ) 1 2 e t o N ( n o i t a s n e p m o c d e s a b ‐ e r a h S ) 1 2 e t o N ( s n o i t p o s k c o t s f o e c i c r e x E ) s s o l ( e m o c n i e v i s n e h e r p m o C r a e y f o d n e t a s e c n a a B l n o i t a g i l b o r e b m u N s e r a h s f o 7 1 0 2 , 7 5 5 8 7 7 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 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 $ ) 8 1 ( ‐ n o N t s e r e t n I g n i l l o r t n o c $ y t i u q e 6 4 4 , 5 0 1 l a t o T l ’ s r e d o h e r a h s $ t i c i f e D $ s s o l ) 9 1 5 , 6 3 2 ( ) 0 7 5 , 4 ( $ 6 8 5 , 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 8 1 0 2 9 4 9 , 1 4 3 1 4 0 , 1 0 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 2 7 9 , 3 1 2 7 9 , 3 1 ‐ ) 3 ( ) 4 6 9 ( ) 7 3 1 ( 8 6 8 , 2 1 ‐ 5 4 3 4 4 0 , 1 ‐ ‐ ‐ ‐ ‐ ‐ 2 7 9 , 3 1 ) 3 ( ) 4 6 9 ( ) 7 3 1 ( ) 4 0 1 , 1 ( ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ l l 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 t e N 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 i s g n n r a e t e N e m o c n i ) s s o l ( e v i s n e h e r p m o C n o i t a g i l b o t s e r e t n i g n i l l o r t n o c ‐ n o n f o e s a h c r u p e R ) 7 8 4 ( 5 4 3 ‐ 1 3 5 , 1 ‐ 0 5 7 , 8 0 7 ) 1 2 e t o N ( n o i t a s n e p m o c d e s a b ‐ e r a h S ) 1 2 e t o N ( s n o i t p o s k c o t s f o e c i c r e x E 3 0 7 , 9 1 1 ) 7 4 5 , 2 2 2 ( ) 4 7 6 , 5 ( 4 4 4 , 4 0 8 4 , 3 4 3 1 9 7 , 9 0 6 , 4 8 r a e y f o d n e t a s e c n a l a B 44 5N Plus 2018 Annual Report 5N PLUS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 Years ended December 31 (Figures in thousands of United States dollars) (in thousands of United States dollars, unless otherwise indicated) Operating activities Net earnings Adjustments to reconcile net earnings to cash flows Depreciation of property, plant and equipment and amortization of intangible assets Impairment of non‐current assets Amortization of other assets Reversal for loss allowance Share‐based compensation expense Deferred income taxes Share of loss from joint ventures Loss on disposal of investment in joint venture Imputed interest Employee benefit plan obligation Change in fair value of debenture conversion option Gain on disposal of property, plant and equipment Unrealized (gain) loss on non‐hedge financial instruments Unrealized foreign exchange loss on assets and liabilities Realized loss on non‐hedge financial instruments Realized foreign exchange gain on assets and liabilities Gain on de‐designation of cash flow hedges Funds from 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 Proceeds on disposal of investment in joint venture Proceeds on disposal of property, plant and equipment Cash used in investing activities Financing activities Repayment of long‐term debt Proceeds from issuance of long term debt Expenses related to issuance of long‐term debt Repayment of convertible debentures Common shares repurchased Issuance of common shares Increase in other liabilities Cash from financing activities Effect of foreign exchange rate changes on cash and cash equivalents Net (decrease) increase 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 2018 $ 2017 $ 13,972 12,013 26 4, 24 21 15 8 8 12 13 16 12 18 6, 18 7 8 6 11 12 19 19 14 8,810 ‐ 163 (29) 3,422 (904) 22 360 3,146 (291) ‐ (510) (124) 370 670 (355) (79) 28,643 (26,448) 2,195 (10,098) (1,198) 417 1,125 (9,754) (78) 30,000 (679) (29,714) ‐ 1,044 120 693 (434) (7,300) 34,024 26,724 1,190 2,714 8,226 3,100 221 ‐ 4,390 (3,068) 110 ‐ 2,541 (312) (85) (1,887) 80 1,007 ‐ ‐ ‐ 26,336 (13,226) 13,110 (6,769) (2,006) ‐ 3,987 (4,788) (74) ‐ ‐ ‐ (654) 812 800 884 517 9,723 24,301 34,024 280 3,094 (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 ▪ 5 5N Plus 2018 Annual Report 45 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) 1. Nature of Activities 5N Plus Inc. (“5N Plus” or the “Company”) is a Canadian‐based international company. 5N Plus is a leading global producer of engineered materials and specialty chemicals with integrated recycling and refining assets to manage the sustainability of its business model. The Company is headquartered at 4385 Garand Street, Montreal, Quebec (Canada) H4R 2B4. The Company operates R&D, manufacturing and commercial centers in several locations in Europe, the Americas and Asia. 5N Plus deploys a range of proprietary and proven technologies to manufacture products which are used as enabling precursors by its customers in a number of advanced electronics, optoelectronics, pharmaceutical, health, renewable energy and industrial applications. Many of the materials produced by 5N Plus are critical for the functionality and performance of the products and systems produced by its customers, many of whom are leaders within their industry. 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 26, 2019. 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 IFRS as issued by IASB (IFRS). 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. 6 ▪ 5N Plus ▪ Consolidated Financial Statements 46 5N Plus 2018 Annual Report 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 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 Belgium SA 5N Plus Asia Limited 5N Plus Wisconsin Inc. Country of incorporation % Equity interest 2017 2018 Canada Germany Germany Belgium Hong Kong United States 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 earnings and the share of other comprehensive income 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 date of the respective transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the consolidated statement of earnings. Foreign exchange gains and losses are presented in the consolidated statement of earnings within “foreign exchange and derivative loss (gain)”. 5N Plus ▪ Consolidated Financial Statements ▪ 7 5N Plus 2018 Annual Report 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. Distinct operating and financial information are available for these segments and are used to determine the operating performance of each segment and to allocate resources. The Electronic Materials segment is associated with products used in a number of applications such as security, aerospace, sensing, imaging, renewable energy and various technical materials. The Eco‐Friendly Materials segment is associated with products used in a number of applications, including pharmaceutical, healthcare, animal feed, catalytic and extractive as well as various industrial materials. 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 (since January 1, 2018) Revenue comprises the sale of manufactured products and the rendering of services and is measured at the amounts specified in the customer’s arrangement. Sales of manufactured products are recognized when products are delivered to the customer, which is also the moment when control of the products is transferred, and when there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery occurs when the products have been shipped to the specific location, the risks of loss have been transferred to the customer and has accepted the products in accordance with the sales contract. Revenue from custom refining activities, often referred to as tolling, is recognized when services are rendered, at a point in time. A receivable is recognized when the products are delivered or services are rendered, as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. The Company does not expect to have any contracts where the period between the transfer of the promised products or services to the customer and payment by the customer exceeds one year. As a consequence, the Company does not adjust any of the transaction prices for the time value of money. 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. 8 ▪ 5N Plus ▪ Consolidated Financial Statements 48 5N Plus 2018 Annual Report 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) 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 Up to 15 years 3 to 10 years 3 to 10 years 3 to 10 years Over the term of the lease 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 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. 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: Technology Software Intellectual property Development costs Period 5 years 5 years 10 years Not exceeding 10 years 5N Plus ▪ Consolidated Financial Statements ▪ 9 5N Plus 2018 Annual Report 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) Impairment of non‐financial assets 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 cost 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 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 earnings. Financial instruments (since January 1, 2018) 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. Measurement At initial recognition, the Company measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Transaction costs of financial assets or financial liabilities carried at FVPL are expensed in profit or loss. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest. Measurement in subsequent periods depends on the classification of the financial instrument. The Company has classified its financial instruments in the following categories depending on the purpose for which the instruments were acquired and their characteristics. 10 ▪ 5N Plus ▪ Consolidated Financial Statements 50 5N Plus 2018 Annual Report 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) Financial assets Debt instruments For the subsequent measurement, there are two measurement categories into which the Company classifies its debt instruments: a) Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss and presented in other gains/(losses), together with foreign exchange gains and losses. Impairment losses are presented as separate line item in the consolidated statement of earnings. FVPL (fair value through profit or loss): Assets that do not meet the criteria for amortized cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognized in profit or loss and presented net within other gains/(losses) in the period in which it arises. b) Financial Liabilities Financial liabilities are subsequently measured at amortized cost using the effective interest method, except for financial liabilities at fair value through profit or loss. Such liabilities, including derivatives that are liabilities, shall be subsequently measured at fair value. The Company has classified its financial instruments as follows: Category Financial assets and liabilities at fair value through profit and loss Financial assets and liabilities at amortized cost (1) The derivative financial instruments are designated in a hedge relationship. Impairment Financial instrument Other current assets Derivative financial assets (1) Derivative financial liabilities (1) Cash and cash equivalents Accounts receivable Trade and accrued liabilities Long‐term debt Convertible debentures At each reporting date, the Company assesses, on a forward‐looking basis, the expected credit losses associated with its debt instruments carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Company applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables (Note 24). The Company assumes that there is no significant increase in credit risk for instruments that have a low credit risk. 5N Plus ▪ Consolidated Financial Statements ▪ 11 5N Plus 2018 Annual Report 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) 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, while the ineffective portion is recorded in consolidated statement of earnings. The amounts recognized in other comprehensive income are reclassified in consolidated statement of earnings as a reclassification adjustment when the hedged item affects net earnings. As permitted by IFRS 9, the Company has elected to continue to apply all the hedge accounting requirements of IAS 39. As a result, there is no change in the Company’s previous accounting policy. Embedded financial liabilities 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 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. 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. 12 ▪ 5N Plus ▪ Consolidated Financial Statements 52 5N Plus 2018 Annual Report 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 tax expense for the year comprises current and deferred tax is recognized in the consolidated statement of 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. 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. 5N Plus ▪ Consolidated Financial Statements ▪ 13 5N Plus 2018 Annual Report 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) 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 assessment 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 sites closure, are recognized when a detailed formal plan identifies the business or part of the business concerned, the location and number of employees affected, detailed estimates of the associated costs, and 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 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 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; and 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 prorated on service, market interest rates and management’s best estimate of expected plan investment performance, retirement age 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 change in actuarial assumptions are charged or credited to equity in other comprehensive (loss) income in the period in which they arise. Share‐based payments The fair value of the equity‐settled share‐based payment plan is determined using the Black‐Scholes model on the grant date. Measurement inputs include the share price on the measurement date, the exercise price of the instrument, expected volatility, weighted average expected life of the instrument, expected dividends, expected forfeiture rate, and the risk‐free interest rate. The impact of service and non‐market vesting conditions is not taken into account in determining fair value. The compensation expense of the equity‐settled awards is recognized in the consolidated statement of earnings over the graded vesting period, where the fair value of each tranche is recognized over its respective vesting period. 14 ▪ 5N Plus ▪ Consolidated Financial Statements 54 5N Plus 2018 Annual Report 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) 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. Earnings per share Basic earnings per share is calculated by dividing net earnings for the year attributable to equity owners of the Company by the weighted average number of common shares outstanding during the year. Diluted 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. 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 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 estimated forecasted prices obtained from various market sources including publically available metals information as at December 31, 2018. 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. 5N Plus ▪ Consolidated Financial Statements ▪ 15 5N Plus 2018 Annual Report 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) 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 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 are provided in note 12. 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). 16 ▪ 5N Plus ▪ Consolidated Financial Statements 56 5N Plus 2018 Annual Report 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) Accounting policies applied until December 31, 2017 Revenue recognition (prior to the adoption of IFRS 15) 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, 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. Financial instruments (prior to the adoption of IFRS 9) 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 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. When an available‐for‐sale financial asset is sold or impaired, the accumulated gains or losses are moved from accumulated other comprehensive income to the consolidated statement of 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. 5N Plus ▪ Consolidated Financial Statements ▪ 17 5N Plus 2018 Annual Report 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) 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. The Company has classified its financial instruments as follows: Category Financial assets and liabilities at fair value through profit and loss Loans and receivables Financial liabilities at amortized cost Transaction costs Financial instrument Other current assets Derivative financial assets Derivative financial liabilities Cash and cash equivalents Accounts receivable Trade and accrued liabilities Long‐term debt Convertible debentures 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 for its financial assets carried at amortized cost, as follows: 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 earnings. 18 ▪ 5N Plus ▪ Consolidated Financial Statements 58 5N Plus 2018 Annual Report 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) 3. Changes in Accounting Policies and Futures Changes in Accounting Policies Changes in accounting policies IFRS 15 – Revenues from Contracts with Customers On January 1, 2018, the Company has adopted the new accounting standard IFRS 15 to all contracts using the modified retrospective approach. The adoption of IFRS 15 did not result in significant changes in the accounting for revenue from contracts with customers and the Company has concluded that there was no significant impact on its consolidated financial statements nor would there have been any significant effect on the 2018 consolidated statement of earnings had the prior accounting policies continued to be applied. IFRS 9 – Financial Instruments On January 1, 2018, the Company has also adopted the new accounting standard IFRS 9 and elected to apply prospectively. The adoption of the new classification requirements under IFRS 9 did not result in a change in the carrying value of any of Company's financial instruments on the transition date. Future changes in accounting policies The following standards have been issued but are not yet effective: IFRS 16 – Leases 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. Effective January 1, 2019, the Company will adopt IFRS 16 using the modified retrospective approach and will chose the option under which the amount of the right‐of‐use assets will be equal to the amount of the lease liabilities. The expected impact in the consolidated statement of financial position of this new standard is noted below. For contracts entered into before January 1, 2019, the Company determined whether the arrangement contained a lease under IAS 17 and IFRIC 4. Prior to the adoption of IFRS 16, these leases were classified as operating or finance leases based on an assessment of whether the lease transferred significantly all the risks and rewards of ownership of the underlying asset. The Company leases production and warehouse locations, production equipment and furniture, office equipment and rolling stock. On transition, the Company will elect to apply the practical expedient to grandfather the determination of which contract is or contains a lease and will apply IFRS 16 to those contracts that were previously identified as leases. Upon transition to the new standard, right‐of‐use assets and lease liabilities will be measured at the present value of the remaining lease payments discounted by the Company's incremental borrowing rate as at January 1, 2019. At transition, right‐of‐use assets and lease liabilities of approximately $7,000 will be recognized in the consolidated statement of financial position. The Company will elect not to recognize right‐of‐use assets and lease liabilities for leases with a lease term of less than 12 months and low value assets and will continue to recognize the lease payments associated with these leases as an expense on a straight‐line basis over the lease term, as permitted by IFRS 16. 5N Plus ▪ Consolidated Financial Statements ▪ 19 5N Plus 2018 Annual Report 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) IFRIC 23 – Uncertainty over Income Tax Treatments In June 2017, the IFRS Interpretations Committee of the IASB issued IFRIC 23, Uncertainty over Income Tax Treatments (IFRIC 23). The interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The interpretation is effective for the annual period beginning on January 1, 2019. The Company has concluded that no impact will result from the application of IFRIC 23 on its financial statements. 4. Accounts Receivable Gross trade receivables Loss allowance (Note 24) Trade receivables Sales taxes receivable Other receivables Total accounts receivable 2018 $ 19,100 (97) 19,003 3,238 743 22,984 2017 $ 21,673 (126) 21,547 3,104 988 25,639 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’s exposure to credit risks and the calculation of the loss allowance related to accounts receivable are 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 2018 $ 32,912 63,977 96,889 2017 $ 27,924 62,723 90,647 For the year ended December 31, 2018, a total of $97,598 of inventories was included as an expense in cost of sales (2017 – $111,661). For the year ended December 31, 2018, a total of $3,061 previously written down was recognized as a reduction of expenses in cost of sales concurrently with the related inventories being sold ($nil for the Eco‐Friendly Materials segment and $3,061 for the Electronic Materials segment) (2017 – $7,532 [$890 for the Eco‐Friendly Materials segment and $6,642 for the Electronic Materials segment]). The majority of inventories are pledged as security for the revolving credit facility (Note 11). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31 5N PLUS INC. (in thousands of United States dollars, unless otherwise indicated) 6. Property, Plant and Equipment Land and buildings Production equipment equipment and rolling stock Leasehold improvements Furniture, office Net book value as at December 31, 2016 Additions Disposals Depreciation Additions Disposals Depreciation Impairment (Note 26) Effect of foreign exchange and others Net book value as at December 31, 2017 Effect of foreign exchange and others Net book value as at December 31, 2018 As at December 31, 2017 Cost Cost Accumulated depreciation Net book value As at December 31, 2018 Accumulated depreciation Net book value $ 20,491 765 (2,100) (1,147) ‐ 441 18,450 676 (615) (1,026) (144) 17,341 23,888 (5,438) 18,450 22,640 (5,299) 17,341 35,586 5,903 $ ‐ (5,997) (1,116) (123) 34,253 7,480 ‐ (6,130) (98) 35,505 54,951 (20,698) 34,253 60,319 (24,814) 35,505 $ 1,722 665 ‐ ‐ ‐ (467) 56 1,976 1,291 (495) (8) 2,764 2,234 (258) 1,976 3,100 (336) 2,764 2,146 $ 78 ‐ (297) ‐ 1 ‐ ‐ 1,928 70 (311) 1,687 Total $ 59,945 7,411 (2,100) (7,908) (1,116) 375 56,607 9,517 (615) (7,962) (250) 57,297 3,264 (1,336) 1,928 84,337 (27,730) 56,607 3,334 (1,647) 1,687 89,393 (32,096) 57,297 As at December 31, 2018, property, plant and equipment that were not depreciated until ready for their intended use amounted to $5,042 (2017 ─ $4,315) (mainly production equipment). Most of the property, plant and equipment are pledged as security for the revolving credit facility (Note 11). 20 ▪ 5N Plus ▪ Consolidated Financial Statements 60 5N Plus 2018 Annual Report 5N Plus ▪ Consolidated Financial Statements ▪ 21 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, 2016 Additions Disposals Depreciation Impairment (Note 26) Effect of foreign exchange and others Net book value as at December 31, 2017 Additions Disposals Depreciation Effect of foreign exchange and others Net book value as at December 31, 2018 As at December 31, 2017 Cost Accumulated depreciation Net book value As at December 31, 2018 Cost Accumulated depreciation Net book value Land and buildings $ 20,491 765 (2,100) (1,147) ‐ 441 18,450 676 (615) (1,026) (144) 17,341 23,888 (5,438) 18,450 22,640 (5,299) 17,341 Production equipment $ 35,586 5,903 ‐ (5,997) (1,116) (123) 34,253 7,480 ‐ (6,130) (98) 35,505 54,951 (20,698) 34,253 60,319 (24,814) 35,505 Furniture, office equipment and rolling stock $ 1,722 665 ‐ (467) ‐ 56 1,976 1,291 ‐ (495) (8) 2,764 Leasehold improvements $ 2,146 78 ‐ (297) ‐ 1 1,928 70 ‐ (311) ‐ 1,687 Total $ 59,945 7,411 (2,100) (7,908) (1,116) 375 56,607 9,517 (615) (7,962) (250) 57,297 2,234 (258) 1,976 3,100 (336) 2,764 3,264 (1,336) 1,928 84,337 (27,730) 56,607 3,334 (1,647) 1,687 89,393 (32,096) 57,297 As at December 31, 2018, property, plant and equipment that were not depreciated until ready for their intended use amounted to $5,042 (2017 ─ $4,315) (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 ▪ 21 5N Plus 2018 Annual Report 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) 7. Intangible Assets Net book value as at December 31, 2016 Additions Disposals and others Impairment (Note 26) Amortization Net book value as at December 31, 2017 Additions Disposals and others Amortization Net book value as at December 31, 2018 As at December 31, 2017 Cost Accumulated amortization Net book value As at December 31, 2018 Cost Accumulated amortization Net book value Technology $ 3,026 ‐ ‐ (837) ‐ 2,189 ‐ ‐ (219) 1,970 2,189 ‐ 2,189 2,189 (219) 1,970 Software, intellectual property and development costs $ 8,083 2,006 43 (1,147) (318) 8,667 1,198 (7) (629) 9,229 10,983 (2,316) 8,667 12,103 (2,874) 9,229 Total $ 11,109 2,006 43 (1,984) (318) 10,856 1,198 (7) (848) 11,199 13,172 (2,316) 10,856 14,292 (3,093) 11,199 As at December 31, 2018, intangible assets that were not depreciated until ready for their intended use amounted to $5,814 (2017 ─ $10,020). The category of development costs which includes capitalized costs of $9,973 (2017 ‐ $8,951), primarily consists of internally generated intangible assets. 22 ▪ 5N Plus ▪ Consolidated Financial Statements 62 5N Plus 2018 Annual Report 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 loss from joint ventures Disposal Effect of foreign exchange End of year 2018 $ 718 (22) (777) 81 ‐ 2017 $ 779 (110) ‐ 49 718 During the third quarter of 2018, the Company sold its participation in the joint venture, Zhuhai Gallium Industry Co. for an amount of $417 and recognized a loss of $360. In addition, following the liquidation of its other joint venture, Ingal Stade GmbH which had closed its manufacturing activities in 2016, the Company received an amount of $238 in cash. 9. Other Assets Deferred costs Other Total other assets 10. Trade and Accrued Liabilities Trade payables Accrued liabilities Total trade and accrued liabilities 2018 $ 648 756 1,404 2018 $ 21,647 17,602 39,249 2017 $ 132 898 1,030 2017 $ 38,834 18,209 57,043 5N Plus ▪ Consolidated Financial Statements ▪ 23 5N Plus 2018 Annual Report 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) 11. Bank Indebtedness and Long‐Term Debt a) Bank indebtedness The Company has a Chinese renminbi (“RMB”) credit line with a financial institution 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%. Contractual Currency RMB 10,000 ‐ 2018 Reporting Currency US$ 1,454 ‐ Contractual Currency RMB 10,000 ‐ 2017 Reporting Currency US$ 1,530 ‐ Facility available Amount drawn b) Long‐term debt Senior secured revolving facility of $79,000 with a syndicate of banks, maturing in April 2022(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) Less current portion of long‐term debt 2018 $ 30,000 175 30,175 175 30,000 2017 $ ‐ 271 271 271 ‐ (1) In April 2018, the Company signed a senior secured multi‐currency revolving credit facility of $79,000 maturing in April 2022 to replace its existing $50,000 senior secured revolving facility maturing in August 2018. At any time, the Company has the option to request that the credit facility be expanded through the exercise of an additional $30,000 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 (up to $4,000). 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 net debt to consolidated EBITDA ratio. Under the terms of its credit facility, the Company is required to satisfy certain restrictive covenants as to financial ratios. As at December 31, 2018, the Company has met all covenants. (2) The term loan is classified as short‐term debt since these amounts could become payable on demand. 24 ▪ 5N Plus ▪ Consolidated Financial Statements 64 5N Plus 2018 Annual Report 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 earnings. The fair value of the debenture conversion option, which consists of the holder’s conversion option subject to the Company’s early redemption options, was estimated based on a methodology for pricing convertible bonds using an approach based on partial differential equations or binomial lattices, with the following assumptions: average expected volatility of 40%; expected dividend per share of nil; entity‐specific credit spread, and expected life of 5 years. As a result, the initial fair value of the liability representing the debenture conversion option for the two tranches of the issuance of the debenture was estimated at CA$10,484 (US$9,666). Assumptions were reviewed in the valuation as at December 31, 2018 and December 31, 2017 and have not changed substantially. 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). On June 28, 2018, the Company partially redeemed its 5.75% convertible unsecured subordinated debentures maturing on June 30, 2019 for an aggregate principal amount of CA$40,000. On the same date, the Company completed a drawdown on its senior revolving credit facility of US$30,000 to partially redeem the debentures on favorable terms reducing the current cost of gross debt. As at December 31, 2018, the aggregate principal amount of debentures currently outstanding is CA$26,000. Consequently, the Company de‐designated CA$40,000 of the nominal amount of the associated cross‐currency swap and reclassified the net gain of $79, representing the accumulated net changes in cash flow hedges, from accumulated other comprehensive loss to realized gain on de‐designation during the second quarter of the year as the related anticipated cash flows are no longer expected to occur. Following the early redemption of the CA$40,000 convertible debentures, an accelerated imputed interest of $1,490 was recognized as an expense in the second quarter of the year. 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 2018 $ 14,619 2017 $ 15,396 5N Plus ▪ Consolidated Financial Statements ▪ 25 5N Plus 2018 Annual Report 65 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) Movement in the defined benefit obligation is as follows: Beginning of year Current service cost Interest cost Effect of foreign exchange Benefits paid Actuarial losses (gains) End of year The principal actuarial assumptions as at December 31 were as follows: Discount rate Salary growth rate Pension growth rate 2018 $ 15,396 88 282 (687) (660) 200 14,619 2018 1.9% 2.0% 1.8% 2017 $ 14,813 87 266 1,957 (665) (1,062) 15,396 2017 1.9% 2.0% 1.8% Assumptions regarding mortality are based on mortality tables “Richttafeln 2018 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 Impact on defined benefit obligation Change in assumption 0.50% 0.50% 0.50% Increase in assumption (6.27%) 0.54% 6.29% Decrease in assumption 6.99% (0.52%) (5.77%) Increase by 1 year in assumption 4.15% Decrease by 1 year in assumption (3.66%) The weighted average duration of the defined benefit obligation is 13.20 years (2017 – 13.45 years). Expected maturity analysis of undiscounted pension liability: Less than a year Between 1 and 5 years Over 5 years Total 2018 $ 668 2,772 15,774 19,214 2017 $ 687 2,925 16,734 20,346 Expected contributions to pension benefit plans for year ending December 31, 2019 are $668. 26 ▪ 5N Plus ▪ Consolidated Financial Statements 66 5N Plus 2018 Annual Report 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, 2016 Additions Utilized As at December 31, 2017 Additions Utilized As at December 31, 2018 15. Income Taxes Current tax: Current tax for the year Adjustment in respect of prior years’ estimates Total current tax Deferred tax: Recognition and reversal of temporary differences Recognition of previously unrecorded tax assets Adjustment in respect of prior years’ estimates Total deferred tax Income tax (recovery) expense Deferred revenues $ 5,419 800 (9) 6,210 120 ‐ 6,330 Other $ 243 ‐ (17) 226 ‐ (11) 215 2018 $ 3,723 (2,875) 848 (125) (1,609) 830 (904) (56) A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows: Earnings before income tax Canadian statutory income tax rates Income tax on earnings at Canadian statutory rate Increase (decrease) resulting from: Unrecorded losses carried forward Recognition of previously unrecorded tax assets Non‐deductible expense (non‐taxable gain) for tax purposes Non‐taxable foreign exchange Effect of difference of foreign tax rates compared to Canadian tax Adjustment in respect of prior years’ estimates Other Income tax (recovery) expense 2018 $ 13,916 26.7% 3,716 (258) (1,609) 217 (205) 135 (2,045) (7) (56) Total $ 5,662 800 (26) 6,436 120 (11) 6,545 2017 $ 3,306 289 3,595 (3,068) ‐ ‐ (3,068) 527 2017 $ 12,540 26.8% 3,361 (2,298) ‐ (163) (1,099) 265 289 172 527 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 ▪ 27 5N Plus 2018 Annual Report 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 3 8 8 1 , ) 9 2 6 6 ( , $ l a t o T $ y b t e s f f O n o i t c i d s i r u j $ l a t o T 2 1 5 8 , 6 8 4 4 0 4 2 , $ 3 3 6 s r e h t O 0 3 8 4 6 1 , 1 9 8 6 , ) 1 1 5 4 ( , 2 0 4 1 1 , 1 1 3 2 , 3 6 ) 0 6 4 ( ‐ ) 4 3 5 ( $ ‐ 7 6 6 4 7 3 2 , 1 4 0 3 , 3 6 2 0 5 2 7 8 , 7 ) 3 3 1 , 3 ( 5 0 0 , 1 1 7 7 7 , 1 6 0 6 , 3 $ 9 5 1 4 , ) 0 9 6 2 ( , ‐ ‐ 9 6 4 1 , 3 2 5 , 1 2 9 9 , 2 $ 3 6 6 ) 3 4 ( ‐ 0 2 6 ) 3 1 3 ( ‐ 7 0 3 $ 0 4 8 1 , ‐ 7 1 1 7 5 9 1 , ‐ ) 5 5 7 ( 2 0 2 , 1 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 s s o L y r r a c d r a w r o f 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 $ 7 1 2 1 , ‐ 7 8 7 4 0 0 2 , ‐ ) 3 8 8 ( 1 2 1 , 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 i s g n n r a e f o ) d e g r a h c ( d e t i d e r C e m o c n i e v i s n e h e r p m o c o t d e t i d e r C 7 1 0 2 , 1 3 r e b m e c e D t a s A : s w o l l o f s a s i , n o i t c i d s i r u j 6 1 0 2 , 1 3 r e b m e c e D t a s A s t e s s a x a t d e r r e f e D 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 ( i s g n n r a e f o e m o c n i e v i s n e h e r p m o c o t d e t i d e r C 8 1 0 2 , 1 3 r e b m e c e D t a s A 68 5N Plus 2018 Annual Report $ 5 1 7 l a t o T $ ) 9 2 6 6 ( , y b t e s f f O n o i t c i d s i r u j 1 5 2 ) 1 1 5 4 ( , 6 6 2 ) 3 3 1 , 3 ( $ l a t o T 4 4 3 7 , ) 2 8 5 2 ( , 2 6 7 4 , ) 4 6 3 , 1 ( 1 9 9 3 , 3 $ 9 6 1 1 , s r e h t O ) 3 0 1 1 ( , 6 6 6 7 ‐ 2 4 1 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 $ 5 0 1 3 , ) 8 8 3 ( 7 1 7 2 , ) 6 5 9 , 1 ( 1 2 6 7 $ 4 1 8 9 5 3 7 8 ) 5 9 2 ( ‐ 8 7 5 $ 0 5 3 ) 5 7 2 ( 5 7 4 6 ‐ 9 3 1 $ 6 0 9 1 , ) 5 7 8 ( 1 3 0 1 , ‐ 7 4 7 8 7 7 , 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 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 i s g n n r a e f o 7 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 i s g n n r a e f o ) d e t i d e r c ( d e g r a h C e m o c n i e v i s n e h e r p m o c o t d e g r a h C 8 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 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) Movement in the deferred income tax amounts is as follows: Beginning of year Tax charge relating to components of other comprehensive income Credited to consolidated statement of earnings End of year 2018 $ 6,640 62 904 7,606 2017 $ 1,168 2,404 3,068 6,640 Deferred tax assets of $2,927 (2017 – $2,060), 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. Unremitted earnings totalled $16,343 as at December 31, 2018 (2017 ‐ $1,285). As at December 31, 2018, 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 Hong Kong China $ 3,170 45,281 30,196 17,196 4,188 Expiry No limit No limit No limit No limit 2019‐2023 As at December 31, 2018, the Company had other deductible temporary differences of $425 for which no deferred tax benefit has been recorded (2017 – $451). 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 include cross‐currency swap and the equity swap agreement, is calculated as the present value of the estimated future cash flows using an appropriate interest rate yield curve, foreign exchange rate and the stock price. 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; 5N Plus ▪ Consolidated Financial Statements ▪ 29 69 5N Plus 2018 Annual Report 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) (iii) The fair value of the debenture conversion option is described in Note 12; (iv) The fair value of long‐term debt is 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. The carrying values and fair values of financial instruments, by class, are as follows as at December 31, 2018 and 2017: As at December 31, 2018 Carrying value Fair value At amortized cost (loans and receivables in 2017) $ At fair value through profit or loss $ Financial liabilities at amortized cost $ Derivative designated in a hedge relationship $ ‐ ‐ 5,835 5,835 26,724 22,984 ‐ 49,708 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 39,249 ‐ 175 18,571 30,000 87,995 ‐ ‐ ‐ ‐ ‐ 197 ‐ ‐ ‐ 197 Financial assets Cash and cash equivalents Accounts receivable Other current assets Total Financial liabilities Trade and accrued liabilities Derivative financial liabilities Current portion of long‐term debt Current portion of convertible debentures Long‐term debt Total As at December 31, 2017 At fair value through profit or loss $ Loans and receivables $ Financial liabilities at amortized cost $ Derivative designated in a hedge relationship $ Financial assets Cash and cash equivalents Accounts receivable Other current assets Derivative financial assets Total Financial liabilities Trade and accrued liabilities Current portion of long‐term debt Convertible debentures Total ‐ ‐ 6,141 ‐ 6,141 34,024 25,639 ‐ ‐ 59,663 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 57,043 271 48,768 106,082 ‐ ‐ ‐ 3,602 3,602 ‐ ‐ ‐ ‐ Total $ 26,724 22,984 5,835 55,543 39,249 197 175 18,571 30,000 88,192 Carrying value Total $ 34,024 25,639 6,141 3,602 69,406 Total $ 26,724 22,984 5,835 55,543 39,249 197 175 19,062 30,000 88,683 Fair value Total $ 34,024 25,639 6,141 3,602 69,406 57,043 57,043 271 48,768 106,082 271 52,766 110,080 30 ▪ 5N Plus ▪ Consolidated Financial Statements 70 5N Plus 2018 Annual Report 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) 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 level, which are recognized at fair value in the consolidated statements of financial position: As at December 31, 2018 Financial assets (liabilities) At fair value through profit or loss Debenture conversion option (Note 12)(1) Equity swap agreement (Note 21)(2) Derivative designated in a hedge relationship Cross‐currency swap(3) Total As at December 31, 2017 Financial assets (liabilities) At fair value through profit or loss Debenture conversion option (Note 12)(1) Equity swap agreement (Note 21)(2) Derivatives designated in a hedge relationship Cross‐currency swap(3) Level 1 $ Level 2 $ Level 3 $ ‐ ‐ ‐ ‐ ‐ 5,835 (197) 5,638 ‐ ‐ ‐ ‐ Level 1 $ Level 2 $ Level 3 $ ‐ ‐ ‐ ‐ ‐ 6,141 3,602 9,743 ‐ ‐ ‐ ‐ Total (1) (2) 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 was nil and no amount was recognized in the consolidated statement of earnings for the year ended December 31, 2018 ($85 as income for the year ended December 31, 2017). In June 2017, the Company has entered into a swap agreement with a major Canadian financial institution to reduce its income exposure to fluctuations in its share price relating to the DSU, PSU, RSU and SAR programs. Pursuant to the agreement, the Company receives the economic benefit of share price appreciation while providing payments to the financial institution for the institution’s cost of funds and any share price depreciation. The net effect of the equity swaps partly offset movements in the Company’s share price impacting the cost of the DSU, PSU, RSU and SAR programs. As at December 31, 2018, the equity swap agreement covered 2,571,569 common shares of the Company. The fair value of this indexed deposit is recorded under other current assets. (3) 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. Following the partially redemption of the convertible debentures in the second quarter of the year, the Company de‐designated and settled CA$40,000 of the nominal amount of the associated cross‐currency swap (Note 12). 5N Plus ▪ Consolidated Financial Statements ▪ 31 71 5N Plus 2018 Annual Report 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, 2018 Segment revenues Adjusted EBITDA(1) Interest on long‐term debt, imputed interest and other interest expense Shared based compensation expense (Note 21) Litigation and restructuring costs (income) (Note 26) Foreign exchange and derivative loss Gain on disposal of property, plant and equipment Depreciation and amortization Earnings (loss) before income tax Capital expenditures For the year ended December 31, 2017 Segment revenues Adjusted EBITDA(1) (2) Interest on long‐term debt, imputed interest and other interest expense Shared based compensation expense(2) (Note 21) Litigation and restructuring costs (income) (Note 26) Change in fair value of debenture conversion option Foreign exchange and derivative loss Gain on disposal of property, plant and equipment Impairment of non‐current assets (Note 26) Depreciation and amortization Earnings (loss) before income tax Capital expenditures Eco‐Friendly Materials $ 136,981 12,517 Electronic Materials $ 81,014 29,226 Corporate and unallocated $ ‐ (9,393) 4,850 5,248 ‐ Eco‐Friendly Materials $ 146,468 14,976 Electronic Materials $ 73,448 24,835 Corporate and unallocated $ ‐ (10,224) 4,091 2,678 ‐ Total $ 217,995 32,350 6,295 3,298 316 225 (510) 8,810 13,916 10,098 Total $ 219,916 29,587 6,097 4,470 (2,953) (85) 79 (1,887) 3,100 8,226 12,540 6,769 (1) (2) Earnings (loss) before income tax, depreciation and amortization, impairment of non‐current assets, share‐based compensation expense, gain on disposal of property, plant and equipment, litigation and restructuring costs (income) and financial expense (revenues). Restated to reflect the change in the definition of Adjusted EBITDA which now excludes the share‐based compensation expense. 18. Supplemental Cash Flow Information a) Net change in non‐cash working capital balances related to operations consists of the following: As at December 31, 2018 Total assets excluding the deferred tax asset: As at December 31, 2017 Total assets excluding the deferred tax asset: Eco‐Friendly Materials $ 96,856 Electronic Materials $ 113,995 Corporate and unallocated $ 18,334 Eco‐Friendly Materials $ 106,631 Electronic Materials $ 104,945 Corporate and unallocated $ 26,465 Total $ 229,185 Total $ 238,041 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 32 ▪ 5N Plus ▪ Consolidated Financial Statements 72 5N Plus 2018 Annual Report 5N Plus ▪ Consolidated Financial Statements ▪ 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31 5N PLUS INC. (in thousands of United States dollars, unless otherwise indicated) The geographic distribution of the Company’s revenues based on the location of the customers for the years ended December 31, 2018 and 2017, and the identifiable non‐current assets as at December 31, 2018 and 2017 are summarized as follows: Revenues Asia China Japan Other(1) Americas United States Other Europe France Germany United Kingdom Other(1) Other Total Asia(1) United States Canada Europe Belgium Germany Total (1) None exceeding 10% Non‐current assets (other than deferred tax assets) For the year ended December 31, 2018, one customer represented approximately 22 % (2017 – 12%) of the revenues, and is included in the Electronic Materials revenues. 2018 $ 5,592 4,590 52,015 50,751 19,083 7,691 29,097 4,805 37,110 7,261 217,995 2018 $ 15,942 9,896 18,543 8,159 17,360 69,900 2018 $ 2,684 (6,242) 1,254 796 (21,333) (3,607) (26,448) 2017 $ 10,754 4,450 47,856 43,934 12,626 9,705 33,713 8,285 37,940 10,653 219,916 2017 $ 16,166 8,180 21,609 8,454 18,404 72,813 2017 $ 4,134 (10,338) 674 (6,177) (4,436) 2,917 (13,226) 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 geographic distribution of the Company’s revenues based on the location of the customers for the years ended December 31, 2018 and 2017, and the identifiable non‐current assets as at December 31, 2018 and 2017 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 Total (1) None exceeding 10% 2018 $ 5,592 4,590 52,015 50,751 19,083 7,691 29,097 4,805 37,110 7,261 217,995 2018 $ 15,942 9,896 18,543 8,159 17,360 69,900 2017 $ 10,754 4,450 47,856 43,934 12,626 9,705 33,713 8,285 37,940 10,653 219,916 2017 $ 16,166 8,180 21,609 8,454 18,404 72,813 For the year ended December 31, 2018, one customer represented approximately 22 % (2017 – 12%) of the revenues, and is included in the Electronic Materials revenues. 18. Supplemental Cash Flow Information a) 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 2018 $ 2,684 (6,242) 1,254 796 (21,333) (3,607) (26,448) 2017 $ 4,134 (10,338) 674 (6,177) (4,436) 2,917 (13,226) 5N Plus ▪ Consolidated Financial Statements ▪ 33 73 5N Plus 2018 Annual Report 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) b) The reconciliation of assets/liabilities arising from financing activities consists of the following: December 31 2017 $ 271 Cash flows $ 29,922 48,768 (3,602) 6,210 (29,714) ‐ 120 51,647 328 Long‐term debt Convertible debenture(1) Cross‐currency swap(1) Deferred revenues Total net liabilities from financing liabilities Non‐Cash changes Foreign exchange movement $ (18) (3,629) ‐ ‐ (3,647) Fair value changes $ ‐ December 31 2018 $ 30,175 ‐ 3,799 ‐ 3,799 18,571 197 6,330 55,273 Imputed interest $ ‐ 3,146 ‐ ‐ 3,146 December 31 2016 $ 325 Cash flows $ (74) Imputed interest $ ‐ Non‐Cash changes Foreign exchange movement $ 20 Fair value changes $ ‐ December 31 2017 $ 271 48,768 ‐ (3,602) 6,210 51,647 2017 $ 1,050(1) 3,741 Long‐term debt Convertible debenture(1) Debenture conversion option Cross‐currency swap(1) Deferred revenues Total net liabilities from financing liabilities 43,157 68 (189) 5,419 48,780 ‐ ‐ ‐ 791 717 2,171 3,440 ‐ ‐ ‐ 17 ‐ ‐ 2,171 3,477 ‐ (85) (3,413) ‐ (3,498) (1) Interest settlement were reflected as cash flows from operating activities in the consolidated statements of cash flows. c) The consolidated statements of cash flows exclude or include the following transactions: i) Excluded additions unpaid at end of year: Additions to property, plant and equipment ii) Included additions unpaid at beginning of year: Additions to property, plant and equipment 2018 $ 469 1,050 (1) In 2017, the Company agreed with a customer to net a trade receivable against a payable for the purchase of property, plant and equipment. 34 ▪ 5N Plus ▪ Consolidated Financial Statements 74 5N Plus 2018 Annual Report 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) 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, 2018 and 2017, no preferred shares were issued. On February 21, 2017, the TSX approved an amendment to the Company’s normal course issuer bid implemented on October 11, 2016. Under this normal course issuer bid amendment, the Company had the right to purchase for cancellation, from October 11, 2016 to October 10, 2017, a maximum of 2,100,000 (previously 600,000) common shares. The Company’s normal course issuer bid program expired on October 10, 2017 and has not been renewed. In 2017, the Company had repurchased and cancelled 475,016 common shares at an average price of $1.38 for a total amount of $654. An amount of $1,943 has been applied against share capital, and an negative amount of $1,289 has been applied against the deficit. 20. Earnings per Share The following table reconciles the numerators and denominators used for the computation of basic and diluted earnings per share: Numerators Net earnings attributable to equity holders of 5N Plus Net earnings for the year Denominators Basic weighted average number of shares Dilutive effect: Stock options Diluted weighted average number of shares 2018 $ 13,972 13,972 2018 2017 $ 12,023 12,013 2017 84,243,976 83,676,315 446,764 84,690,740 336,979 84,013,294 As at December 31, 2018, a total number of 379,291 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, 2017, a total number of 501,747 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. 5N Plus ▪ Consolidated Financial Statements ▪ 35 75 5N Plus 2018 Annual Report 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) 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 an expense 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 an expense. For the year ended December 31, 2018, the Company granted nil RSUs (2017 – nil), 215,167 of RSUs were paid (2017 – 171,000) and 833 RSUs were forfeited (2017 – 53,000). As at December 31, 2018, nil RSUs were outstanding (2017 – 216,000). 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 forfeited 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 forfeited 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 forfeited immediately. 36 ▪ 5N Plus ▪ Consolidated Financial Statements 76 5N Plus 2018 Annual Report 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 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, 2018, the Company granted 393,897 New RSUs (2017 – 368,360), 28,361 New RSUs were paid (2017 – nil) and 67,370 New RSUs were forfeited (2017 – 37,500). As at December 31, 2018, 1,854,026 New RSUs were outstanding (2017 – 1,555,860). For the year ended December 31, 2018, the Company granted nil PSUs (2017 – nil) and, as at December 31, 2018, 500,000 PSUs were outstanding (2017 – 500,000). 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, 2018, the Company granted 223,762 SARs (2017 – 542,700), 46,500 of SARs were paid (2017 – 25,000), 14,995 SARs were expired (2017 – 30,156) and 106,500 SARs were forfeited (2017 – 30,000). As at December 31, 2018, 778,462 SARs were outstanding (2017 – 722,695). 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, 2018, the Company granted 199,823 DSUs (2017 – 290,408) and nil DSUs were paid (2017 – nil). As at December 31, 2018, 1,504,395 DSUs were outstanding (2017 – 1,304,572). 5N Plus ▪ Consolidated Financial Statements ▪ 37 77 5N Plus 2018 Annual Report 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) 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, 2018 may be exercised during a period not exceeding six years from their date of grant. Options vest at a rate of 25% (100% for directors) per year, beginning one year following the grant date of the options. Any unexercised options will expire one month after the date a beneficiary ceases to be an employee, director or officer and one year for retired directors. The following table presents information concerning all outstanding stock options: Number of options 2,224,747 143,335 (708,750) (137,704) (31,087) 1,490,541 726,750 2018 Weighted average exercise price CA$ 2.20 2.71 1.92 2.54 3.61 2.32 2.75 Number of options 2,860,648 288,000 (597,500) (116,476) (209,925) 2,224,747 1,001,497 2017 Weighted average Exercise price CA$ 2.63 1.75 1.75 2.50 8.59 2.20 2.59 Outstanding, beginning of year Granted Exercised Forfeited Expired Outstanding, end of year Exercisable, end of year The outstanding stock options as at December 31, 2018 are as follows: March and May 2019 March to August 2020 March 2021 March 2022 February 2023 February 2024 Exercise price Number of options Low CA$ 2.20 3.33 2.40 1.65 1.75 2.71 High CA$ 2.22 4.29 2.40 1.65 1.75 2.71 Exercisable Outstanding 275,000 242,000 91,500 62,500 55,750 ‐ 726,750 275,000 242,000 130,750 445,000 260,500 137,291 1,490,541 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, 2018 and 2017: Expected stock price volatility Dividend Risk‐free interest rate Expected option life Fair value – weighted average of options issued 38 ▪ 5N Plus ▪ Consolidated Financial Statements 78 5N Plus 2018 Annual Report 2018 53% None 2.03% 4 years CA$1.16 2017 59% None 0.98% 4 years CA$0.79 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) The following table shows the share‐based compensation expense recorded in the consolidated statements of earnings for the years ended December 31, 2018 and 2017: Expense RSUs PSUs SARs DSUs Stock options Equity swap Total 2018 $ 1,395 575 241 866 345 (124) 3,298 2017 $ 1,709 356 322 1,617 386 80 4,470 In June 2017, the Company entered into an equity swap agreement to reduce its earnings exposure on the fluctuation in the Company’s share price since this has an effect on the evaluation of the DSU, PSU, RSU and SAR plans. The fair value of this indexed deposit is recorded under other current assets. Any futher change in the fair value is recorded against the share‐based compensation expense (note 16). The following amounts were recorded: Liability RSUs PSUs SARs DSUs Total Intrinsic value of vested units 22. Commitments and Contigencies Commitments 2018 $ 3,144 995 585 3,369 8,093 4,064 2017 $ 2,475 485 418 2,748 6,126 3,652 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 2018 $ 1,598 2,635 61 4,294 As at December 31, 2018, in the normal course of business, the Company contracted letters of credit for an amount of $422 (2017 – $432). 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 ▪ 39 79 5N Plus 2018 Annual Report 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 incorporated special terms and conditions and no guarantees were given or received. Outstanding balances are settled in cash. 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 and others Total 24. Financial Risk Management 2018 $ 3,148 3,503 6,651 2017 $ 3,016 4,027 7,043 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. 40 ▪ 5N Plus ▪ Consolidated Financial Statements 80 5N Plus 2018 Annual Report 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) The following table summarizes in US dollar equivalents the Company’s major currency exposures as at December 31, 2018: Cash and cash equivalents Accounts receivable Other current assets Trade and accrued liabilities Long‐term debt Net financial assets (liabilities) CA $ 3,462 196 5,835 (11,703) (175) (2,385) EUR $ 3,555 6,197 ‐ (8,726) ‐ 1,026 GBP $ 1,126 170 ‐ ‐ ‐ 1,296 RMB $ 652 1,169 ‐ (659) ‐ 1,162 MYR $ 582 ‐ ‐ (407) ‐ 175 2018 Other $ 433 754 ‐ (566) ‐ 621 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, 2018 for the Company’s financial instruments denominated in non‐functional currencies: 5% Strengthening 5% Weakening CA $ (119) 119 EUR $ 51 (51) GBP $ 65 (65) RMB $ 58 (58) MYR $ 9 (9) Other $ 31 (31) 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, 2018, 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 risk fluctuation by ensuring that a reasonable portion of its current portion and long‐term debt, made of subordinated debts, currently as 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 have an impact of approximately $220 on the Company’s net earnings on a twelve‐month horizon based on the balance outstanding on December 31, 2018. (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. 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. 5N Plus ▪ Consolidated Financial Statements ▪ 41 81 5N Plus 2018 Annual Report 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 applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss allowance for trade receivables. The expected loss rates are based on the Company’s historical credit losses experienced over the three year period prior to the period end. The historical loss rates are then adjusted for current and forward‐looking information on macroeconomic factors affecting the Company’s customers. As at December 31, 2018, the lifetime expected loss allowance for trade receivables was determined as follows: Expected loss rate Gross carrying amount Loss allowance Current ‐ 18,355 ‐ More than 30 days past More than 60 days past 5.7% 594 34 41.6% 151 63 The following table summarizes the changes in the loss allowance for trade receivables: Beginning of year (no change on the adoption of IFRS 9) Increase during the year Trade receivables written off during the year as uncollectible Unused amounts reversed End of year 2018 $ 126 26 ‐ (55) 97 2018 Total 19,100 97 2017 $ 126 50 (38) (12) 126 The loss allowance is included in selling, general and administrative expenses in the consolidated statement of earnings, and is net of any recoveries that were provided for in prior periods. Amounts charged to the loss allowance account are generally written off when there is no reasonable expectation of recovery. Counterparties to financial instruments may also 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, therefore no impairment loss was identified as at December 31, 2018. Previous accounting policy for impairment of trade receivables In the prior year, the impairment of trade receivables was assessed based on the incurred loss model and determined by management in accordance with its assessment of recoverability. Receivables for which an impairment provision was recognised were written off against the provision when there was no expectation of recovering additional cash. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. 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, 2018: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31 5N PLUS INC. (in thousands of United States dollars, unless otherwise indicated) Carrying amount $ 39,249 30,175 18,571 87,995 1 year $ 39,249 1,394 19,884 60,527 2 year 3 year 4 year $ ‐ ‐ $ ‐ ‐ $ ‐ ‐ 1,219 1,219 31,219 1,219 1,219 31,219 2018 Total $ 39,249 35,051 19,884 94,184 Trade and accrued liabilities 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. 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, 2018 and 2017 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 2018 $ 30,175 18,571 197 48,943 (26,724) 22,219 119,703 19% 2017 $ 271 48,768 (3,602) 45,437 (34,024) 11,413 105,446 11% 42 ▪ 5N Plus ▪ Consolidated Financial Statements 82 5N Plus 2018 Annual Report 5N Plus ▪ Consolidated Financial Statements ▪ 43 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 reflects the contractual maturity of the Company’s financial liabilities as at December 31, 2018: Carrying amount $ 39,249 30,175 18,571 87,995 1 year $ 39,249 1,394 19,884 60,527 2 year $ ‐ 1,219 ‐ 1,219 3 year $ ‐ 1,219 ‐ 1,219 4 year $ ‐ 31,219 ‐ 31,219 2018 Total $ 39,249 35,051 19,884 94,184 Trade and accrued liabilities 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. 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, 2018 and 2017 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 2018 $ 30,175 18,571 197 48,943 (26,724) 22,219 119,703 19% 2017 $ 271 48,768 (3,602) 45,437 (34,024) 11,413 105,446 11% 5N Plus ▪ Consolidated Financial Statements ▪ 43 83 5N Plus 2018 Annual Report 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) 26. Expenses by Nature Expenses by nature include the following: Wages and salaries Share‐based compensation expense (Note 21) Depreciation of property, plant and equipment and amortization of intangible assets (Notes 6 and 7) Impairment of non‐current assets Amortization of other assets Gain on disposal of property, plant and equipment Research and development, net of tax credit Litigation and restructuring costs (income) 2018 $ 38,018 3,298 8,810 ‐ 163 (510) 1,328 316(1) 2017 $ 38,388 4,470 8,226 3,100(2) 221 (1,887) 1,761 (2,953)(3) (1) During the third quarter, the Company sold its participation in the joint venture, Zhuhai Gallium Industry Co. for an amount of $417 and recognized a loss of $360. In addition, following the liquidation of its other joint venture, Ingal Stade GmbH which had closed its manufacturing activities in 2016, the Company received an amount of $238 in cash. Also, included is a non‐recurring income of $588 relating to an amount receivable from an inactive legal entity for which no receivable had been recorded given the uncertainty attached to it, as well as severance costs of $782 associated with workforce optimization initiatives implemented throughout the year in line with our strategic plan. (2) During the fourth quarter of 2017, the Company recorded an impairment charge on non‐current assets of $3,100 ($1,116 for Production equipment, $837 for Technology and $1,147 for Development costs), included in Electronic materials segment, reflecting recent development to assumptions used in assessing the carrying value of specific product development assets. The change in assumptions is from an active decision to alter the market penetration strategy, other factors remaining constant. It is motivated by intentional delays in increasing production levels in order to prioritize products with higher premiums in niche applications, requiring longer market development cycle compared to other products. The discount rate of 17.5% was used to determine the recoverable amount of these non‐ current assets. (3) Including an income resulting from an amendment to optimize commercial agreements mitigated by cost related to termination of a non‐ core activity. 27. Subsequent events On February 6, 2019, the Company announced the closing of a $25,000 unsecured subordinated term loan with Investissement Québec. The new loan has a five‐year term and will be disbursed in two tranches: the first tranche of $5,000 was disbursed on February 6, 2019 and the second tranche of $20,000 will be disbursed by no later than March 29, 2019. The new term loan will bear an interest equivalent to the 5‐year US dollar swap rate plus a margin of 4.19%. On February 11, 2019, the Company’ shareholders voted to approve a special resolution by which the stated capital of the common shares of the Company be reduced to $5,000 and the amount of the reduction be added to the contributed surplus of the Company pursuant to Section 38(1) of the Canada Business Corporation Act (the “Stated Capital Reduction”). The reduction of stated capital will not result in any change to shareholders' equity. On February 25, 2019, 5N Plus announced that it has exercised its right to redeem all of its outstanding 5.75% convertible unsecured subordinated debentures maturing on June 30, 2019. On March 28, 2019 the Company will redeem its convertible debentures in an aggregate principal amount of CA$26 million. Following the redemption, there will remain no outstanding convertible debentures. 44 ▪ 5N Plus ▪ Consolidated Financial Statements 84 5N Plus 2018 Annual Report Board of Directors Luc Bertrand Chairman of the Board Jean-Marie Bourassa Chairman of the Audit and Risk Management Committee Nathalie Le Prohon Chair of the Governance and Compensation Committee Donald F. Osborne Board Member James T. Fahey Member of the Governance Arjang J. (AJ) Roshan President and Chief Executive Officer and Compensation Committee – Member Audit and Risk Management Jennie S. Hwang Member of the Governance and Compensation Committee – Member Audit and Risk Management Executive Committee Arjang J. (AJ) Roshan President and Chief Executive Officer Pascal Coursol Vice President, Nicholas Audet Executive Vice President, Electronic Materials Evelyne Bundock Vice President, Human Resources Recycling, Refining and Corporate R&D Richard Perron Chief Financial Officer Paul Tancell Executive Vice President, Eco-Friendly Materials 5N Plus 2018 Annual Report 85 Corporate Information For more information, please contact: Investor Relations 5N Plus Inc. 4385 Garand Street Montreal, Quebec H4R 2B4 T: 514-856-0644 F: 514-856-9611 invest@5nplus.com Si vous souhaitez obtenir une copie en français de ce rapport annuel, communiquez avec : Relations avec les investisseurs 5N Plus inc. 4385, rue Garand Montréal (Québec) H4R 2B4 Aussi disponible à l’adresse www.5nplus.com Stock Exchange 5N Plus is listed on the Toronto Stock Exchange, under the symbol VNP. Transfer Agent and Registrar Computershare Investor Services Inc. Auditors PricewaterhouseCoopers LLP Head Office 4385 Garand Street Montreal, Quebec H4R 2B4 Annual Meeting The annual shareholders meeting will be held on: Wednesday, May 1st, 2019 at 10:00 a.m. Stikeman Elliott LLP Room Mont-Royal 1155 René-Lévesque Blvd. West 41st floor Montreal, Quebec 86 5N Plus 2018 Annual Report 100% 5N Plus Inc. 4385 Garand Street Montréal, Quebec, Canada H4R 2B4 www.5nplus.com Enabling Performance