2008 was a transformational year for Timminco. It was the first year of commercial production of upgraded metallurgical silicon (UMSi) for the solar industry. It also marked the disengagement of Timminco from non-core, i.e., non-silicon, related activities. Both events have to be seen in context, as the focus of the Company is now solely on its silicon related activities, resulting in a major simplification of the corporate structure and the management process.

The ramp-up in 2008 in the production of UMSi was challenging and slower than originally planned. Nevertheless, we expanded shipments from 100 metric tons (mt) in the first quarter to 424 mt in the fourth quarter with total shipments for the year of 1,045 mt. That product line generated $65 million in gross revenue and contributed significantly to the 52% growth in overall sales to $253 million with EBITDA³ of $21 million.

The challenges we faced included managing the construction of a new plant in stages with a sequential start-up of furnaces commissioned, the training of personnel, acquiring the necessary skills to handle new equipment and a new process, and securing a new mix of raw materials. We are continuing the learning process in concert with our customers. The build-out of our solar grade silicon business has positioned Timminco for growth. The rapid deterioration in the global economy, however, has had an adverse impact on our markets in the first quarter of 2009, significantly dampening the demand for both silicon metal and UMSi.

During my long tenure in the metals industry, I have witnessed a number of market downturns. Experience has taught me that minimizing risk through capital preservation, cost reduction, and inventory management are essential during such periods. Accordingly, we have taken decisive action, implementing a cost containment plan that eliminates non-essential capital expenditures, reduces our working capital requirements and reduces the overall cost structure of our silicon operations. Once the markets return, as they eventually will, Timminco will emerge as a more efficient competitor.

We have temporarily adjusted our output levels of solar grade silicon to bring them in line with customer orders. We have also deferred further expansion of our solar grade silicon capacity until our customers have confirmed orders that exceed our existing capacity. We are working closely with our customers to monitor their needs going forward.

We will also temporarily curtail production of silicon metal while continuing to supply silicon metal to customers from existing finished goods inventory.

As part of the transformation of Timminco, during 2008 we also focused on positioning our Magnesium Group for a return to profitability and strategic divestiture. We took a number of important steps forward in this regard, including the closure of the Haley, Ontario facility, as well as the continued implementation of cost management initiatives. Subsequent to year end, we signed a letter of intent to merge the majority of our magnesium operations with Winca Tech Limited, a leading China-based producer of magnesium products. The transaction is subject to several conditions, including financing and definitive agreements. We expect to maintain a minority ownership in the new entity, which will be known as Applied Magnesium International. We have also begun to wind down operations at our magnesium extrusion facility in Aurora, Colorado, with the expectation of closing that facility later this year. As a result of these actions, we expect to significantly reduce our working capital investment.

By restricting our involvement in the magnesium business following our exit from the aluminum casting business in Norway, the effort to turn Timminco into a silicon company with particular emphasis on the solar industry is now complete.

The solar energy industry is one with significant long-term opportunity. The global demand for energy is steadily increasing and solar energy is expected to play a significant role in the portfolio of renewables. 2009, however, will be a challenging year. It is difficult to predict when market conditions will improve. We have taken steps to minimize risk and to position the Company to weather this difficult environment. Our ongoing efforts to continue to increase the value proposition of our material will support our long-term success as the solar industry rebounds.

 

Your truly,

Dr. Heinz C. Schimmelbusch
Chairman of the Board and
Chief Executive Officer