Timminco 2008 Annual Report

The Company is divided into two segments: the Silicon Group, which includes the production and sale of silicon metal and solar grade silicon products, and the Magnesium Group, which includes the sale of magnesium extruded and fabricated products and specialty nonferrous metals.

The fourth quarter 2008 saw continued progress towards the Company’s goal of achieving profitable operations through increasing production and sales of solar grade silicon and further expansion of the Company’s solar grade silicon manufacturing facility. The Company’s operations were profitable in fourth quarter 2008 and fiscal 2008 (before charges for reorganization costs, equity in the loss of Fundo Wheels and the impairment of investment in Fundo Wheels). The reported loss before income taxes in fiscal 2008 includes a reorganization charge relating to the closure of the Company’s Haley, Ontario magnesium manufacturing facility and an asset impairment charge relating to the write-down of the Company’s investment in Fundo Wheels AS (“Fundo”).

Sales for the fourth quarter 2008 were $72.7 million compared to $36.4 million in the fourth quarter 2007, an increase of 100%. The increase is attributable primarily to increased sales of the Company’s Silicon Group reflecting volume growth of solar grade silicon and pricing strength in silicon metal products. For the fourth quarter 2008, the Company’s EBITDA was $6.4 million, compared to an EBITDA loss of $7.3 million in the fourth quarter 2007. For the fourth quarter 2008, the net loss was $1.3 million or $0.01 per share, compared to a loss of $8.8 million or $0.08 per share in the fourth quarter 2007.
During fiscal 2008 sales increased by 52% from $166.2 million in fiscal 2007 to $252.6 million reflecting the strong growth in sales of solar grade silicon. EBITDA for fiscal 2008 was $21.3 million compared to an EBITDA loss of $8.9 million in fiscal 2007. Net loss for fiscal 2008 was $22.6 million or $0.22 per share compared to a loss of $18.0 million or $0.20 per share for fiscal 2007.
The Company, through its wholly owned subsidiary Bécancour Silicon Inc. (“BSI”), shipped 424 metric tons of solar grade silicon in the fourth quarter 2008 generating $27.7 million of gross revenue from this product line in the quarter (1,045 metric tons and $64.6 million of gross revenue for fiscal 2008).
During the fourth quarter 2008, the Company received $4.4 million in deposits from customers in accordance with the terms of solar grade silicon supply contracts. These amounts, which are non-interest bearing pre-payments to be credited against future deliveries of solar grade silicon, will be used to fund the capacity expansion.
During the fourth quarter 2008, the Company amended its Credit Agreement with Bank of America, N.A. to increase the maximum revolving credit line to US$50.0 million from US$32.8 million. The availability of the revolving credit facility is subject to the borrowing base net of a minimum availability requirement of US$2.0 million. The Company intends to use the increased credit line to finance potential increases in working capital in support of the ramp-up of its solar grade silicon production.
During the third quarter 2008 management determined that there was a permanent impairment in the carrying value of the Company’s equity and loan investment in Fundo. The investment was written down to $nil which is management’s best estimate of its fair value. On January 12, 2009, Fundo commenced bankruptcy proceedings in Norway. The Company’s investment in Fundo is in the form of common equity and convertible loans that are subordinated to other secured parties. As a result of the commencement of these proceedings, management does not anticipate recovery of any proceeds from the Company’s investment in Fundo.

Global economic conditions have deteriorated rapidly over the last several months as a result of the financial crisis and recession that negatively impacted markets in North America, Europe and Asia during 2008. These developments are having and will likely continue to have a broad-reaching impact on the Company’s businesses and the industries in which they operate. The severity, duration and impact of these developments are not yet fully understood. Many of the Company’s customers are experiencing financial constraints and have reduced or deferred their purchases. In response to this environment, the Company has subsequent to the year end announced certain initiatives in both its Silicon and Magnesium Groups to reduce expenditures and accelerate reduction of working capital.

On February 3, 2009, the Company issued 7,042,000 common shares in an equity offering by way of private placement at $3.55 per share for net proceeds of $24.2 million. The Company’s controlling shareholder, AMG Advanced Metallurgical Group N.V. (“AMG”), subscribed for 3,938,200 shares (55.9% of the offering) and the remaining 3,103,800 shares were issued to other investors. AMG currently holds 50.7% of the total issued and outstanding share capital of the Company. The Company completed this financing as a prudent contingency measure in light of the impact that the current global economic conditions are having on the solar industry. The additional capital from this financing will strengthen the Company’s financial position by providing the Company with additional liquidity to finance working capital having regards to potentially lower operating cash flows from possible reduced short-term demand from solar grade silicon customers and delays in receipt of outstanding customer deposits.
On February 18, 2009, the Company announced a non-binding letter of intent with Winca Tech Limited (“Winca”), a leading Chinese-based producer of magnesium products, to merge the principal components of the Company’s magnesium and specialty metals business, including its manufacturing facility in Nuevo Laredo, Mexico, with all of Winca’s operations. The Company expects to retain a minority equity interest in the combined business, which will be known as Applied Magnesium International. The proposed merger is subject to a number of conditions, including financing and execution of definitive agreements, and is expected to be completed in the second quarter 2009.
Also on February 18, 2009, the Company announced that it would wind down production operations at its existing magnesium extrusion facility in Aurora, Colorado and close that facility later in 2009.
On March 17, 2009, the Company announced that it will temporarily curtail production of silicon metal starting in the second quarter 2009 in recognition of difficult market conditions including reduced demand for silicon metal in the chemical and aluminum industries. The decrease of the Company’s silicon metal production will result in a temporary workforce reduction. During this period, the Company will supply silicon metal to customers from existing finished goods inventory. The Company will continue to produce solar grade silicon, although at levels that bring production in line with customer orders. The Company will defer further capacity expansion of its solar grade silicon facility pending recovery of demand for solar grade silicon.