Liquidity and Capital Resources

Summary of Cash Flows

Cash Flows before Financing Activities

The Company’s operations consumed cash flows of $1.6 million in the fourth quarter 2008 compared to consuming cash flows of $15.0 million in the same quarter in the prior year. For fiscal 2008 the Company’s operations consumed $44.2 million compared to consumption of $20.1 million in fiscal 2007. In both the fourth quarter 2008 and fiscal 2008 the Company generated positive cash from operations before changes in non-cash working capital of $5.9 million and $19.5 million, respectively.

The consumption of cash during fiscal 2008 is largely attributable to the growth of the Company’s solar grade silicon product line. Accounts receivable have increased $17.6 million due to the higher average selling price of solar grade silicon and the increased sales volumes. For fiscal 2008, Magnesium Group accounts receivable increased $0.7 million as increased magnesium costs were passed on to customers. The inventories increase of $55.9 million was driven by both the Silicon Group ($46.3 million) and the Magnesium Group ($9.6 million).

For fiscal 2008, the Silicon Group has been building inventories in support of the growth of the solar grade silicon product line as additional production lines are commissioned and anticipated to be put into service in future periods. Inventory increases reflect silicon metal required to support the ramp-up of the solar grade silicon facilities while concurrently supplying silicon metal customers, plus accumulation of intermediate products that will either be consumed in the manufacture of silicon once additional production capacity has been brought on-line or will be sold subsequent to the quarter end. A portion of the increase is also the result of seasonal purchases of raw materials prior to the closure of shipping lanes in the winter. Inventories for the Magnesium Group increased during fiscal 2008 due to the increased unit cost of magnesium and an increase in raw materials inventory in transit as the supply chain was changed in anticipation of the closure of the Haley facility. The increase in accounts payable and accrued liabilities of $13.0 million for fiscal 2008 reflects the increased inventory purchases of the Silicon Group and the timing of payments related to the plant expansion ($10.7 million) and the timing of inventory purchases for the Magnesium Group ($2.3 million).

In the fourth quarter 2008, accounts receivable increased by $1.7 million. Sales to Silicon Group customers were higher in the fourth quarter 2008 resulting in accounts receivable increasing $2.8 million compared to the third quarter 2008. Magnesium Group accounts receivable were $1.1 million lower due to lower sales than the third quarter 2008. Throughout the fourth quarter, receivables were generally collected within credit terms and bad debts were minimal. Inventories increased $14.8 million from the third quarter 2008. Substantially all of the increase is attributable to the Silicon Group with a $0.6 million decrease in the Magnesium Group. Silicon metal purchases have increased in anticipation of the commissioning of new solar grade silicon production lines in the fourth quarter 2008 and the seasonal purchase of raw materials before the closure of shipping lanes. In the Magnesium Group, the price for magnesium metal decreased relative to the third quarter 2008 and the quantity of magnesium in inventories was decreased. This was offset by the conversion of the United States dollar carrying value due to the weakening Canadian dollar exchange rate. Accounts payable and accrued liabilities increased $10.2 million compared to the third quarter 2008: $8.9 million for the Silicon Group and $1.3 million for the Magnesium Group. The Silicon Group increase relates to the plant expansion and the timing of payments for inventory purchases related to the expanded plant capacity.

Results of operations in both the fourth quarter 2008 and fiscal 2008 reflect the growth in revenue from solar grade silicon that has generated cash flow from operations before changes in working capital.

Customer Deposits

BSI received $45.5 million in deposits during fiscal 2008, including $4.4 million received during the fourth quarter 2008, from its customers under 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 under such contracts, are being used to fund the capacity expansion. In the event of an early termination or completion of a supply contract, any remaining balance on the deposits would be returned to the customer within a specified time period. If the remaining amount is not repaid within the specified time period it becomes interest bearing at rates specified in the contract. One such supply contract will be completed at the end of 2009, and unless the Company concludes a contract extension with this customer, up to $17.9 million of the deposits will be repayable early in the first quarter 2010. As of December 31, 2008, $1.9 million has been drawn down against deposits through shipments of finished product to customers.

The global economic downturn has negatively impacted the solar industry in general and has resulted in weakened liquidity of certain market participants. Under the terms of existing supply contracts the Company has contractual commitments from certain customers to pay additional deposits. There is significant uncertainty as to whether these deposits will be received. The Company is in discussions with its customers regarding alternatives to these contractual commitments in the context of facilitating requests that may serve to maintain and enhance long-term customer relationships. The outcome of these discussions may include a renegotiation of certain terms and conditions that preserves the economic return to the Company while adjusting deposits, advances and timing of delivery to better reflect the current environment.

Capital Expenditures

The Company operates in a capital-intensive manufacturing industry. Capital expenditures are incurred to expand capacity for new product lines, maintain capacity, comply with safety and environmental regulations, support cost reductions and foster growth.

During the fourth quarter 2008, the Company invested $28.5 million in capital assets, of which approximately $20.0 million was in respect of the expansion of its solar grade silicon production capacity. For fiscal 2008, the Company acquired $80.1 million of capital assets, of which approximately $67.0 million related to the construction of its solar grade silicon facilities in Bécancour, Québec.

In the first quarter 2008, the Company announced plans to expand its nominal production capacity for solar grade silicon to 14,400 metric tons per year. This expansion, the construction of which commenced in the second quarter 2008, includes: the installation of additional lines of purification equipment in the existing silicon metal production facility to enable processing of silicon metal in liquid form as a “first pass”; the reconfiguration of equipment at the existing three line purification facility and the installation of new purification equipment in such facility and in another new purification facility all of which will produce “second pass” and “third pass” material; and the construction of new buildings for packaging and shipping, maintenance and employee services, all of which will be located at the Company’s Bécancour site. To date, the Company has installed and commissioned seven of a planned total of 12 purification lines. Construction of the new and expanded buildings and the commissioning of the new and reconfigured equipment for this expansion were originally expected to be completed by mid 2009. However, the Company announced on March 17, 2009 that it will defer further capacity expansion of its solar grade silicon facility until orders for solar grade silicon in excess of current capacity are confirmed by its customers.

The Company believes it has sufficient liquidity to finance the expected capital expenditures for its current expansion plans for its solar grade silicon production in Bécancour. Sources of financing include proceeds from the private placement of common equity of $24.2 million which closed on February 3, 2009, the Company’s credit facilities, further solar grade silicon customer deposits, if any, cash flow from operations and cash on hand. See “Credit Facilities” and “Customer Deposits” below.

Capitalization

The Company uses its credit facility to finance working capital requirements. As it develops a steady history of operating earnings and as credit markets stabilize in the future, the Company will evaluate seeking term debt financing to fund its capital assets. Since 2004, the Company has funded its expansion from the issuance of convertible debentures and share capital to its majority controlling shareholder and public shareholders.

The Company’s controlling shareholder, AMG Advanced Metallurgical Group N.V. (“AMG”), has consistently owned more than 50% of the total common shares outstanding and has participated in financings to maintain its majority control. Although AMG has expressed its intent to maintain a majority controlling position in the Company, there can be no assurance that AMG will always participate in future equity financings.

Credit Facilities

The Company has a Credit Agreement dated April 15, 2005 (as amended, the “Credit Agreement”) with Bank of America, N.A. (the “Bank”). The Credit Agreement principally includes a revolving line of credit (the “Revolver”) for US$50.0 million as of December 31, 2008. The Revolver currently bears interest at the U.S. prime rate plus bank margin of 1.25% (6.25% as at December 31, 2008) and does not require minimum repayments. The Credit Agreement expires on March 31, 2010. The Revolver is secured by the assets of the Company.

The Credit Agreement currently includes a financial covenant requiring the Company to maintain a minimum EBITDA level on a rolling 12-month basis. The Company is currently in compliance with this covenant as of December 31, 2008. As a result, the Company presently is able to utilize the total availability under the Credit Agreement. Total availability is equal to (i) the lesser of the borrowing base and the revolving credit commitment under the Revolver, minus (ii) the amount borrowed under the Revolver, which was US$41.8 million as of December 31, 2008. The Company is also required to maintain a minimum availability of at least US$2.0 million at all times. The Credit Agreement previously included other financial covenants, including minimum fixed charge coverage ratios. These covenants have been revised or waived from time to time. The covenant relating to the Company’s fixed charge coverage ratio ceased to apply as of and from June 30, 2008.

Equity Financings

On April 30, 2007, the Company completed a public offering of 11,500,000 common shares at a price of $2.60 per share, resulting in gross proceeds of $29.9 million. Net proceeds of the offering, which were $27.8 million, were used primarily for the construction of the new solar grade silicon production facility in Bécancour, Québec, and for general corporate purposes.

On September 27, 2007, the Company completed a public offering of 5,014,334 common shares at a price of $8.50 per share, resulting in gross proceeds of $42.6 million. Concurrently with the public offering, the Company completed a private placement of 5,136,140 common shares to AMG, the Company’s controlling shareholder, resulting in gross proceeds of $43.7 million. Net proceeds of the public offering and private placement, which were $83.6 million, were used primarily for additional production capacity expansion for solar grade silicon at the Bécancour facility and to further the Company’s objective to increase the purity of its solar grade silicon production beyond the 99.999% material presently produced. The balance of the net proceeds was used for repayment of bank debt and for general corporate purposes.

On February 3, 2009, the Company completed an equity offering by way of private placement of 7,042,000 common shares at a price of $3.55 per share, resulting in gross proceeds of $25.0 million. AMG acquired 3,938,200 common shares in this offering. Net proceeds, which were $24.2 million, were used for general corporate purposes including repayment of funds drawn on the Company’s revolving credit facility.

Convertible Notes

The Company currently owes the following amounts to ALD International LLC (“ALD International”), which is a controlled subsidiary of Safeguard International Fund, LP (“Safeguard”). Such borrowings were made pursuant to the terms and conditions of certain convertible promissory notes, as are described below under “Related Party Transactions – Convertible Notes”.

Contractual Obligations as at December 31, 2008

Defined Benefit Pension Plan Obligations

The Company directly and through its wholly-owned subsidiaries sponsors five defined benefit pension plans. However, only two such plans have active members. These are contributory defined benefit pension plans for employees in the Company’s Silicon Group (“Silicon plans”). The remaining three defined benefit pension plans, which have no active members, are for former employees of former operations of the Company and are in the process of being wound up (“inactive plans”). The notes to the Company’s audited financial statements for the year ended December 31, 2008 reflect an aggregate unfunded deficit of $16.3 million (for the year ended December 31, 2007 – $12.8 million) in respect of its defined benefit pension plans.

With respect to the Silicon plans, the most recent actuarial valuations were performed as of December 31, 2007, and the next actuarial valuations will be performed no later than December 31, 2010. Based on the actuarial valuations updated as at December 31, 2008, the plans have an aggregate unfunded deficit of $9.2 million on a solvency basis (December 31, 2007 – $10.9 million). The Company expects that funding contributions will be made to these plans in the amount of approximately $2.6 million in both 2009 and 2010, which are comparable to the funding contributions made in 2008. The Company’s actuaries estimate that annual funding contributions to these plans could increase to as much as $4.6 million for each of the years 2011 to 2013, based on the actuarial valuations as of December 31, 2007 and taking into consideration actuarial losses of approximately $9.8 million incurred in 2008. Such losses are due to a combination of: (i) an investment loss of approximately 20% of the market values of the plans’ assets due to negative investment returns during 2008 – as of December 31, 2008, such market values totalled $30.6 million; and (ii) a solvency liability loss of approximately 6% in the plans’ liabilities during 2008, due to changes in prescribed actuarial assumptions. However, this increase in estimated annual funding contributions starting in 2011, which is based on December 31, 2008 market data, does not take into account any potential gains or losses that may arise in 2009 and 2010. The Company’s pension expenses associated with the Silicon plans for 2009 are expected to be approximately $2.4 million.

With respect to the inactive plans, two plans are in the final stages of settlement and wind up (“inactive wind-up plans”) and one is in the early stages of settlement (“Haley plan”). The inactive wind-up plans have assets of less than $0.5 million and are anticipated to require cumulative payments of less than $0.4 million to settle the plans. These plans have been terminated as of December 31, 2008 and further actuarial valuations are not required for the purposes of funding if they are terminated as scheduled. An actuarial valuation of the Haley plan was last performed as of January 1, 2007. The Haley plan ceased having active members as of August 1, 2008, and a wind-up valuation is currently being performed as of that date. Based on a January 1, 2008 update to the prior actuarial valuation, the Company made funding contributions to this plan throughout 2008 both in respect of accruals for service up to August 1, 2008, and special payments to address the funding deficit. Until the wind-up valuation report is completed and approved by the Financial Services Commission of Ontario, the Company will continue to contribute special payments to the Haley plan in accordance with the January 1, 2008 update. These payments are expected to be $1.5 million in 2009. The Company will be required to make contributions to fully fund the deficit within five years after approval of the wind-up report, whose approval is not expected until the latter half of 2009. For the year ended December 31, 2008, the Company recognized an estimated pension curtailment expense of $4.3 million and will record a pension settlement expense in a future fiscal period which currently is estimated to be $7.6 million. This expense will be recognized upon final settlement of the pension liabilities and determination of the actual deficit in the Haley plan upon completion of the wind-up process. Until the final settlement of the pension liabilities, this expenditure will change based on gains or losses that may arise prior to completion of the wind-up process, based on fluctuations in market values of assets and investment returns and changes in actuarial assumptions and data experience in respect of the Haley plan.

There are various risks to the Company related to its obligations to the defined benefit plans:

1. There is no assurance that the plans will be able to earn the assumed rates of return. The Company assumed the Haley plan will be settled in approximately five years; accordingly, the actuarial valuation assumed five year bond yields. The Silicon plans are active ongoing defined benefit plans. Therefore, long term bond yields and equity returns were assumed in the latest actuarial valuation.
2. Market driven changes may result in changes in the discount rates and other variables which would result in the Company being required to make contributions in the future that differ significantly from the current estimates. The Company is currently remitting annual special payments of $1.5 million to address the funding deficit in the Haley plan. If equity markets decline below current levels, the Company may be required to remit material payments to this plan prior to settlement. Currently, it is anticipated that contributions to the Silicon plans will increase from current annual remittances of $2.6 million to $4.6 million in 2011. If equity market values change significantly in the interim period, then the required annual contributions may increase or decrease significantly.
3. There is measurement uncertainty incorporated into the actual valuation process. The Company and its actuarial advisors believe they have applied conservative valuation parameters in the derivation of the plans’ obligations. If those assumptions are incorrect, then future calculations of the plans’ obligations could be materially different.

All of these risks may materially change the Company’s future contribution requirements and the pension expense it will recognize in future period statements of operations.

Foreign Exchange and Foreign Currency Contracts

On an annualized basis, approximately 90% of the Company’s sales are denominated in U.S. dollars or Euros. For reporting purposes all foreign currency sales and expenses are converted to the Canadian dollar equivalent at the exchange rate applicable at the time of the transaction. While the Company has historically been exposed to swings in foreign exchange rates, and will continue to be exposed to some extent, it is increasingly endeavouring to reduce these risks through foreign exchange contracts. As at December 31, 2008, the Company had outstanding exchange contracts to sell €12.0 million over the 12 month period to December 2009 at a weighted average rate of 1.5801 and US$9.0 million over the same period at an average rate of $1.2365. The counterparty to the contracts is a multinational commercial bank.