Inmet Mining Corporation For the year ending December 31, 2004

Transcription

1 Inmet Mining Corporation For the year ending December 31, 2004 TSX/S&P Industry Class = Annual Revenue = Canadian $546.3 million 2004 Year End Assets = Canadian $751.5 million Web Page (October, 2005) = Financial Reporting In Canada Survey Company Number 97

2 CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT This section of our annual report contains the audited consolidated financial statements of Inmet Mining Corporation, along with detailed notes. Auditors report To the shareholders of Inmet Mining Corporation: We have audited the consolidated balance sheets of Inmet Mining Corporation as at December 31, 2004 and 2003, and the consolidated statements of earnings, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of Inmet s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Inmet as at December 31, 2004 and 2003 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Consolidated financial statements Chartered Accountants Toronto, Canada February 8, 2005

3 Consolidated balance sheets As at December 31 (thousands of Canadian dollars) Assets Current assets: Cash and short-term investments (note 4) $ 245,807 $ 230,251 Accounts receivable 50,239 68,467 Inventories (note 5) 57,313 45,031 Future income tax asset (note 7) , ,964 Property, plant and equipment (note 6) 322, ,753 Investments 2,377 1,714 Future income tax asset (note 7) 8,942 7,877 Deferred charges (notes 10 and 22) 27,377 Other assets (note 8) 36,661 32,981 $ 751,453 $ 645,289 Liabilities Current liabilities: Accounts payable and accrued liabilities $ 87,920 $ 68,826 Current portion of long-term debt (note 9) 64,052 4, ,972 73,812 Long-term debt (note 9) 16,870 24,115 Reclamation liabilities (note 11) 63,060 64,726 Other liabilities (note 12) 40,627 24,517 Future income tax liabilities (note 7) 36,525 18,630 Non-controlling interest (note 2) 26, , ,896 Subsequent event (note 10) Commitments and contingencies (note 14) Shareholders equity Convertible debentures (note 10) 45,260 Share capital (note 15) 237, ,682 Contributed surplus 66,999 66,999 Stock based compensation (note 16) 4,938 6,538 Retained earnings 136,648 60,471 Foreign currency translation account (note 18) (4,117) 6, , ,393 $ 751,453 $ 645,289 (See accompanying notes) On behalf of the Board: Richard A. Ross Director Paul E. Gagné Director 62 INMET MINING CORPORATION

4 CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT As at December 31, 2004 Ok Tedi Çayeli Pyhäsalmi Troilus (Papua (thousands of Canadian dollars) Corporate (Turkey) (Finland) (Canada) New Guinea) Total (note 3) Assets Cash and short-term investments $ 140,925 $ 33,852 $ 52,255 $ $ 18,775 $ 245,807 Other current assets ,241 31,774 20,750 30, ,552 Property, plant and equipment 27,161 99,651 93,182 63,472 39, ,737 Investments 2,377 2,377 Deferred charges 6,750 20,627 27,377 Other assets 30,632 1,984 4,702 8,285 45,603 $ 208,771 $ 158,728 $ 177,211 $ 109,551 $ 97,192 $ 751,453 Liabilities Current liabilities $ 72,795 $ 12,394 $ 24,197 $ 21,376 $ 21,210 $ 151,972 Long-term debt 16,870 16,870 Reclamation liabilities 26,503 3,138 12,492 3,847 17,080 63,060 Other liabilities 11,975 2,940 23,545 2,167 40,627 Future income tax liabilities 26,271 5,823 4,431 36,525 $ 128,143 $ 44,743 $ 42,512 $ 48,768 $ 44,888 $ 309,054 Segmented balance sheets As at December 31, 2003 Ok Tedi Çayeli Pyhäsalmi Troilus (Papua (thousands of Canadian dollars) Corporate (Turkey) (Finland) (Canada) New Guinea) Total (note 3) Assets Cash and short-term investments $ 177,262 $ 10,835 $ 21,613 $ $ 20,541 $ 230,251 Other current assets 1,069 33,239 26,210 25,981 27, ,713 Property, plant and equipment 26,952 49,769 98,954 42,559 40, ,753 Investments 1,714 1,714 Other assets 29, ,643 7,260 40,858 $ 236,743 $ 94,052 $ 146,777 $ 72,183 $ 95,534 $ 645,289 Liabilities Current liabilities $ 16,089 $ 13,476 $ 13,423 $ 12,655 $ 18,169 $ 73,812 Long-term debt 24,115 24,115 Reclamation liabilities 28,240 3,162 11,802 3,636 17,886 64,726 Other liabilities 12,143 2,520 5,740 4,114 24,517 Future income tax liabilities 9,868 4,611 4,151 18,630 Non-controlling interest 26,096 26,096 $ 80,587 $ 55,122 $ 29,836 $ 22,031 $ 44,320 $ 231,896

5 Consolidated statements of earnings For the years ended December 31 (thousands of Canadian dollars except per share amounts) Gross sales $ 546,306 $ 408,054 Smelter processing charges and freight (121,816) (105,907) Cost of sales (244,609) (201,865) Depreciation (25,301) (20,724) 154,580 79,558 Corporate development and exploration (6,484) (4,057) General and administration (4,684) (5,294) Stock based compensation (note 16) (85) (2,522) Investment and other income (note 19) 2, ,914 Interest expense (note 20) (3,031) (5,695) Capital tax expense (903) (1,173) Income tax expense (note 21) (47,778) (21,487) Non-controlling interest (14,225) (8,747) Net income $ 80,353 $ 179,497 Accretion on equity component of convertible debentures (note 10) $ (4,176) $ (4,089) Basic net income per common share (note 17) $ 1.89 $ 4.46 Diluted net income per common share (note 17) $ 1.82 $ 4.05 (See accompanying notes) 64 INMET MINING CORPORATION

6 CONSOLIDATED FINANCIAL STATEMENTS 65 ANNUAL REPORT 2004 For the year ended December 31, 2004 Ok Tedi Çayeli Pyhäsalmi Troilus (Papua (thousands of Canadian dollars) Corporate (Turkey) (Finland) (Canada) New Guinea) Total (note 3) Gross sales $ $ 152,303 $ 146,470 $ 93,289 $ 154,244 $ 546,306 Smelter processing charges and freight (40,188) (44,646) (8,502) (28,480) (121,816) Cost of sales (2,025) (55,422) (48,094) (67,046) (72,022) (244,609) Depreciation (4,519) (11,446) (4,819) (4,517) (25,301) (2,025) 52,174 42,284 12,922 49, ,580 Corporate development and exploration (4,415) (569) (745) (130) (625) (6,484) General and administration (4,684) (4,684) Stock based compensation (85) (85) Investment and other income 698 2,265 2,963 Interest expense (2,988) (17) (26) (3,031) Capital tax expense (903) (903) Income tax expense (1,818) (16,442) (11,902) (17,616) (47,778) Non-controlling interest (14,225) (14,225) Net income (loss) $ (16,220) $ 23,186 $ 29,637 $ 12,766 $ 30,984 $ 80,353 For the year ended December 31, 2003 Ok Tedi Çayeli Pyhäsalmi Troilus (Papua (thousands of Canadian dollars) Corporate (Turkey) (Finland) (Canada) New Guinea) Total Segmented statements of earnings (note 3) Gross sales $ $ 118,478 $ 113,702 $ 91,547 $ 84,327 $ 408,054 Smelter processing charges and freight (40,071) (41,827) (9,598) (14,411) (105,907) Cost of sales (2,013) (45,196) (44,274) (68,030) (42,352) (201,865) Depreciation (4,127) (10,513) (2,940) (3,144) (20,724) (2,013) 29,084 17,088 10,979 24,420 79,558 Corporate development and exploration (4,057) (4,057) General and administration (5,294) (5,294) Stock based compensation (2,522) (2,522) Investment and other income 147,680 1, ,914 Interest expense (4,930) (681) (84) (5,695) Capital tax expense (1,173) (1,173) Income tax expense (818) (10,050) (2,956) (7,663) (21,487) Non-controlling interest (8,747) (8,747) Net income $ 126,873 $ 9,606 $ 15,366 $ 10,895 $ 16,757 $ 179,497

7 Consolidated statements of cash flows For the years ended December 31 (thousands of Canadian dollars) Cash provided by (used in) operating activities Net income $ 80,353 $ 179,497 Add (deduct) items not affecting cash: Depreciation 25,301 20,724 Stock based compensation 85 2,522 Gain on sale of assets (161) (33,146) Troilus litigation settlement (109,618) Future income tax 4,912 3,925 Non-controlling interest 14,225 8,747 Amortization of capitalized stripping 5,624 3,669 Accretion expense on reclamation liabilities 3,696 3,538 Deferred revenue 4, Other 5, Distributions in excess of earnings from Ok Tedi 15,605 Reclamation costs (3,830) (4,127) Net change in non-cash working capital (note 4) 13,157 (9,484) 152,738 83,407 Cash provided by (used in) investing activities Acquisition and dispositions (note 2) (63,495) 38,685 Troilus litigation settlement (note 19) 109,618 Property, plant and equipment (63,627) (31,933) Purchase of short-term investments (note 4) (41,811) (37,836) Other (1,059) (720) (169,992) 77,814 Cash provided by (used in) financing activities Long-term debt repayments (4,799) (48,430) Financial assurance fund payments (2,240) (1,876) Dividends paid to non-controlling shareholder (3,366) (1,453) Issue of share capital 6, Other (776) 942 (5,030) (50,734) Cash assumed on consolidation of Ok Tedi 9,454 Foreign exchange change on cash held in foreign currency (3,971) (4,058) Increase (decrease) in cash (26,255) 115,883 Cash: Beginning of year 177,135 61,252 End of year 150, ,135 Short-term investments 94,927 53,116 Cash and short-term investments $ 245,807 $ 230,251 (See accompanying notes) 66 INMET MINING CORPORATION

8 CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT For the year ended December 31, 2004 Ok Tedi Çayeli Pyhäsalmi Troilus (Papua (thousands of Canadian dollars) Corporate (Turkey) (Finland) (Canada) New Guinea) Total (note 3) Cash provided by (used in) operating activities Before net change in non-cash working capital $ (20,350) $ 50,150 $ 42,010 $ 27,476 $ 40,295 $ 139,581 Net change in non-cash working capital (2,409) 8,864 2,628 7,069 (2,995) 13,157 (22,759) 59,014 44,638 34,545 37, ,738 Cash provided by (used in) investing activities Acquisition and dispositions (64,085) 590 (63,495) Property, plant and equipment (409) (21,986) (3,736) (31,488) (6,008) (63,627) Other (1,059) (1,059) Short-term investments (41,811) (41,811) (106,305) (21,986) (3,146) (32,547) (6,008) (169,992) Cash provided by (used in) financing activities 3,333 (6,123) (2,240) (5,030) Foreign exchange change on cash held in foreign currency (5) (2,766) 275 (1,475) (3,971) Segmented statements of cash flows Intergroup funding (distributions) 47,588 (5,122) (11,125) (1,998) (29,343) Increase (decrease) in cash (78,148) 23,017 30,642 (1,766) (26,255) Cash: Beginning of year 124,146 10,835 21,613 20, ,135 End of year 45,998 33,852 52,255 18, ,880 Short-term investments 94,927 94,927 Cash and short-term investments $ 140,925 $ 33,852 $ 52,255 $ $ 18,775 $ 245,807

9 Segmented statements of cash flows For the year ended December 31, 2003 Ok Tedi Çayeli Pyhäsalmi Troilus (Papua (thousands of Canadian dollars) Corporate (Turkey) (Finland) (Canada) New Guinea) Total (note 3) Cash provided by (used in) operating activities Before net change in non-cash working capital $ (15,997) $ 28,829 $ 26,454 $ 18,655 $ 34,950 $ 92,891 Net change in non-cash working capital 1,638 (18,788) 773 (781) 7,674 (9,484) (14,359) 10,041 27,227 17,874 42,624 83,407 Cash provided by (used in) investing activities Acquisition and dispositions 38,685 38,685 Troilus litigation settlement 109, ,618 Property, plant and equipment (197) (9,473) (6,431) (15,439) (393) (31,933) Other (720) (720) Short-term investments (37,836) (37,836) 110,270 (9,473) (6,431) (16,159) (393) 77,814 Cash provided by (used in) financing activities (41,324) (7,534) (1,876) (50,734) Cash assumed on consolidation of Ok Tedi 9,454 9,454 Foreign exchange change on cash held in foreign currency (12) (3,449) 213 (810) (4,058) Intergroup funding (distributions) 40,214 (1,721) (8,320) (1,715) (28,458) Increase (decrease) in cash 94,789 (12,136) 12,689 20, ,883 Cash: Beginning of year 29,357 22,971 8,924 61,252 End of year 124,146 10,835 21,613 20, ,135 Short-term investments 53,116 53,116 Cash and short-term investments $ 177,262 $ 10,835 $ 21,613 $ $ 20,541 $ 230,251 Consolidated statements of retained earnings For the years ended December 31 (thousands of Canadian dollars) Retained earnings (deficit), beginning of year $ 60,471 $ (114,937) Net income 80, ,497 Accretion on equity component of convertible debentures (note 10) (4,176) (4,089) Retained earnings, end of year $ 136,648 $ 60,471 (See accompanying notes) 68 INMET MINING CORPORATION

10 CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT All dollar amounts in tables are in thousands of Canadian dollars except per share amounts. Note 1. Significant accounting policies Acquisition and dispositions Accounting for Ok Tedi Statements of cash flows Inventories Property, plant and equipment Future income taxes Other assets Long-term debt Convertible debentures Reclamation liabilities Other liabilities Pension plans Commitments and contingencies Share capital Stock based compensation Net income per share Translation of foreign currencies Investment and other income Interest expense Income tax expense Financial instruments Significant accounting policies Basis of presentation and consolidation We have prepared our consolidated financial statements according to Canadian generally accepted accounting principles (GAAP). We consolidate the financial statements of all of the companies we control. We proportionally consolidate our share of the financial statements of our joint venture interests. Basis of segmented disclosure The segmented statements reflect the management structure of our company. Operations are managed independently primarily because of their geographical diversity. Each operation retains its own management team and compiles its own financial information, following the accounting policies outlined here. Çayeli a mine in Turkey that produces copper and zinc concentrates. As of September 23, 2004, Çayeli is a whollyowned subsidiary. Pyhäsalmi a mine in Finland that produces copper and zinc concentrates. Pyhäsalmi is a wholly-owned subsidiary. Troilus a mine in Quebec that produces gold. Troilus is a division of Inmet. Ok Tedi a company in Papua New Guinea that owns a copper and gold mine. We have an 18 percent joint venture interest in Ok Tedi. The US dollar is the functional currency of Çayeli and Ok Tedi and the euro is the functional currency of Pyhäsalmi. Comparative figures We have reclassified some of the figures in the consolidated financial statements to make previous years consistent with the 2004 figures. Specifically, we have separated the components of our sales between gross sales and smelter processing charges and freight, and we have expanded our disclosure of non-cash add backs on the consolidated statements of cash flows. Notes to the consolidated financial statements Using estimates When preparing financial statements according to GAAP, management makes estimates and assumptions about the: reported amounts of revenues and expenses reported amounts of assets and liabilities disclosure of contingent assets and liabilities. Management regularly reviews the estimates and assumptions used when preparing the financial statements, but actual results could be different from these estimates. Estimates of future cash flows are subject to risks and uncertainties. We periodically review and evaluate the recoverability of property, plant and equipment, based on our estimate of future undiscounted net cash flows from each property. This includes our estimates of: recoverable mineral reserves future metal prices future foreign exchange rates future operating, capital and reclamation costs.

11 Recognizing revenue We recognize revenue when title is legally transferred to the purchaser. The timing of title transfer varies depending on the terms of the sales contracts with smelters. Title is typically transferred when the material is delivered or, in some cases, when it is shipped. Revenue includes the sale of all concentrate and gold doré. We use prevailing market prices to calculate the revenue from the sale of our products. We adjust revenue quarterly to account for changes in accounts receivable that arise from a difference in market price between the date we recognize the revenue and the settlement date. Other significant accounting policies Cash and short-term investments see note 4 Inventories see note 5 Property, plant and equipment see note 6 Income taxes see notes 7 and 21 Reclamation costs see note 11 Employee future benefits see note 13 Stock based compensation see note 16 Net income per share see note 17 Translation of foreign currencies see note 18 Financial instruments see note Acquisition and dispositions We made the following acquisition and dispositions in 2004 and Çayeli $ (64,273) $ Antamina NPI 31,199 Ovaçik 5,561 Other 778 1,925 $ (63,495) $ 38,685 Acquisition of Çayeli In September 2004, we acquired an additional 45 percent interest in Çayeli, increasing our ownership to 100 percent. We accounted for the acquisition using the purchase method, and included earnings from the additional 45 percent interest from October 1, The net assets acquired represent the 45 percent interest in Çayeli that was previously accounted for as non-controlling interest. The difference between the cash consideration paid of $64.3 million and the noncontrolling interest at September 30, 2004 was $29.0 million. We allocated $41.5 million to increase the fair value of Çayeli s property, plant and equipment, and increased our future tax liability related to property, plant and equipment by $12.5 million. When the asset is depreciated there will be a tax benefit for accounting purposes associated with it. Sale of Antamina NPI In July 2003, we sold our 3.3 percent net proceeds interest (NPI) in the Antamina copper and zinc mine in Peru for $31.2 million. We recorded the full amount as a gain in investment and other income because the NPI had no carrying value. Ovaçik In 2003, we received a deferred payment of $5.6 million in relation to the sale of the Ovaçik property in INMET MINING CORPORATION

12 CONSOLIDATED FINANCIAL STATEMENTS 71 ANNUAL REPORT Accounting for Ok Tedi As of July 1, 2003, we changed our method of accounting for our investment in Ok Tedi from cost accounting to proportionate consolidation. This is a result of new governance arrangements in place, which gives us joint control over the strategic decisions at Ok Tedi with the two other shareholders. We consolidated the balance sheet and results from operations effective July 1, The table below shows the allocation of the book value of our 18 percent interest at that time. Cash and short-term investments $ 9,454 Other current assets 25,924 Property, plant and equipment 44,026 Other assets 6,624 Current liabilities (8,678) Reclamation liabilities (note 11) (18,319) Other liabilities (5,308) Future income tax liabilities (4,151) $ 49,572 Before July 1, 2003, we cost accounted for our 18 percent interest in Ok Tedi and recorded dividends of $15.6 million we received in 2003, before July 1, as a reduction in the carrying value of our investment in Ok Tedi. 4. Statements of cash flows Cash includes cash and money market instruments that mature in 90 days or less from the date of acquisition. Short-term investments mature in 91 days to a year. These investments are carried at cost, which represents market value. In the consolidated statements of cash flows, we show: short-term investments we buy with cash during the year as cash used in investing activities short-term investments we sell to generate cash as a source of cash from investing activities. The following tables show the components of our net change in non-cash working capital by segment for the years 2004 and Corporate Çayeli Pyhäsalmi Troilus Ok Tedi Total Accounts receivable $ (86) $ 11,238 $ (6,199) $ 6,334 $ 4,288 $ 15,575 Inventories (5,385) 687 (286) (10,852) (15,836) Accounts payable and accrued liabilities (2,276) 3,111 1,067 1, ,783 Taxes payable (243) 579 7,073 2,302 9,711 Other 196 (679) 407 (76) $ (2,409) $ 8,864 $ 2,628 $ 7,069 $ (2,995) $ 13, Corporate Çayeli Pyhäsalmi Troilus Ok Tedi Total Accounts receivable $ (997) $ (13,183) $ (3,701) $ (195) $ (5,859) $ (23,935) Inventories (3,787) (125) (1,554) 2,663 (2,803) Accounts payable and accrued liabilities 2,063 (5,444) 2, ,252 5,634 Taxes payable 67 3,340 1,804 5,379 10,590 Other ,030 $ 1,638 $ (18,788) $ 773 $ (781) $ 7,674 $ (9,484) In addition, we paid $31.2 million in taxes in 2004 and $5.2 million in We paid $4.8 million in interest in 2004 and $8.4 million in 2003.

13 5. Inventories Finished goods $ 32,190 $ 20,076 Materials and supplies 23,445 22,521 Stockpiled ore 1,678 2,434 $ 57,313 $ 45,031 Finished goods are inventories of concentrates and gold doré that are ready for sale but title has not yet been transferred to the purchaser. We value finished goods and stockpiled ore at cost or net realizable value, whichever is lower. Cost includes any cost directly related to bringing the inventory to its current condition and location, such as mining, milling, transport costs and depreciation. We classify inventories of stockpiled ore that are not expected to be processed in the next year as other assets. We value materials and supplies at average cost or replacement cost, whichever is lower. 6. Property, plant and equipment Accumulated Accumulated depreciation Net depreciation Net and book and book Cost amortization value Cost amortization value Property $ 117,657 $ 17,186 $ 100,471 $ 82,403 $ 10,840 $ 71,563 Plant and equipment 237,958 66, , ,411 51, ,396 Capitalized stripping 31,241 11,253 19,988 24,644 5,629 19,015 Deferred development and exploration 30,859 30,859 26,779 26,779 $ 417,715 $ 94,978 $ 322,737 $ 326,237 $ 67,484 $ 258,753 Property, plant and equipment include: property, which is primarily mineral reserves plant and equipment capitalized stripping, which are mining costs associated with waste rock removal at Troilus deferred development and exploration. Property We record property at cost and depreciate it using the unit-of-production method, where the value of the property is reduced as reserves are depleted. Plant and equipment We record plant and equipment at cost and depreciate it using the straight-line method over its estimated useful life, which ranges from five to fourteen years. We review useful lives every year and adjust, if necessary. Capitalized stripping We capitalize the mining costs associated with waste rock removal at Troilus in property, plant and equipment, and then charge the amortized costs to cost of sales as ore is mined and sold. Amortization is calculated using the unit-of-production method, which uses estimated proven and probable gold reserves, and is charged to cost of sales using a stripping ratio that equals the ratio of total tonnes to be removed to total ore to be mined over the life of the mine. This approach allows us to recognize the costs evenly over the life of the mine, and to match the cost of mining material more closely with the income we generate when we sell it. 72 INMET MINING CORPORATION

14 CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT Deferred development and exploration We charge exploration costs to earnings in the year we incur them. When we can reasonably foresee the development of a property we capitalize development and exploration costs, including interest and financing costs on funds we borrow. When production begins, we reclassify these costs, along with property acquisition costs, to property, and depreciate them using the unit-of-production method. If estimated future net undiscounted cash flows are less than the carrying value of the property, we write down the property to its net realizable value. We also consider the ability to obtain sufficient financing for the project, the ability to recover its costs by selling the property, and other factors. 7. Future income taxes The table below shows the significant components within our future income tax liabilities at our foreign operations. Capital losses $ 42,537 $ 23,812 Current assets and liabilities 1,489 2,879 Reclamation liabilities (5,835) (5,417) Provisions (2,288) (2,195) Future income tax liabilities 35,903 19,079 Less current portion (622) 449 $ 36,525 $ 18,630 The table below shows the significant components within our Canadian future income tax asset. Capital losses $ 33,176 $ 38,122 Capital assets 74,508 73,832 Canadian resource deductions 22,858 23,724 Non-capital losses (1) 3,863 Reclamation liabilities 10,060 14,355 Other 3,510 3,071 Future income tax asset before valuation allowance 147, ,104 Valuation allowance (139,033) (145,012) Future income tax asset 8,942 8,092 Less current portion 215 (1) Expire in $ 8,942 $ 7,877 Calculating future income taxes We calculate future income tax assets and liabilities based on temporary differences between the carrying amounts in our balance sheet and their tax bases, using income tax rates expected to be in effect when the temporary differences are likely to be settled. We include the effects of changes in tax rates in income when the change is enacted or substantially enacted. We reduce future income tax assets by a valuation allowance if we decide it is more likely than not that the assets will not be realized. Our future income tax asset from Canadian taxes before valuation allowance is $148 million. Our ability to realize this asset depends on future Canadian taxable income and taxable capital gains. We assess the chances for recovery of these losses, and when it seems more likely than not that we will use part of the losses we establish a future tax asset. At December 31, 2004 we recognized a future income tax asset of $9 million and therefore we have provided a valuation allowance of $139 million against the $148 million asset.

15 8. Other assets Note Investment in Petaquilla $ 16,725 $ 16,725 Cash in trust for Ok Tedi rehabilitation 11 7,196 5,333 Corporate pension asset 13 4,361 4,331 Troilus stockpiled ore 5 4,702 3,643 Other 3,677 2,949 $ 36,661 $ 32, Long-term debt Note Debt component of convertible debentures 10 $ 64,052 $ 9,908 Promissory note 16,870 16,470 Çayeli project financing 2,723 80,922 29,101 Less current portion: Debt component of convertible debentures 64,052 2,263 Çayeli project financing 2,723 $ 16,870 $ 24,115 Credit facility In 2002, we entered into a credit agreement with a syndicate of Canadian and international banks. The agreement includes access to a credit facility, a letter of credit facility and a hedging facility. We repaid the credit facility in The facilities are secured by a pledge of shares and guarantees from certain whollyowned subsidiaries. Promissory note As part of the purchase of Pyhäsalmi, we issued a 14 million unsecured promissory note to Outokumpu Oyj. The note was for a 10-year term at a 6 percent rate of interest. We recorded the note at 9 million ($12.7 million), which was its fair value on the date of issue, March In October 2003, we amended our agreement with Outokumpu Oyj, extending the note s maturity date to October 3, We received a payment of $0.9 million, which we will recognize in income over the term of the loan. We are not required to make any repayments of principal until the note matures. 10. Convertible debentures We redeemed the entire aggregate principal amount of $64.1 million of our convertible debentures on January 20, 2005, at a redemption price of $1,000 per $1,000 of stated principal together with accrued and unpaid interest. $64 million was redeemed for cash and the remaining $0.1 million for 3,058 common shares at $21.25 per share. Debt and equity components Prior to the redemption notice we segregated the debentures into components: a debt component which represented the present value of future interest payments and an equity component which represented our right to pay the debenture amount in common shares and the holders option to convert the debentures to common shares. The aggregate carrying value of the convertible debentures on December 9, 2004 (the date the redemption notice was issued) was $57.2 million. We carried $7.7 million of this as a liability and $49.5 million as equity. At December 31, 2004, we classified the debenture, $64.1 million, as current debt since the obligation was due on January 20, The book value of the debentures, however, was $6.8 million less than the redemption cost. We recorded this amount in Deferred charges, and expensed it in the first quarter of 2005 when the debt was settled. 74 INMET MINING CORPORATION

16 CONSOLIDATED FINANCIAL STATEMENTS 75 ANNUAL REPORT 2004 At December 31, 2003, the aggregate carrying value of the debentures was $55.2 million. $9.9 million of this was carried as a liability and $45.3 million was equity. Convertible debenture charges The table below shows charges related to our convertible debentures: Note Interest expense on the liability component 20 $ 1,162 $ 1,093 Accretion Interest 2,173 2,111 Discount amortization 1,827 1,791 Debenture cost amortization $ 5,338 $ 5,182 After the redemption notice was issued on December 9, 2004, we classified the debentures as a liability, and expensed all interest charges, including discount and debenture cost amortization as interest expense in the income statement. Convertible debenture terms direct unsecured subordinated obligation 5 percent interest per year September 30, 2007 maturity convertible to Inmet common shares any time before the last business day before the maturity date, at a conversion price of $21.25 per share. Rather than redeeming the debentures at par, we could have chosen to pay the principal amount of the debentures outstanding at maturity in Inmet common shares. Shares would be priced at their average closing market price for the 30 trading days before maturity. 11. Reclamation liabilities The table below shows our total reclamation liabilities. Present value of future water treatment costs $ 17,000 $ 17,000 Obligations at closed properties 13,503 15,240 Obligations at operating mines 36,557 36,486 67,060 68,726 Less current portion, included in accounts payable 4,000 4,000 $ 63,060 $ 64,726 The following table shows how our reclamation liabilities changed as a result of our business activities during the year. Note Opening balance at January 1 $ 68,726 $ 52,612 Proportionate consolidation of Ok Tedi 3 18,319 Spending on reclamation (3,830) (4,127) Accretion expense charged through cost of sales 3,696 3,538 Foreign exchange (1,532) (1,616) Closing balance at December 31 $ 67,060 $ 68,726

17 Our closed mines, operations and joint ventures are subject to environmental laws and regulations in Canada and the other countries we operate in. Mining companies are legally obligated to reclaim land or other property that is damaged or contaminated in the course of their business activities. While reclamation activities usually happen after the sites have been closed, companies are required to estimate reclamation costs for operating sites as well as closed sites. Operating sites We incur asset retirement obligations through the construction and normal operation of our mines. We recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When we record a liability, we record a corresponding increase in the carrying amount of the related asset (where we can identify one). We increase the amount of the liability every year by the interest factor that was applied when we initially determined fair value, and we amortize the asset over its estimated life. We also reassess the amount of the liability at each reporting period, and make adjustments, if any, to both the liability and its related asset. Closed sites For closed properties, we record any change in fair value of the asset retirement obligation in income. Estimated reclamation liabilities We estimate that $100 million in undiscounted cash flows is needed to settle these liabilities, payable over approximately 20 years. Cash flows are discounted at interest rates ranging from 3 percent to 7 percent depending on a number of factors, including the duration of the obligation and the jurisdiction where the obligation is owed. Funding At most of our properties, reclamation activities are funded when they are incurred. Ok Tedi sets aside cash in a trust account every year for future rehabilitation activities. Using estimates Due to uncertainties around environmental remediation, the actual cost of site restoration could be different from the amounts estimated. Our estimates can also change because of changes to the laws and regulations that govern them, and as new information about our operations becomes available. We also cannot predict the impact on our financial position of environmental laws and regulations that may be enacted in the future. 12. Other liabilities Note Deferred revenue 22 $ 18,845 $ 982 Government assistance obligation 4,700 4,700 Compensation obligations 9,262 8,565 Pension liabilities 13 6,518 6,687 Other 1,302 3,583 $ 40,627 $ 24,517 Government loan We received a $4.7 million government loan during the construction of the Troilus project. Repayment of the loan is tied to a percentage of net profits related to production from Troilus J-4 pit. We expect to begin repaying the loan in Compensation obligations Compensation obligations include: payments to employees whose employment is terminated payments for long service leave available to employees who have met certain requirements, including length of employment obligations related to a supplementary executive retirement plan for a former executive, which is secured by a letter of credit. 76 INMET MINING CORPORATION

18 CONSOLIDATED FINANCIAL STATEMENTS 77 ANNUAL REPORT Pension plans We provide the following retirement benefits for employees: Canada: defined contribution and defined benefit plans United States: a defined benefit plan that is maintained by a subsidiary Papua New Guinea: a defined contribution plan that is maintained by Ok Tedi. Defined contribution plans Certain employees take part in the defined contribution employee benefit plans. The costs of these plans represent our required contributions based on specified percentages of salaries. Certain executives in Canada also participate in a supplementary retirement plan, under which we pay fixed amounts in excess of the contribution limits established by Canada Revenue Agency for registered pension plans directly to the executives. Our aggregate contribution to the defined contribution component of the registered plan and the supplementary plan is equivalent to 9 to 12 percent of salary and bonus for the executives. We paid $0.2 million to the supplementary plan in 2004 and $0.3 million in Our contributions to defined contribution plans include: service costs for the Canadian plan. These were $1.2 million in 2004 and In 2003, $0.7 million of the service cost was funded from a surplus in the pension plan. our share of Ok Tedi s service costs. This was $0.5 million in 2004 and $0.2 million in We expense these amounts as they come due. Defined benefit plans We have Canadian and US defined benefit pension plans that cover certain of our current and former employees. These provide benefits to employees based on a number of factors, including years of service, and the highest average rate of pay over a specified period, or a stated amount for each year of service, as specified in the plan agreements. The table below shows our pension expense for these plans. Canadian plan US plan Expected return on fair value of plan assets $ (1,160) $ (1,153) $ (1,194) $ (1,226) Current service cost including administration Interest cost on accrued benefit obligations 1,003 1,014 1,330 1,448 Net amortization, deferrals and other (50) (1) (136) (222) Net pension expense (income) $ (30) $ 27 $ $ Net amortization, deferrals and other includes: amortization of actuarial gains and losses that are more than 10 percent of the accrued benefit obligation or the fair value of plan assets, whichever is greater. We amortize actuarial gains or losses over the average remaining life expectancy of participants amortization of the transitional asset on a straight-line basis. Current service cost Current service cost is the actuarial present value of benefits attributed to employees services during the period. Interest cost The interest cost on an accrued benefit obligation is determined by applying the discount rate at the beginning of the period to the accrued benefit obligation for the period. Actuarial gain or loss Actuarial gains and losses arise when the actual return on plan assets for the period is different from the expected return on plan assets, and when the actual experience caused the expected and actuarial accrued benefit obligation to differ at the end of the year. Transitional asset The accounting for employee future benefits was revised in The transitional asset is the unrecognized difference between the fair value of plan assets and the accrued benefit obligation, less the pension asset recorded on the books at that time.

19 Plan assets Canadian plan US plan Fair value of plan assets, beginning of year $ 17,219 $ 17,736 $ 16,626 $ 19,170 Actual gain on plan assets 1,771 1,936 1,506 2,206 Surplus applied to defined contribution plan (733) Benefits paid (1,288) (1,645) (1,579) (1,422) Foreign exchange and other (75) (1,058) (3,328) Fair value of plan assets, end of year $ 17,702 $ 17,219 $ 15,495 $ 16,626 Composition of plan assets by percentage: Bonds 36% 36% 44% 41% Equity 61% 61% 56% 59% Cash 3% 3% 100% 100% 100% 100% All plan assets are managed by professional investment managers, who follow a balanced investment approach that considers asset risks and returns in the context of the demographics of the plan members. The assets are generally allocated between pooled funds and mutual funds that invest in bonds and equities. Benefit obligations Canadian plan US plan Accrued benefit obligation, beginning of year $ 16,222 $ 16,878 $ 22,447 $ 25,375 Current service cost Interest cost 1,003 1,014 1,330 1,448 Actuarial loss (gain) 712 (192) 1,168 1,695 Benefits paid (1,288) (1,645) (1,579) (1,422) Foreign exchange (1,706) (4,649) Accrued benefit obligation, end of year $ 16,826 $ 16,222 $ 21,660 $ 22,447 Actuaries determine the present value of accrued pension benefits every year, using: the accrued benefit method, prorated on years of service and future salary levels a discount rate based on current market long-term bond interest rates with maturities that match the timing and benefits expected to be paid by the plans management s best estimate of the plan s expected investment performance, terminations, retirement ages of employees and life expectancy. We measure plan assets and accrued benefits on October 31 for the Canadian plan and December 31 for the US plan. An independent actuary performs a valuation of the obligations under the Canadian defined benefit plan at least every three years. The last actuarial valuation was on January 1, 2003 and the date of the next actuarial valuation should be January 1, The US defined benefit plan has an actuarial valuation annually on January 1. We did not make any payments to the Canadian defined benefit plan in 2004 or We made payments of $0.2 million to the US defined benefit plan in both 2004 and In 2005 we are expecting to fund approximately $1 million to the US defined benefit plan. 78 INMET MINING CORPORATION

20 CONSOLIDATED FINANCIAL STATEMENTS 79 ANNUAL REPORT 2004 Reconciliation of funded status of pension asset (liability) The table below shows the change in the plan assets and the funded status of the plans at the end of the year. We record the difference between the amounts expensed and actual funding contributions in the balance sheet as a liability or an asset. We record the pension asset in Other assets and the pension liability in Other liabilities in the balance sheet. Canadian plan US plan Fair value of plan assets $ 17,702 $ 17,219 $ 15,495 $ 16,626 Less accrued benefit obligation 16,826 16,222 21,660 22,447 Funded status (6,165) (5,821) Unamortized transitional asset (635) (847) (6) Unamortized net actuarial loss 4,120 4,181 Other (353) (860) Pension asset (liability) $ 4,361 $ 4,331 $ (6,518) $ (6,687) Actuarial assumptions We used the following weighted average significant actuarial assumptions to measure the accrued benefit obligation and the pension expense: Expected long-term rate of return on plan assets 7.25% 7.25% Discount rate to determine the net benefit cost 6.1% 6.5% Discount rate to determine the accrued benefit obligation 5.9% 6.1% Rate of compensation increase 3.5% 3.5% Amortization years for experience gains and losses: Canadian plan US plan The expected rate of return on the plan assets is the estimated return we expect to earn on plan assets. The discount rate we use to determine the net benefit cost is the same as the discount rate we used to value the liabilities at the beginning of the year. The assumptions we choose can have a significant effect on the amounts reported. For example, a one percent change in the discount rate would change the consolidated accrued benefit obligation by about $4 million. We would amortize this experience gain or loss over the life expectancy of plan members. 14. Commitments and contingencies Çayeli Purchase of Teck Cominco Madencilik Sanayi A.S. In 2004, Çayeli purchased all of the shares of Teck Cominco Madencilik Sanayi A.S. (TCM) for US $11 million, from an associated entity of Teck Cominco Limited. TCM owns the Cerattepe copper property. Çayeli paid US $2 million at closing and has two optional installments of US $4.5 million each for the remainder of the purchase price. If Çayeli chooses not to pay the second installment, it must transfer the TCM shares back to the vendor. Capital commitments Çayeli has committed approximately US $8 million for continuing work on its shaft deepening project. Ok Tedi Community mine continuation agreements Ok Tedi has a community mine continuation agreement with each community affected by the operation of the mine. Under these agreements: each community has given its consent for Ok Tedi to continue operations Ok Tedi and its shareholders are released from any future claims relating to environmental impact Ok Tedi will provide approximately $42 million (our proportionate share is $7.5 million) in compensation to these communities over the remaining life of the mine as long as the mine is in operation.

21 Lease payments Ok Tedi is required to make minimum lease payments for property and equipment. The table below shows our share of these payments $ 6, , , , ,600 Thereafter 700 $ 25,000 Letters of credit At December 31, 2004, we maintained approximately $15 million in letters of credit. The letters of credit provide financial assurance that we can meet obligations related to the environment and other matters, and have been accrued in Reclamation liabilities (note 11) and Other liabilities (note 12). Most of these letters of credit are covered by a US $10 million secured letter of credit facility (see note 9, Long-term debt). The remaining letters of credit are unsecured. 15. Share capital Our articles of incorporation provide for an unlimited number of preferred shares, subordinate voting participating shares and common shares. The table below lists the shares that have been issued. (in thousands) Common Common shares Amount shares Amount Balance, beginning of year 39,348 $ 227,682 39,283 $ 227,372 Exercise of stock options 1,875 10, Exercise of deferred share units Balance, end of year 41,237 $ 237,931 39,348 $ 227,682 Share purchase loans At both December 31, 2004 and December 31, 2003, we had outstanding share purchase loans from current and former directors of $0.6 million. This is included in Other assets. 16. Stock based compensation The table below shows the change in stock based compensation equity. Balance, beginning of year $ 6,538 $ 3,823 Reclassification from liabilities due to waiver of stock appreciation rights feature stock options 2,418 deferred share units 2,835 Exercise of stock options (4,015) (92) Exercise of deferred share units (83) (135) Stock based compensation expense Balance, end of year $ 4,938 $ 6,538 Stock option plans Under our Treasury and Supplementary stock option plans, the Board of Directors may grant options to directors, officers and key executives to acquire Inmet common shares. The exercise price is not less than the closing market price of the shares on the date of the grant. These options cannot be assigned. Option grants vest in equal amounts over four years from the date of the grant, and become exercisable as they vest. Options granted through the Treasury stock option plan can be exercised over a period of up to 10 years. Options granted through our Supplementary stock option plan can only be exercised over a period of up to six years. As of April 30, 2003, we issue shares from treasury for all exercised options. 80 INMET MINING CORPORATION

22 CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT The tables below are a summary of our stock options outstanding at December 31, Treasury plan Remaining Exercise years Outstanding Exercisable price outstanding 275, ,000 $ ,000 60,000 $ ,900 32,900 $ ,050 32,050 $ ,000 76,000 $ ,250 $ , ,250 $ , ,200 $ Supplementary plan Remaining Exercise years Outstanding Exercisable price outstanding 96,250 96,250 $ , ,500 $ ,000 5,000 $ , ,750 $ The tables below show changes to the stock option plans during 2004 and Treasury plan Weighted Weighted average average Options price Options price Balance, beginning of year 2,201,000 $ ,271,000 $ 3.62 Options exercised (1,462,300) $ 3.60 (70,000) $ 2.82 Balance, end of year 738,700 $ ,201,000 $ 3.64 Supplementary plan Weighted Weighted average average Options price Options price Balance, beginning of year 760,750 $ ,500 $ 2.39 Options exercised (419,250) $ 1.80 (21,000) $ 1.82 Options terminated (2,500) $ 2.95 (3,750) $ 2.95 Balance, end of year 339,000 $ ,750 $ 2.40 Both stock option plans included stock appreciation rights that allowed the option holders the right to receive cash instead of Inmet common shares upon the exercise of the option. At the end of 2002, Inmet s option holders waived their stock appreciation rights on the majority of outstanding stock options and on January 1, 2004, the remaining option holders waived their stock appreciation rights on all but 6,500 options. On January 1, 2004, the related liability of $2.4 million was reclassified to shareholders equity. During the year, the 6,500 stock options with the stock appreciation rights feature were exercised for cash. None of the remaining stock options outstanding have stock appreciation rights. We calculate compensation expense using the fair value method as follows: for option awards, we measure fair value on the day the option is granted using the Black-Scholes valuation method. We accrue the compensation expense and equity over the vesting period of the options granted. for options with a cash settlement feature, we calculated the compensation expense by subtracting the exercise price from the quoted market value. We accrued this amount over the remaining vesting period of the options.

23 In 2002 and 2003 Inmet s common shares appreciated significantly, resulting in a stock based compensation expense of $2.4 million in 2003 and $4.7 million in Taking into account these significant charges, in 2004, compensation expense was $0.1 million for options without the stock appreciation rights feature. In 2003, compensation expense was $0.1 million for options without stock appreciation rights and $2.4 million for options with stock appreciation rights. When options are exercised the following transactions take place: the amount employees pay when they exercise their stock options is recognized as share capital the fair value of the options included in stock based compensation equity is transferred to share capital. Deferred share unit program We have a deferred share unit (DSU) program that allows directors to receive director fees in the form of deferred share units rather than cash. Directors can only redeem their DSUs for Inmet common shares when they retire. The table below shows the changes to the deferred share units during the year. Balance, beginning of year 449, ,467 Redeemed for common shares (13,801) (22,539) Balance, end of year 436, ,928 The deferred share units are recorded in equity at an average price of $6.00 per share. Before January 1, 2003, directors, when they retired, could elect to redeem their DSUs for cash or common shares of Inmet. Effective January 1, 2003, our directors waived their stock appreciation rights on the DSUs and can no longer redeem their DSUs for cash. We reclassified the $2.8 million liability associated with the DSUs to shareholders equity in Net income per share The following tables show our calculation of basic and diluted net income per share. Net income $ 80,353 $ 179,497 Accretion on equity component of convertible debentures (4,176) (4,089) Income available to common shareholders 76, ,408 Income effect of assumed conversion of convertible debentures 5,338 5,182 Income available to common shareholders with assumed conversions $ 81,515 $ 180,590 (thousands) Weighted average common shares outstanding 40,407 39,309 Plus incremental shares from assumed conversions: Convertible debentures 3,016 3,016 Stock options 847 1,800 Deferred share units Diluted weighted average common shares outstanding 44,706 44,575 Basic net income per common share $ 1.89 $ 4.46 Dilutive effect from assumed conversions: Convertible debentures per common share (0.01) (0.20) Stock options per common share (0.04) (0.17) Deferred share units per common share (0.02) (0.04) Diluted net income per common share $ 1.82 $ 4.05 We calculate basic net income per share by dividing income available to common shareholders by the weighted average number of shares. 82 INMET MINING CORPORATION