Falconbridge Limited

2004 ANNUAL REPORT 2004 Financial Highlights

(US$ MILLIONS, EXCEPT PER SHARE DATA) 2004 2003

Operating Highlights Revenues $ 3,070 $ 2,083 Operating income 969 301 Earnings 672 191 Cash provided by operating activities before changes in working capital 1,067 445 Capital expenditures and deferred project costs 573 370

Financial Position Cash and cash equivalents 645 298 (at December 31) Working capital 933 649 Total assets 5,118 4,172 Long-term debt 1,437 1,427 Shareholders’ equity 2,563 1,938 Return on common shareholders’ equity (ROE) 31% 11% Return on net assets 31% 13% Ratio of net debt to net debt plus equity 24% 37%

Per Common Share (US$) Earnings (Basic) $ 3.71 $ 1.03 Earnings (Diluted) 3.69 1.02 Cash provided by operating activities 5.38 2.48 Book value 14.25 10.84

Shares outstanding (millions of shares) 179.8 178.8

Front cover, from left to right: RETURN ON EQUITY RETURN ON NET ASSETS SHARE PRICE 1) Nickel Rim South, Sudbury, Falconbridge achieved a Falconbridge increased its During 2004, Falconbridge Ontario, vent shaft galloway 31% return on equity in RONA to 31% in 2004, maintained an average stock price assembly of two sections 2004 exceeding its 15% surpassing its 18% target. of Cdn$31.88, 60% higher than 2) Nickel end product ROE objective. its 2003 average of Cdn$19.95. 3) Lomas Bayas, Chile 4) Nikkelverk, Norway, refinery (%) (%) (Cdn$)

37 30 30 34

25 25 31

28 20 20 GOAL 18% 25

15 GOAL 15% 15 22

2003 average stock price 10 10 19 16 5 5 13

0 0 10 00 01 02 03 04 00 01 02 03 04 2003 2004

Investment Grade Credit Ratings: Moody’s: Baa3 Standard & Poor’s: BBB– Dominion Bond Rating Service: BBB High Why Invest in Falconbridge?

Right metals – nickel and copper Solid production base – upside potential Growth opportunities – within our control Growing value of scarce resources Financial strength to fund operations and growth projects

NICKEL PRODUCTION COPPER PRODUCTION

Falconbridge achieved Falconbridge achieved record refined nickel production of copper mine production of 100,900* tonnes in 2004. 340,900 tonnes in 2004.

(000s TONNES) (000s TONNES)

120 400

90 300

60 200

30 100

0 0 00 01 02 03 04 00 01 02 03 04

*Production was impacted by a three-week strike at Sudbury operations.

TABLE OF CONTENTS 1 Why Invest in Falconbridge? 60 Auditors’ Report 2 International Operations 61 Consolidated Financial Statements 3 2004 Highlights 65 Notes to the Consolidated 4 To Our Shareholders Financial Statements 10 Falconbridge Nickel 90 Board of Directors 16 Falconbridge Copper 92 Ongoing Corporate Governance Initiatives 22 Summary of Mineral Reserves and Mineral Resources 93 Officers of the Corporation 24 Management’s Discussion 94 Corporate Directory and Analysis 96 Shareholder and Corporate 59 Accounting Responsibilities, Information Procedures and Policies

WHY INVEST IN FALCONBRIDGE? 1 International Operations

2 4 8 3 15 1 12 6 14 10 13 14 6 14

5 6

7 12 11 9 11 12

NICKEL COPPER CORPORATE

1 Sudbury 7 Compañía Minera Doña Inés de 10 Corporate Office (Sudbury, Ontario) Collahuasi S.C.M. (44%) (Toronto, Ontario) Mines and mills nickel-copper (Northern Chile) 11 Project Offices ores; smelts nickel-copper con- Mines and mills copper sulphide (Koné and Nouméa, centrate from mines in Sudbury, ores into concentrate; mines and New Caledonia; Brisbane, Raglan and Montcalm, and leaches copper oxide ores to Australia) processes custom feed materials. produce cathodes. 12 Exploration Offices 2 Raglan 8 Kidd Division (Sudbury, Timmins and Toronto, (Nunavik, Quebec) (Timmins, Ontario) Ontario; Laval, Quebec; Mines and mills nickel-copper Mines copper-zinc ores from Kidd Belo Horizonte, Brazil; ores from open pits and under- Mine. Mills, smelts and refines Brisbane, Australia) ground mines. copper-zinc ores from Kidd Mine and processes Sudbury copper 13 Business Development 3 Montcalm concentrate and custom feed (Toronto, Ontario) (Timmins, Ontario) materials. Processes Montcalm Mines nickel-copper ores from an 14 Marketing and Sales nickel-copper ore. underground mine. (Brussels, Belgium; Pittsburgh, 9 Compañía Minera Falconbridge Pennsylvania; Tokyo, Japan) 4 Nikkelverk A/S Lomas Bayas (Kristiansand, Norway) 15 Technology Centre (Northern Chile) Refines nickel, copper, cobalt, (Sudbury, Ontario) Mines copper oxide ores from an precious and platinum group open pit; refines into copper metals from Sudbury, Raglan and cathode through the solvent from custom feeds. extraction-electrowinning process 5 Falconbridge Dominicana, (SX-EW). C. por A. (85.26%) (Bonao, Dominican Republic) Mines, mills, smelts and refines nickel laterite ores.

6 Custom Feed (Brussels, Belgium; Pittsburgh, Pennsylvania; Christ Church, Barbados)

2 FALCONBRIDGE • 2004 ANNUAL REPORT 2004 Highlights

Achieved record financial results with net income of $672 million ($3.71 per share) and ROE of 31% – Solid production allowed the company to take full advantage of high nickel and copper prices. With a strengthened balance sheet, a net-debt-to- total-capitalization ratio of 24% and over $1 billion in liquidity, Falconbridge has substantial financial flexibility to fund operations and growth opportunities.

Nikkelverk, Norway, refinery

Met or exceeded most production targets – Falconbridge produced 100,900 tonnes of refined nickel and a record 340,900 tonnes of mined copper in 2004.

Lomas Bayas, Chile, blast drilling

Generated $29 million in cost savings from Six Sigma projects – Momentum was maintained in 2004 with the completion of 64 projects. Over 1,000 employees have received training, including over 91 black and brown belts. Six Sigma continues to offset the cost pressures experienced at operations by improving operating efficiencies and margins.

Falcondo, Dominican Republic, surface mining

Completed growth and expansion projects in nickel and copper – Both the $77 million Montcalm nickel mine and the $584 million Collahuasi transition and concentrator expansion projects were completed under budget and ahead of schedule. Montcalm will increase refined nickel production by 9,000 tonnes annually. The expansion at Collahuasi will allow the operation to sustain mined copper production of 500,000 tonnes per year. Collahuasi, Chile, primary crusher transfer bin

Advanced Koniambo Project – Completed a bankable feasibility study on the Koniambo nickel project, increasing the level of project definition, with engineering increasing from 10% to 25%. Completion of this study marks an important milestone in the development of the Koniambo project – one of the best laterite nickel resources in the world.

Koniambo, New Caledonia, field work

Exploration success strengthened nickel production profile – Falconbridge launched an underground definition program at Nickel Rim South, which contains 13.4 million tonnes of over 1.8% nickel, 3.3% copper and significant platinum and palladium. At Raglan, new discoveries and extensions to current ore zones added tonnes to the mineral reserves and resources equivalent to twice the amount of ore mined during the year. Nickel Rim South, Sudbury, Ontario, aerial view of vent shaft galloway installation

2004 HIGHLIGHTS 3 To Our Shareholders

We had excellent results in 2004. Our performance was the result of the commitment to executing a proven strategy. We remained focused on nickel and copper, two metals with excellent funda- mentals; we strived to maximize the value of our assets through a focus on operational excellence; we expanded our pipeline of growth opportunities; and we maintained a strong financial position. During the year we achieved many of our operating goals. Production of 100,900 tonnes of refined nickel and a record 340,900 tonnes of mined copper positioned us to take full advantage of rising nickel and copper prices. This strong operating performance was realized with safety remaining a top priority. In 2004, we improved our safety performance with a lost-time injury frequency improvement of 11% over 2003 and 20% over the last two years. Solid operating performance led to record financial results in 2004. Earnings reached $672 million, or $3.71 of basic earnings per common share, compared to $191 million or $1.03 of basic earnings per common share in 2003 – a 252% improvement – and the return on shareholders’ equity was 31%. With improved earnings and cash flows, we also strengthened our financial position by reducing the Company’s net-debt-to-total-capitalization ratio to 24% from 37% at the end of 2003, and increasing our cash balance to $645 million from $298 million at the end of 2003. Overall, Falconbridge is in an excellent position. We will continue to benefit from the expected continuation of high metal prices and the growth in our production of nickel and copper with a high-quality pipeline of new projects. This will enable us to continue to add significant value for our shareholders in the years ahead.

FOCUSED ON NICKEL AND COPPER Our strategy remains focused on the production of nickel and copper and the development of nickel and copper resources. This strategy has been particularly rewarding during a year when nickel and copper prices averaged $6.28 and $1.30, respectively – the highest prices we have seen in many years.

SOLID OPERATING PERFORMANCE LED TO RECORD FINANCIAL RESULTS IN 2004: EARNINGS WERE $672 MILLION, OR $3.71 PER SHARE, COMPARED TO $191 MILLION OR $1.03 PER SHARE IN 2003, AND THE RETURN ON SHAREHOLDERS’ EQUITY WAS 31%.

On the nickel side, after more than a decade of industry under-investment in new nickel production, demand has outstripped supply over the past three years. In 2004, the market deficit was satisfied by nickel inventories stored in the warehouses of various metal exchanges, such as the London Metals Exchange, as well as by existing producers. With inventories declining to critical levels, the nickel price, out of necessity, rose to a level that would both curtail demand and attract new supply. Nickel demand was strong during the year; however, some of that demand receded as stainless steel producers reduced the nickel content of their products. Furthermore, stainless steel scrap volumes increased in 2004. As a result, the nickel market reached a position of equilibrium during the year. Entering 2005, demand for nickel continues to be strong, with high growth rates in China and a recovery in demand from the aerospace sectors. Going forward, supply will continue to be con- strained due to limited sources of new production coming on stream over the next few years. Consequently, the nickel market is expected to be very finely balanced, which will lead to a

4 FALCONBRIDGE • 2004 ANNUAL REPORT “ POSITIVE NICKEL AND COPPER FUNDAMENTALS, COMBINED WITH A SOLID PRODUCTION BASE AND PIPELINE OF HIGH-QUALITY GROWTH OPPORTU- NITIES, WILL ENABLE US TO CONTINUE TO CREATE VALUE FOR OUR

SHAREHOLDERS IN THE YEARS AHEAD.” AARON REGENT, President & Chief Executive Officer

high degree of nickel price volatility as the market reacts to subtle changes in supply and demand. FOUNDATION FOR In the copper market, China’s industrialization continues to be one of RESPONSIBLE GROWTH the main drivers affecting the market. Copper-intensive infrastructure projects, particularly in the power generation sector, along with improving living standards are creating demand for mass consumer items such as cars Sustainable development is a and air conditioners in China. As a result, Chinese copper demand fundamental aspect of our business increased by 15% last year, and China passed the U.S. as the world’s practice and the basis for our largest copper consumer. In addition, U.S. demand for copper has grown Company’s commitment to social considerably due to the strength of the residential construction and auto responsibility, environmental sectors. This strong growth in global demand for copper, combined with the management and economic strength. inability of current supply to meet consumption needs, drove down metal As a natural resource company, we exchange copper inventories by more than 671,000 tonnes to critically low affect communities in all areas where levels. Additional supply expected in 2005 will not keep pace with we operate. Our Sustainable Develop- demand, and the current copper price of $1.40/lb. should continue to ment Policy and Code of Ethics are be supported. public commitments to apply the The outlook for nickel and copper prices is quite positive, and market highest standards at our locations fundamentals are solid. Both markets are forecast to remain in deficit around the world. In 2004, we positions as new supply is expected to be inadequate to keep up with expanded the Code of Ethics to demand. Construction of potential sources of production requires long lead include specific commitments to times because of the size and complexity of such projects, as well as stakeholders, extend Falconbridge increasingly lengthy permitting processes. As a result, the pricing environ- standards to suppliers and enhance ment should continue to be positive for the foreseeable future. With over our accountability. 80% of Falconbridge’s revenue coming from nickel and copper, we are well Falconbridge is also actively positioned to benefit from these positive fundamentals and to maintain involved in local, government and our position as a key player in these metal markets. industry consultative groups. We work as partners to balance community MAXIMIZING THE VALUE OF OUR ASSETS interests with responsible mining. At our nickel operations, made up of our integrated nickel operations Each year, Falconbridge publishes (INO) and Falcondo, we produced 100,900 tonnes of refined nickel in a joint Sustainable Development 2004. Meanwhile, we achieved record mined copper production of Report with Noranda Inc. that reviews 340,900 tonnes. Overall in 2004, we had a year of solid operational the Company’s social, environmental performance. and economic performance. Visit The INO, which consists of the Sudbury mines and smelter, the Raglan www.falconbridge.com to view our mine, the Montcalm mine and the Nikkelverk refinery in Norway, produced 2004 report online. 71,400 tonnes of refined nickel. Production was lower than originally Falconbridge supports the Mining forecast, due to a three-week strike at our Sudbury operations in January. T Association of Canada’s “Towards Although we would have preferred to reach a new labour agreement in Sustainable Mining” initiative. Sudbury without disruption, controlling costs and maintaining operating flexibility are important priorities in preserving the value of these assets. Fortunately the strike was relatively brief, and the subsequent ramp-up smooth. At Falcondo, our ferronickel operation in the Dominican Republic, nickel production increased by 8% to 29,500 tonnes. Falcondo exceeded annual operating targets and realized solid margins, despite increasing cost pressures resulting from high oil prices.

TO OUR SHAREHOLDERS 5 2004 SENIOR MANAGEMENT TEAM

At Collahuasi, a world-class copper mine in Chile, Falconbridge’s 44% share of copper production exceeded forecast, reaching 205,100 tonnes – a 22% increase over 2003. Collahuasi successfully completed two key initiatives in 2004: the transition of mining activities from the Ujina orebody to the Rosario orebody, and the concentrator capacity expansion. Both projects were completed ahead of schedule and under budget, contributing to Collahuasi’s impressive performance. Lomas Bayas, also located in Chile, produced 62,000 tonnes of copper in 2004. In April, we completed a crusher expansion project, on budget and on schedule. Kidd Creek, our copper/zinc mine and smelter in Timmins, Ontario, produced 41,000 tonnes of copper, and 87,800 tonnes of zinc, refined copper of 115,600 tonnes and refined zinc of 121,600 tonnes in 2004. This past year was a challenge as we transitioned mining activities from the upper part of the mine to the newly developed and deeper Mine D. Also, the impact of the stronger Canadian dollar adversely impacted our financial results, particularly at our metallurgical operations. However, the building blocks for improved mine production are now in place, with a changed management structure and access to new work areas in Mine D. On the smelter side, we signed a life-of-mine agreement with Agnico Eagle, which will allow us to operate the zinc refinery at full capacity and sell some of our excess zinc concentrate. We have also identified opportunities to secure higher margin copper concentrates. While the business’ position has improved during the year, many challenges remain. Our efforts continue to be focused on stabilizing this operation and maximizing the generation of free cash flow.

Cost Management Managing costs has remained a top priority. In 2004, we saw the mining industry’s cost curves rise as a result of the rising costs of oil, energy, acid, treatment and refining of metals and shipping, as well as the impact of a weakening U.S. dollar. Although the prices of these commodi- ties and services are beyond our control, we remain focused on managing those costs we can control by driving efficiencies at our operations using Six Sigma. At Falconbridge, we have an enormous commitment to this program – and REFINED NICKEL MINED COPPER PRODUCTION PRODUCTION with good reason. This disciplined and measured approach to improving margins and driving efficiencies allowed us to realize benefits of $29 million in 2004 alone. With over 1,000 employees trained in Six (000s TONNES) (000s TONNES) Sigma, Falconbridge will continue to build on this success and benefit from this program in the future.

160 480 SUBSTANTIAL PIPELINE OF GROWTH OPPORTUNITIES 120 360 Falconbridge is a large nickel and copper producer, however, we are always exploring profitable growth opportunities that will further strengthen our

80 240 position in these metals. In 2004, we uncovered and examined a number of opportunities to increase our nickel and copper production and extract

40 120 further value from our operations.

Nickel 0 0 In 2004, we successfully increased the resource base of our Integrated 04 04 Nickel Operations through exploration activities in Sudbury at the Nickel

Current Current Rim South and Fraser Morgan properties, and at the Raglan mining camp. Potential Potential

6 FALCONBRIDGE • 2004 ANNUAL REPORT From left to right:

MICHAEL DOOLAN, Senior Vice-President & Chief Financial Officer

CLAUDE FERRON, President, Canadian Copper & Recycling Nickel Rim South is a high-grade 13.4 million tonne resource that has PETER KUKIELSKI, Executive Vice-President, Projects dramatically changed Falconbridge’sprofile in Sudbury – extending the life JOSEPH LAEZZA, President, Nickel of this resource base to at least 20 years. We began an underground IAN PEARCE, Senior Vice-President, Projects & Engineering definition program in 2004 and we anticipate starting ore production FERNANDO PORCILE, President, Copper in 2009. PAUL SEVERIN, Senior Vice-President, Exploration Fraser Morgan is another example of the success of our exploration efforts. Our exploration results were encouraging in 2004, resulting in new intersections with very high grades. A pre-feasibility study for the development of this site is now underway. At Raglan, new discoveries and extensions to current ore zones added tonnes to the mineral reserves and resources equivalent to twice the amount of ore mined during the year. We are developing a two-phase expansion that would increase Raglan’s annual mine production from 900,000 tonnes to 1.2 million tonnes of ore (or a 5,000 tonne-per-year increase in refined nickel production) by 2007. Production began in the fourth quarter of 2004 – ahead of schedule – at Montcalm, a property in the Timmins area that we acquired in 2001. Montcalm is expected to produce 750,000 tonnes of ore per year, which will increase annual nickel production by 9,000 tonnes, beginning in 2005. To take advantage of rising nickel prices, we are also examining the potential to increase Montcalm’s production to 1.0 million tonnes of ore per year. We expect to complete the preliminary review of this acceleration project early in 2005. Based on planned production rates at Sudbury and Raglan, the addition of Montcalm, and opportunities to increase materials from our custom feed business, we expect INO operations to run at full capacity of 85,000 tonnes of refined nickel beginning in 2005. This would be a new record for our business, and a production level we believe is sustainable for the next five years and beyond. We are also examining expansion of our Falcondo ferronickel operation to add a further 6,000 to 7,000 tonnes of production. A scoping study is in progress for this two-phase expansion, and a decision is expected in 2005. The Koniambo ferronickel project in New Caledonia represents a major growth initiative for Falconbridge. Koniambo is a very large nickel resource, and one of the best undeveloped nickel resources in the world. A bankable feasibility study (BFS) completed in 2004 supports annual production of 60,000 tonnes of nickel at a cash cost of $1.65/lb. At this production level, the resource base is sufficient to support 50 to 100 years of production, with future expan- sion possible. During 2005, we will focus on the implementation strategy and financing structure of this $2.2 billion project, along with our 51% partner, Société Minière du Sud Pacifique (SMSP). Financially, we expect returns to exceed our cost of capital. Strategically, Koniambo represents a future anchor asset in our nickel business. As a long-life asset, Koniambo has the potential to add enormous value to Falconbridge for years to come. Falconbridge has developed an excellent position in the nickel business. With the current expansion potential at our owned operations, as well as our partnership opportunities at new resources, Falconbridge has the potential to increase annual nickel production from its current 100,900 tonnes to more than 150,000 tonnes.

TO OUR SHAREHOLDERS 7 Copper SIX SIGMA AND THE STAGE GATE We also have a number of opportunities to increase our copper production PROCESS – LEVERAGING OUR and realize further value from our copper operations. POTENTIAL A scoping study has been initiated at Collahuasi to assess further expansion that would increase annual copper production by 175,000 tonnes, Six Sigma has improved productivity at of which Falconbridge’s share would be 77,000 tonnes. In addition, we our operations since widespread began construction of a new molybdenum plant at Collahuasi in the first implementation in 2002. The program quarter of 2005, with first production expected in the first quarter of 2006. provides a fact- and statistics-based With average annual production capacity of 12,000 tonnes of molybdenum, approach to continuous improvement this project is forecast to deliver high rates of returns, even at low molyb- and project management. Dedicated denum prices. full-time resources are applied to At Lomas Bayas, we have an option to purchase an adjacent resource, ensure the timely execution of projects Fortuna de Cobre, which would allow us to increase copper production at and the maintenance of gains. A clear Lomas Bayas by 50%, to 90,000 tonnes per year. If completed, Fortuna de audit trail ensures easy validation of Cobre could be in production by mid-2007 and would extend the life of the progress and final results. mine past 2020. Though sponsored by corporate Expansion potential could increase Falconbridge’s annual copper management, Six Sigma is driven by production from the current 340,900 tonnes to more than 470,000 tonnes local management and business unit over the next five to seven years. strategies. Projects integrate individual initiatives with operational objectives STRONG FINANCIAL POSITION and employee expertise to deliver A key part of our strategy is to maintain a strong financial position and bottom-line results. significant liquidity to enable us to fund our operations and projects at all Six Sigma improves and optimizes points of the metals cycle. We target investment grade credit ratings for existing processes across all areas. our debt securities and manage our credit ratios to meet investment Business and support unit manage- grade criteria. ment identify high-impact initiatives Over 2004, we strengthened our balance sheet by reducing our net-debt- and ensure dedicated resources are to-total-capitalization ratio to 24%, down from 37% at the end of 2003. applied and supported. With the high earnings level achieved in 2004, we were able to more than In addition, major capital projects fund our operations and capital expenditures from operating cash flows. under consideration at Falconbridge We further increased our financial flexibility during the year, with more must pass through the stage gate than $1 billion in cash and undrawn credit facilities available to fund our approval process using Six Sigma- operations in 2005 and beyond. specific tools. At each phase of their evolution, only projects that meet LOOKING FORWARD WITH CONFIDENCE defined deliverables and risk-hurdles Over the last few years, Falconbridge has grown into a key player in the are further developed. world’s base metals industry. We have built momentum that is sustainable for the foreseeable future. We enter 2005 with confidence in Falconbridge’s future. Positive nickel and copper fundamentals, combined with our solid production base and pipeline of high-quality growth opportunities, will continue to create value for our shareholders and allow Falconbridge to remain a leader in the industry. I would like to thank our customers for their valued business, our shareholders for their continuing support, our Board of Directors for its guidance and our employees for another year of excellent work. It is because of you, our stakeholders, that Falconbridge is positioned to deliver another year of successful results in 2005.

AARON REGENT President & Chief Executive Officer February 24, 2005

8 FALCONBRIDGE • 2004 ANNUAL REPORT Measuring Our Progress in 2004

OBJECTIVE PERFORMANCE

Achieve production and cost ➾ Met or exceeded production targets at most operations; lower-than-planned production objectives at Sudbury due to three-week labour disruption. Controllable cost targets were largely met; results were impacted by exchange rate movements and higher energy prices.

Complete Collahuasi, Kidd Mine D ➾ Both Collahuasi and Montcalm were completed ahead of schedule and under budget; and Montcalm projects on budget the Kidd Mine D project continues to progress. and on schedule

Complete Koniambo bankable ➾ The BFS was completed in the fourth quarter of 2004; development of financing feasibility study (BFS); finalize structure and implementation approach continues in consultation with our 51% financing structure partner SMSP and the French Government.

Complete scoping studies on ➾ Scoping studies have been completed; development concepts being evaluated and expansions at Raglan, Falcondo, pre-feasibility studies to be initiated in 2005. Collahuasi and Lomas Bayas

Add nickel and copper production ➾ Strong exploration program added 4.3 million tonnes of discovered nickel resources; through technology, exploration, eight joint ventures were established in 2004; new targets were also identified. acquisitions and partnerships

Maintain good access to capital ➾ Current liquidity is over $1 billion; balance sheet ratios improved with a reduction in a and substantial liquidity net-debt-to-total-capitalization ratio to 24% from 37% in 2003.

2005 Objectives

■ Achieve production and cost objectives

■ Advance growth initiatives in nickel and copper businesses

■ Ensure projects remain on schedule and within budget

■ Advance the Koniambo project

■ Realize cost savings of $30 million through Six Sigma

■ Maintain strong balance sheet and substantial liquidity

MEASURING OUR PROGRESS IN 2004 / 2005 OBJECTIVES 9 NICKEL

AS A LARGE PLAYER IN THE NICKEL MARKET, FALCONBRIDGE BENEFITED FROM STRONG PRICES

IN 2004, WITH PRODUCTION OF REFINED NICKEL EXCEEDING 100,000 TONNES.

Above: Nickel Rim South, Sudbury, Ontario, galloway vent shaft

10 FALCONBRIDGE NICKEL Nickel Market Review

IN 2004, NICKEL CONTINUED TO BENEFIT FROM STRONG DEMAND AND CONSTRAINED

SUPPLY.

Strong Demand between mineral deposit discovery and metal Nickel consumption, mainly driven by stainless delivery means that any new supply from these steel production, has grown at an average rate sources will require a number of years. of 4% per year since 1993. Average stainless steel growth has been around 6% for the last Low Inventories decade, and the non-stainless steel sector has London Metals Exchange (LME) inventories doubled its growth rate during the same period. currently stand at critically low levels. In 2004, Since 1990, nickel demand from China has market pressure was alleviated to some degree grown at more than twice the rate in the by greater scrap availability, as well as some Western World. Despite these increases, China substitution into ferritic production and 200- remains in the early stages of intense metal series stainless steel. usage, and per capita metal consumption is With existing producers operating at full only now reaching levels that have historically capacity and limited LME stocks, there is no triggered significant growth in metal demand in extra supply elasticity in the system. Under other newly industrialized Asian countries. these conditions, nickel prices are expected to be volatile. Constrained Supply Low nickel prices during the nineties led to Favourable Outlook both under-investment in the nickel industry The fundamentally sound market conditions and a short-term nickel shortage. The recovery for nickel remain intact. The nickel market is to higher prices over the past few years has expected to continue to benefit from strong made a number of potential new projects more ongoing demand over the long term, against attractive. However, the significant time lag a backdrop of limited supply.

FIRST USES OF NICKEL NICKEL PRICES AND WORLD NICKEL WORLD STAINLESS STEEL INVENTORIES PRODUCTION AND PRODUCTION CONSUMPTION

(000s TONNES) ($/lb.) (000s TONNES) (MILLIONS OF TONNES)

Stainless steel 68% 28 7 High Ni alloys 11% 1,200 20 Plating 10% 24 6 Foundry 3% 20 5 Other 6% 900 15 Cu-Ni based 16 4 alloys 2% 600 10 12 3

8 2 300 5 4 1

0 0 0 0 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04

LME Cash Settlement Production Price (US$/lb.) Consumption LME Inventories

FALCONBRIDGE NICKEL 11 Nickel – Operations and Growth Opportunities

As a large player in the nickel market, with account pre-production revenues, the net production of refined nickel exceeding capital investment will be $412 million. 100,000 tonnes, Falconbridge benefited from Because of its high grades, Nickel Rim South strong prices in 2004. To maintain a strong will be one of the lowest-cost mines in the position in nickel, the challenge faced by all history of Falconbridge at Sudbury, with unit mining companies is the requirement to cash costs estimated at negative $0.65/lb. replace reserves, to sustain production levels after by-product credits. and to pursue growth opportunities. To meet This project has progressed on schedule and this challenge, Falconbridge’s strategy to within budget, and site work is in preparation secure new resources has been focused on a for shaft sinkage, expected in early 2005. With combination of exploration, acquisitions and full production anticipated in late 2009, Nickel the creation of joint ventures. Rim South will extend Falconbridge’s presence Falconbridge’s substantial progress in these in the Sudbury basin for at least another areas has positioned the Company to produce 20 years.

FALCONBRIDGE’S STRATEGY TO SECURE NEW RESOURCES HAS BEEN FOCUSED ON A COMBINATION OF EXPLORATION, ACQUISITIONS AND THE CREATION OF JOINT VENTURES.

a record 113,000 tonnes of nickel in 2005, Fraser Morgan with anticipated further growth to over There has been continued exploration success 150,000 tonnes in the future. Falconbridge at Fraser Morgan, which contains 7.0 million has also improved the quality of its resources, tonnes of measured, indicated, and inferred with discoveries such as Nickel Rim South, resources with high grades. Drilling in 2004 which has much higher grades than current uncovered intersections of over 36 metres of operations. Falconbridge’s recognized status as 2.3% nickel. This resource has the potential an industry leader has led to the creation of a for continued growth and a pre-feasibility number of joint ventures. In particular, development study is underway. With its Falconbridge was selected as the joint-venture location near existing infrastructure, capital partner to help develop the world-class development costs will be significantly lower Koniambo resource. Falconbridge works with than for a greenfield site. partners all over the world, and is optimistic Below, from left to right: that its list of growth opportunities will Onaping Depth 1) Sudbury, Ontario, underground continue to expand. Onaping Depth, in Sudbury, contains 15.8 mil- mining 2) Montcalm, Ontario, aerial lion tonnes of high-grade indicated and inferred overview of holding ponds and site EXPLORATION SUCCESS, resources. This orebody, located below the Craig 3) Nikkelverk, Norway, quality Mine, is accessible using Craig Mine infrastruc- control 4) Falcondo, Dominican EXPANSION POTENTIAL ture by deepening the existing shaft. In 2004, Republic, conveyor Nickel Rim South Falconbridge continued research on enabling Opposite page, from left to right: In 2001, Falconbridge discovered Nickel Rim technologies to mine safely at greater depths, 1) Nikkelverk, Norway, control room South – a high-grade 13.4 million tonne and continues to make substantial progress. 2) Nickel Rim South, Sudbury, resource with over 1.8% nickel, 3.3% copper Ontario, vent shaft galloway and significant platinum and palladium. A five- assembly of two sections 3) Raglan, year, underground definition program began Quebec, employee 4) Nickel crowns in the first quarter of 2004. After taking into

12 Raglan near Timmins, Ontario. Construction of the Raglan, in northern Quebec, is an attractive $77 million mine, which is expected to deposit with 24.6 million tonnes of reserves produce 750,000 tonnes of ore annually, was and resources with close to 3% nickel and completed in the fourth quarter of 2004. The considerable potential for further discoveries. ore will be processed at the Kidd mill and sent Exploration success has maintained total to Sudbury and Nikkelverk for smelting and reserves and resources at approximately the refining, adding 9,000 tonnes to annual nickel same level since mine start-up in 1998. production. Falconbridge is reviewing a project Continued growth in Raglan’s resource base that would accelerate Montcalm’s annual supports future production rate increases. In mining rate to 1.0 million tonnes and maxi- 2004, the first phase of a two-phase optimiza- mize production during a period of expected tion plan was initiated. The first phase will high nickel prices. convert the mill from autogenous to semi- autogenous grinding, to increase its ability to Falcondo process harder ore and ensure the maintenance At Falcondo, an expansion, which would take of production levels at 1.0 million tonnes per advantage of the existing plant infrastructure to year. The second phase would involve changes increase production by 6,000 to 7,000 tonnes to the grinding circuits in the back half of the per year, is being evaluated. This expansion plant to increase the mining rate to 1.2 million would involve two phases, with Phase I consist- tonnes per year. The optimization program ing of modifications to the power plant and would increase Raglan’s nickel production by Phase II consisting of the re-commissioning of 20%, or 5,000 tonnes beginning in 2007. the #2 furnace and de-bottlenecking various unit operations. This expansion would add additional nickel production at a relatively low CAPACITY UTILIZATION, capital cost. EXPANSION POTENTIAL Montcalm Acquired in 2001, Montcalm has 5.6 million tonnes of reserves and resources and is located

SIX SIGMA CASE STUDY – NICKEL SALES (BRUSSELS)

OPPORTUNITY: SOLUTION: IMPACT: Reduce working capital associated with Through a focused Six Sigma Working inventory of nickel improved from finished nickel inventory by 10%. approach, key inventory drivers were 50 to 38 days of sales, with inventory Finished nickel historically ran at identified, processes mapped, and averaging 7,500 tonnes in 2004 and a 50 days of sales, with inventory of project-based initiatives launched at reduction in working capital of more than 11,000 tonnes. With inventory sales offices and the Nikkelverk $23 million. Results exceeded the original financing costs already covered in the refinery. Strong co-operation between objective, and efforts are underway to sales premium, it was important to sales and refinery personnel resulted continue reducing working capital achieve the reduction without loss of in the development of new processes associated with nickel inventory. profitability or operating efficiency. to manage the way nickel is sold and how it is delivered to customers.

13 POSITIONED FOR GROWTH: cost of Koniambo is now estimated at KONIAMBO – A WORLD-CLASS $2.2 billion, which includes the construction RESOURCE of a 390 MW power facility, a metallurgical plant, mine development and other infra- Falconbridge is a 49% joint-venture partner in structure such as the port and road facilities, the development of the massive Koniambo and excludes $500 million of other costs orebody in New Caledonia. SMSP, the develop- (see page 38). ment arm of the North Province of New Development of the limonite resource would Caledonia, is the 51% partner. be deferred for future years but is also Replenishing Resources sufficient to support a 60,000 tonne-per-year operation, providing a future opportunity to Koniambo is a world-class resource. Nickel is further increase the nickel production base. contained in both saprolite and limonite with With the completion of the BFS, the grades that compare favourably with other Company is focused on finalizing the financing laterite deposits in the world. The saprolite ore- structure and continues to hold discussions with body contains 142.1 million tonnes of its partner and the French government to measured and indicated resources at 2.13% determine their level of financial support.

KONIAMBO IS A WORLD-CLASS RESOURCE THAT HAS THE POTENTIAL TO CONTRIBUTE TO FALCONBRIDGE’S FUTURE WHAT SUDBURY HAS CONTRIBUTED TO ITS PAST.

nickel and 156.0 million tonnes of inferred With the Company’s successful development resources at 2.2% nickel. Nickel would be track record, Falconbridge is confident in extracted using a smelting process to produce Koniambo’s project management team and ferronickel, similar to the process used at its ability to execute this project. The Falconbridge’s Falcondo operations. Nickel implementation approach continues to be would be extracted from the limonite orebody, assessed, with earliest possible start-up a resource of 100 million tonnes of over 1.6% in 2009. nickel, using a hydrometallurgical process. Koniambo’s scope and significance to Project Advancing Falconbridge’s future can be illustrated by comparing it to the Sudbury basin – one of the During 2004, Falconbridge completed a world’s most prolific sources of nickel. For over bankable feasibility study (BFS) on the 75 years, Falconbridge has mined over development and processing of the laterite 140 million tonnes of ore at an average grade resource. The BFS has increased the level of of 1.5% nickel in Sudbury. Consequently, project definition with the level of engineering based on its even larger reserves and resources now at approximately 25%. Annual production at over 2% nickel, Koniambo has the potential would be 60,000 tonnes of nickel in ferro- to contribute to Falconbridge’s future what nickel, at an estimated cash cost of $1.65/lb., Sudbury has contributed to its past, and will positioning this operation as one of the largest add significant value to shareholders for nickel producers in the world. The costs of decades to come. inputs have increased as a result of changes in Below, from left to right: foreign currency exchange rates as well as Koniambo, New Caledonia increased service and raw materials costs. The 1) development work 2) field work 3) aerial overview 4) aerial overview

14 Nickel End Uses

NICKEL PLAYS AN IMPORTANT ROLE IN MODERN SUSTAINABLE SOCIETY, SPECIFICALLY BECAUSE ITS PROPERTIES

ARE CRITICAL TO THE PERFORMANCE OF STAINLESS STEEL.

STAINLESS STEEL The main force driving growing nickel demand over the past 20 years has been the stainless steel sector. Stainless steel benefits from nickel’s ductility – its ability to deform without losing tough- ness – and its corrosion resistance. Stainless steel is often the material of choice for its long life, anti-corrosion properties, strength-to-weight ratio, aesthetic appeal, weldability and its compatibility with food processing and storage.

Food Processing Stainless steels are well established in the food-processing industry END USE OF NICKEL and are among the easiest steels to clean. The smooth pore-free surface not only prevents tainting and discolouration of utensils, but inhibits bacteria growth. With its bright and modern appearance, it is Engineering/ non-Electrical Machinery 24% found in a broad range of kitchen applications from pots and pans, Transport 16% cutlery and sinks, to cladding of large appliances. Metal Goods 16%

Electronics and Architecture Electrical Machinery 15% There are diverse architectural applications for stainless steel, Building and Construction 10% including railings, garbage bins, signs, escalators, elevators, ramps, Tubular Products 11% outdoor furniture, doors, windows and cladding for the external Others 8% facades of buildings, to name a few. Aesthetic appeal, a variety of finishes and corrosion resistance make stainless steel the material of choice for outdoor uses. However, it is in large-scale construction projects, such as bridges, arenas and buildings, that stainless steel really stands out. Compared to less durable materials, such as carbon steel, concrete and plastics, stainless steel provides most applications with long-term performance and minimum down-time, making it ideal for long-life building structures. Moreover, due to its formability, versatility and visual appeal, the use of stainless steel has expanded beyond reinforcement to become the main design feature in visually spectacular structures.

NICKEL ALLOYS Nickel alloys – metallic materials in which nickel is combined with other metals – are used in countless applications. In the innovative electronics and telecommunications sectors, nickel alloys are used in a wide variety of products such as semiconductors, cathode ray tubes for personal computers, optical and laser equipment, radio devices and various telecommunications equipment components. With their heat resisting properties, nickel-based high-performance alloys are used in jet engine turbine blades and vanes, which reach exceptionally high temperatures, and in combustion cans, which are the hottest part of jet engines. Liquid rocket engines use these alloys to provide high strength under extreme conditions. High performance nickel-based alloys are also an important constituent of industrial gas turbines for power generation, a market that is growing world wide.

LETTERFALCONBRIDGE TO SHAREHOLDERS NICKEL 15 COPPER

FALCONBRIDGE HAS A STRONG COPPER PLATFORM WITH THREE LARGE OPERATIONS: COLLAHUASI

AND LOMAS BAYAS IN CHILE AND KIDD CREEK IN CANADA. THESE OPERATIONS PROVIDE A

NUMBER OF OPPORTUNITIES TO CONTINUE TO EXPAND COPPER PRODUCTION.

Above: Collahuasi, Chile, Ujina pit

16 FALCONBRIDGE COPPER Copper Market Review

STRONG FUNDAMENTALS IN THE COPPER MARKET UNDERPINNED A 61% INCREASE IN

COPPER PRICES IN 2004.

Copper prices benefited from strong demand Producer Discipline and Low combined with the limited supply that resulted Inventory Levels from supply cutbacks and producer discipline Copper inventories have declined dramatically in 2002 and 2003. since the beginning of 2003, as a result of producer shutdowns. These have had the Strong Demand intended effect of reducing large stock In 2004, the strength of copper demand took overhang. Exchange inventory levels have the industry by surprise, growing by almost reached critical levels as a result of 9%. In the U.S., higher production in the auto exceptionally strong demand and a number sector and a booming construction sector have of production-related setbacks. been the cornerstones of strong copper demand. The main driving force behind the Outlook resurgence of global copper demand, however, Higher metal prices are leading to the restart of is China. With ongoing investment in basic de-activated production, and to the emergence infrastructure and growing domestic demand of new projects in the form of brownfield for electronic products and motor vehicles, this expansions and greenfield construction. Despite trend is expected to continue into the the rebound in refined production in 2004, and foreseeable future. even greater expansion potential for 2005, demand is expected to continue to exceed supply, leaving the copper market in deficit for another year. Consequently, the copper price outlook moving into 2005 remains favourable.

FIRST USES OF COPPER COPPER PRICES AND WORLD COPPER INVENTORIES PRODUCTION AND CONSUMPTION

(000s TONNES) ($/lb.) (MILLIONS OF TONNES)

Wire rod 55% 15 Sheet/Strip 8% 800 1.2

Tube 11% 12 Copper alloys 17% 600 0.9

Other 9% 9

400 0.6 6

200 0.3 3

0 0.0 0 00 01 02 03 04 00 01 02 03 04

LME Grade A Settlement Price Production (US$/lb.) Consumption LME Inventories

FALCONBRIDGE COPPER 17 Copper – Operations and Growth Opportunities

As a large copper producer, Falconbridge was a anticipated decline in ore grade. As a result, major beneficiary of the high copper prices Falconbridge’s share of 2004 production realized in 2004, with mined copper produc- increased to 205,100 tonnes, from tion reaching a record 340,900 tonnes. 168,600 tonnes in 2003. The Company has a strong platform in copper In the first quarter of 2005, construction with three large operations: Collahuasi and of a new molybdenum flotation plant began at Lomas Bayas in Chile, and Kidd Creek in Collahuasi. Mining operations have now shifted Canada. The South American operations, in to the Rosario orebody, which contains eco- particular, present a number of exciting oppor- nomic molybdenum grades at the top of the tunities for expanding copper production by mine, with increasing molybdenum grades as further developing resources. the orebody deepens. The new molybdenum

FALCONBRIDGE WAS A MAJOR BENEFICIARY OF THE HIGH COPPER PRICES REALIZED IN 2004, WITH MINED COPPER PRODUCTION REACHING A RECORD 340,900 TONNES.

Collahuasi plant will enable Collahuasi to capture the Collahuasi is a world-class resource in Chile in value of the molybdenum in the ore, which Falconbridge holds a 44% interest, and particularly with current prices of over $30/lb. its partners, Anglo American and a Japanese The plant’s average capacity will be consortium, hold interests of 44% and 12%, 12,000 tonnes of molybdenum concentrate respectively. Collahuasi is the world’s fourth annually. First production is anticipated in the largest copper producer and has extensive first quarter of next year with 2006 production reserves and resources of over 4.0 billion expected to be approximately 4,000 tonnes. tonnes of copper ore. Since start-up in 1999, This production will increase over time as a Collahuasi has been a successful operation and result of the increase in molybdenum grades at maintained its position as a low-cost producer. depth. The capital cost of the plant will be In 2004, construction of a new grinding $42 million, with Falconbridge’s share approxi- circuit at the Ujina concentrator was mating $18 million. Below, from left to right: completed, with successful transition to the 1) Lomas Bayas, Chile, employees Rosario pit. The project, which was completed 2) Collahuasi, Chile, loading dock ahead of schedule and under budget, increased 3) Kidd Creek, Ontario, underground mining 4) Collahuasi, Chile, crusher the concentrator’s capacity from 70,000 to 110,000 tonnes per day, compensating for an Opposite page, from left to right: 1) Collahuasi, ore-handling equip- ment 2) Lomas Bayas, Chile, open pit mine 3) Collahuasi, Chile, sulphide mineral stockpile 4) Lomas Bayas, Chile, copper cathode

18 With the large resource base at Collahuasi, in addition to making a solid contribution to a scoping study has been initiated to assess Falconbridge’s performance. further expansion. This could increase produc- In 2004, a crusher expansion project was tion by a further 175,000 tonnes, with successfully completed at Lomas Bayas, on Falconbridge’s share at 77,000 tonnes. Mining schedule and on budget. The plant achieved rates would be increased and additional design capacity of 36,000 tonnes per day in grinding and flotation capacity would be added. the first week of June. Modifications to the current infrastructure At Lomas Bayas there is an opportunity to would also be required. The scoping study and further expand production. A scoping study preliminary engineering work will be completed has been initiated on a nearby deposit called in 2005, with first production possible in late Fortuna de Cobre, which could expand 2007. This project would increase Collahuasi’s production by 50%, to 90,000 tonnes per total copper production to approximately year, and extend the mine life at Lomas Bayas 675,000 tonnes per year, of which by five years, to 2020. Fortuna de Cobre is an Falconbridge’s share would be attractive growth opportunity because of its 297,000 tonnes. low stripping ratio and very favourable mineralogy and leaching kinetics. Falconbridge Lomas Bayas has the option to purchase Fortuna de Cobre Lomas Bayas is an open pit copper mine and a by mid-2006. solvent extraction and electrowinning (SX-EW) plant in northern Chile. Since being acquired in 2001, Lomas Bayas has exceeded both production and earnings expectations,

SIX SIGMA CASE STUDY – COLLAHUASI

OPPORTUNITY: SOLUTION: IMPACT: Reduce monthly unplanned Six Sigma tools identified the potential to decrease Monthly SAG mill shutdown time shutdown time and prevent shutdowns due to electrical failures by 50%. Root decreased on both lines, from production loss on both semi- causes of failures were identified and control measures an average of 10.12 hours to autogenous (SAG) mill lines were implemented in 2004, including: 2.77 hours. Bottom-line savings at Collahuasi’s concentrator. ■ Training for all operators on new standard operating were $850,000 in 2004 and procedures; will increase going forward. ■ Predictive maintenance of key electrical systems and programmable logic controllers (PLCs); and ■ Parallel backups for certain high-failure components.

19 Kidd Creek At the end of 2004, ore from the Montcalm Kidd Creek is located in Timmins, Ontario. nickel deposit, near Timmins, Ontario, began to Mining operations are now transitioning to the be treated at the Kidd concentrator. Montcalm newly developed Mine D, which will improve will be in full production in 2005 and the Kidd operational stability and predictability, and concentrator will continue to process its nickel- should lead to improved financial performance. bearing ores. Commissioning of the block 1 ore handling Kidd Creek has the potential to generate system at Mine D was completed in 2004, with substantial free cash flow. The strategy with first ore hoisted up the shaft in July, ahead of Kidd Creek is to maximize efficiencies at this the feasibility schedule. Mining rates are also operation and generate a significant level of

WITH STRONG OPERATIONS AND A NUMBER OF GROWTH OPPORTUNITIES, FALCONBRIDGE HAS THE POTENTIAL TO GROW ITS COPPER OUTPUT BY 35% OVER THE NEXT FIVE TO SEVEN YEARS.

planned to increase from a 2004 level of cash flow, which can be redeployed into 2.1 million tonnes of ore annually to 2.4 mil- strategic, profitable growth opportunities. lion tonnes once in full production. With Falconbridge is a large producer of copper increased throughput, unit costs are expected with strong operations and a number of growth to decline. opportunities. Over the next five to seven years, Progress was also made at Kidd’s Falconbridge has the potential to grow its metallurgical operations. Falconbridge reached copper output by 35%. an agreement with Agnico Eagle for a life-of- mine contract to process the majority of its annual production of zinc concentrate. This will ultimately provide the zinc operations at Kidd Creek with an annual supply of more than 100,000 tonnes of precious metal-bearing zinc concentrate, and will enable it to run with improved margins at full capacity.

Below, from left to right: 1) Lomas Bayas, Chile, employee 2) Kidd Creek, Ontario, hoist room 3) Lomas Bayas, Chile, conveyer 4) Kidd Creek, Ontario, employee

20 Copper End Uses

COPPER IS USED IN A WIDE SPECTRUM OF INDUSTRIES AND IS VALUED PREDOMINANTLY FOR ITS HIGH ELECTRICAL

CONDUCTIVITY. COPPER COMBINES WITH OTHER METALS TO FORM AN EXTENSIVE RANGE OF COPPER-BASED ALLOYS

POSSESSING MANY USEFUL PROPERTIES.

Copper Wire and Cable Copper wire and cable, the most common copper products, are used in building and construction, automotive, electronics, industrial machinery and consumer products. These applications account for nearly 50% of copper consumption. Building wire is the largest end-use product. The use of copper wire in both residential and commercial buildings has increased considerably with the greater number of appliances and electronics now found in homes and businesses. The wire and cable application is anticipated to continue to grow in both mature and developing economies, as the number of electrical devices used at home and in the workplace continues to rise.

Electrical end uses END USE OF COPPER The second largest end-use sector, accounting for 26% of Western World copper demand, is electrical and electronic products. These applications

Construction 37% include telecommunication cable, power cable, transformer windings,

Electronic Products 26% semiconductors and motors for heavy appliances.

Industrial Machinery 15% The volume of copper consumed by business electronics has grown

Transport 11% rapidly, mainly driven by the widespread use of personal computers and,

Consumer Products 11% correspondingly, electronic connectors. The semiconductors currently found in computers no longer provide the speed and integration required by users, but copper provides a solution. With its lower resistance properties, it can improve speed and integration in semiconductors.

Telecommunications The growth in the popularity of the Internet and email, delivered to users through digital subscriber lines (DSLs), has enhanced the role of copper in telecommunications. Residential markets are expected to follow recent growth patterns in the commercial and industrial sectors of the telecommunications segment. Similarly, developing countries are expected to undergo growth over the next few years that parallels recent gains in the industrialized world.

Automobiles The automotive sector has significant potential. The use of copper in cars has doubled over the past 25 years and a typical car now contains more than 50 pounds of copper, mostly in electrical components and also in radiators. The increasing use of wiring and electronics in cars is a result of copper properties that enable smart sensors, smart airbags, electronic throttle control and improved exhaust sensors. The introduction of electric power steering, electric braking, and hybrid vehicles with battery-generated power, will provide additional opportunities to add several kilos of copper per vehicle.

FALCONBRIDGE COPPER 21 Summary of Mineral Reserves and Mineral Resources1

Operation Percentage Thousand % % % g/t Ownership Category Tonnes Nickel Copper Zinc Silver MINERAL RESERVES Nickel Deposits Sudbury 100% Proven 4,554 1.32 1.59 —— Probable 7,310 1.12 1.17 —— Total 11,864 1.20 1.33 — — Raglan 100% Proven 6,270 2.63 0.74 —— Probable 9,382 2.95 0.81 —— Total 15,652 2.82 0.78 — — Montcalm 100% Proven 3,162 1.56 0.75 —— Probable 1,724 1.44 0.70 —— Total 4,886 1.51 0.73 — — Falcondo 2 85.26% Proven 47,846 1.21 —— — Probable 9,557 1.20 —— — Total 57,403 1.21 — — —

Copper Deposits Kidd Creek 100% Proven 14,286 — 1.91 5.64 62 Probable 3,780 — 1.35 7.52 47 Total 18,066 — 1.80 6.03 58 Lomas Bayas 100% Proven 41,180 — 0.40 —— Probable 301,521 — 0.33 —— Total 342,701 — 0.34 — — Collahuasi 2 44% Proven 310,503 — 1.09 —— Probable 1,539,102 — 0.87 —— Total 1,849,605 — 0.90 — —

MINERAL RESOURCES (IN ADDITION TO MINERAL RESERVES) Nickel Deposits Sudbury 100% Measured 4,000 1.77 0.63 —— Indicated 17,770 2.36 1.04 —— Total 21,770 2.25 0.97 — — Inferred 29,700 1.8 2.6 —— Raglan 100% Measured 55 3.93 1.11 —— Indicated 3,710 2.19 0.73 —— Total 3,765 2.22 0.74 — — Inferred 5,200 2.9 0.8 —— Montcalm 100% Measured 0 —— — — Indicated 0 —— — — Total 0 — — — — Inferred 700 1.7 0.7 —— Falcondo 2 85.26% Measured ————— Indicated 13,840 1.53 ——— Total 13,840 1.53 — — — Inferred 6,400 1.4 ———

Copper Deposits Kidd Creek 100% Measured 310 — 1.32 6.08 43 Indicated 78 — 2.82 8.54 52 Total 388 — 1.62 6.57 45 Inferred 15,300 — 3.0 4.6 82 Lomas Bayas 100% Measured 5,253 — 0.28 —— Indicated 239,736 — 0.27 —— Total 244,989 — 0.27 — — Inferred 42,000 — 0.3 —— Collahuasi 2 44% Measured 50,795 — 0.55 —— Indicated 430,031 — 0.65 —— Total 480,826 — 0.64 — — Inferred 1,820,000 — 0.8 ——

1. The mineral reserve and resource estimates are prepared in There are no known environmental, permitting, legal, taxation, The mineral reserves and resources at Collahuasi are estimated accordance with the “CIM Definition Standards On Mineral political or other relevant issues that would materially affect the and provided by the operator of the joint venture based on a Resources and Mineral Reserves, adopted by CIM Council on estimates of the mineral reserves. copper price of US$0.95/lb. The mineral reserves and resources November 14, 2004, and the CIM Estimation of Mineral The mineral resources have reasonable prospects for economic are estimated and classified to industry standards following the Resources and Mineral Reserves Best Practice Guidelines”, extraction but have not yet had complete formal evaluation, or do Australasian Institute of Mining and Metallurgy’s Joint Ore Reserve adopted by CIM Council on November 23, 2003, using not have demonstrated economic viability under current conditions. Committee code. These estimates have been restated to conform geostatistical and/or classical methods, plus economic and to CIM mineral reserve and resource definitions. The estimates are The mineral reserve and mineral resource estimates are compiled mining parameters appropriate to each project. inspected annually by Chester Moore. and verified by Chester Moore, Director, Mineral Reserve Estima- 2. The mineral reserves and resources at Collahuasi and Falcondo tion and Reporting, a member of the Professional Geoscientists of are shown on a 100% basis. Ontario with over 30 years experience as a geologist.

22 FALCONBRIDGE • 2004 ANNUAL REPORT Financial Section

IN 2004, FALCONBRIDGE BENEFITED FROM IMPROVING FUNDAMENTALS FOR NICKEL, COPPER

AND COBALT. IN 2005 AND BEYOND, THE COMPANY WILL CONTINUE ITS DRIVE TO MAXIMIZE

PRODUCTION AT EXISTING OPERATIONS, GROW PROFITABLY WITH TIMELY AND JUDICIOUS

INVESTMENTS, AND MAINTAIN A STRONG FINANCIAL POSITION.

TABLE OF CONTENTS 24 MANAGEMENT’S DISCUSSION 43 OFF-BALANCE SHEET 54 TRENDS, RISKS AND AND ANALYSIS ARRANGEMENTS UNCERTAINTIES 24 OVERVIEW 43 TRANSACTIONS WITH RELATED 59 ACCOUNTING 26 OVERALL PERFORMANCE PARTIES RESPONSIBILITIES, 27 RESULTS OF OPERATIONS 43 PROPOSED TRANSACTIONS PROCEDURES AND POLICIES 28 NICKEL OPERATIONS 43 FOURTH QUARTER RESULTS 60 AUDITORS’ REPORT 32 COPPER OPERATIONS OVERVIEW 36 CORPORATE AND OTHER 44 CRITICAL ACCOUNTING 61 CONSOLIDATED FINANCIAL 36 BUSINESS DEVELOPMENT ESTIMATES STATEMENTS 39 EXPLORATION 46 CHANGES IN ACCOUNTING 65 NOTES TO CONSOLIDATED 40 ENERGY POLICIES INCLUDING INITIAL FINANCIAL STATEMENTS 40 SUSTAINABLE DEVELOPMENT ADOPTION 87 FIVE-YEAR REVIEW 40 SELECTED FINANCIAL DATA 48 FINANCIAL INSTRUMENTS AND (UNAUDITED) 41 SUMMARY OF QUARTERLY OTHER INSTRUMENTS RESULTS 50 RECONCILIATION OF FINANCIAL 88 CONSOLIDATED RESULTS – 41 LIQUIDITY AND CAPITAL MEASURES 2004 AND 2003 BY RESOURCES 52 OUTSTANDING SHARE DATA QUARTERS (UNAUDITED) 42 SIGNIFICANT FUTURE 52 MARKETS OBLIGATIONS 53 MARKET OUTLOOK

Forward-looking Statements

This discussion contains forward-looking operations; market access; production and Falconbridge’s functional and reporting statements that involve risks, uncertainties and processing technology; legal proceedings; raw currency was converted to U.S. dollars. Unless assumptions. Falconbridge’s actual financial material procurement; and other risks and hazards otherwise noted, all amounts in this report are condition and results of operations could differ associated with mining operations. For additional expressed in U.S. dollars. materially from those that may be contemplated information regarding these factors, please see In the following discussion and analysis, by these forward-looking statements as a result of “Trends, Risks and Uncertainties” on page 54. Falconbridge uses “net debt”, “net debt plus those risks, uncertainties and assumptions. These Falconbridge’s consolidated financial statements equity” and “operating cash costs” which are risks include, but are not limited to, fluctuations are prepared in accordance with Canadian non-GAAP financial measures. The most directly in the prices for copper, nickel or other metals generally accepted accounting principles comparable GAAP financial measures are “total produced by Falconbridge; mining and processing (“GAAP”). The Company’s audited Consolidated debt”, “total debt plus equity” and “operating risks; domestic and foreign laws, particularly Financial Statements for the year ended costs”, respectively. Reconciliations of these non- environmental legislation; labour relations; December 31, 2003 have been restated to reflect GAAP measures to the most directly comparable geological and metallurgical assumptions and the adoption of the new Canadian Institute of financial measures presented in accordance with estimates; fluctuations in currency exchange Chartered Accountants (CICA) standard to account GAAP may be found on pages 50 to 52. rates, principally the Canadian/U.S. dollar for Asset Retirement Obligations (ARO). Com- exchange rate; interest rate and counter-party Information contained in this discussion is parative numbers in the Management’s Discussion risks; energy supply and prices; foreign given as of January 31, 2005, unless otherwise and Analysis have also been restated to reflect indicated. this change in accounting. Effective July 1, 2003,

FINANCIAL SECTION 23 Management’s Discussion and Analysis

FALCONBRIDGE HAD A RECORD YEAR IN 2004, CAPITALIZING ON A BUOYANT METALS MARKET AND ACHIEVING OR EXCEEDING MOST PRODUCTION TARGETS. EARNINGS FOR 2004 WERE $672 MILLION, AN INCREASE OF 252% FROM $191 MILLION IN 2003. CASH GENERATED FROM OPERATING ACTIVITIES BEFORE WORKING CAPITAL CHANGES TOTALED $1,067 MILLION IN 2004, COMPARED TO $445 MILLION FOR 2003.

OVERVIEW Falconbridge is an international mining company engaged in the exploration, development, mining, processing and marketing of metals and minerals, with primary focus on nickel and copper. Falconbridge is also engaged in the custom feed business through the acquisition, processing and recycling of third-party materials. Falconbridge believes that it is the third-largest producer of refined nickel and the twelfth-largest copper producer in the world.

Products and Marketing Falconbridge’s principal products are nickel, ferronickel, copper, zinc and cobalt. Other products include silver, gold, platinum group metals, cadmium, indium and sulphuric acid. Falconbridge markets and sells nickel and cobalt and certain other of its products internationally through marketing and sales offices in the United States, Belgium and Japan. Noranda Inc. acts as sales agent for all products from the Kidd Creek operations. Falconbridge markets copper concentrate and cathode from the Chilean operations through a marketing group in Santiago, Chile to customers around the world.

Mining and Processing Operations Falconbridge has mining and mineral processing facilities in Canada (Sudbury, Raglan, Montcalm and Kidd Creek operations), Norway (Nikkelverk), the Dominican Republic (Falconbridge Dominicana, C. por A. (Falcondo)) and Chile (Compañía Minera Doña Inés de Collahuasi S.C.M. (Collahuasi) and Compañía Minera Falconbridge Lomas Bayas (Lomas Bayas)). These activities are conducted through six segments – the Integrated Nickel Operations (INO), Falcondo, Kidd Creek, Collahuasi, Lomas Bayas and Corporate. ■ The INO encompasses all operations engaged in the integrated operations of mining, milling, smelting, refining and marketing of metals mainly derived from Sudbury, Raglan and Montcalm nickel-copper ores and its custom feed business. ■ Falcondo mines, mills, smelts and refines its own nickel laterite ores. ■ Kidd Creek mines, mills, smelts and refines its own copper-zinc ores from Kidd Mine and processes Sudbury copper concentrate and custom feed materials. Beginning in the fourth quarter of 2004, Kidd Creek began milling Montcalm nickel-copper ore. ■ Collahuasi mines and mills its sulphide ores into concentrate and mines and leaches copper oxide ores to produce copper cathode. Falconbridge owns 44% of Collahuasi. ■ Lomas Bayas mines and refines its own copper ores. ■ The Corporate segment accounts for the following expenditures: general and administrative, exploration, research and process development, foreign exchange gains and losses, and other expenses/(income) items.

Exploration Activities The Falconbridge exploration team conducts worldwide exploration focused primarily on nickel and platinum group metals. Its mandate is to discover and delineate mineral resources that ultimately merit the Board of Directors’ approval to proceed to development and production. The team targets mineral resources of strategic size, in locations with acceptable country risk, with after-tax rates of return on investment of at least 15% and operating costs below the industry mid-point. Its goal is to conduct safe and environmentally responsible exploration utilizing the latest technological advances in exploration methodology to improve efficiency and the likelihood of success.

24 FALCONBRIDGE • 2004 ANNUAL REPORT Joint-venture arrangements are pursued with both junior and senior mining companies to increase the level of focused activity and to share cost and risk.

Business Development The business development function plays a critical role in several aspects of the Company’s management. First, it works in tandem with the various business units, exploration group and project development teams to plan, coordinate and implement long-term strategies to replace the reserves that are depleted in the normal course of mining operations and to grow the business throughout the cycle. Business development regularly 2004 REVENUES evaluates opportunities for growth. These objectives are achieved by, amongst other things, evaluating potential acquisitions of mining properties or assets, investing in junior mining companies, partnering with other companies to Nickel 46% develop growth opportunities, developing long-term strategic, commercial Copper 38% relationships or examining potential brownfield expansions within the Zinc 5% Company’s existing asset base. Furthermore, the Company focuses on the Other 11% development of long-term relationships, which increases the potential for identifying growth opportunities. The Company also focuses on growth opportunities that create additional synergies with its existing asset base.

Safety and Health Providing a safe and healthy workplace is a priority at Falconbridge. Operations continue to implement effective safety training programs and management systems. Safety performance is strongly supported by senior management and the Board of Directors. Safety and health policies are in place at all Falconbridge operations and safety responsibilities are part of all job descriptions, job procedures and performance reviews.

Sustainable Development Falconbridge is a strong proponent of sustainable development where economic prosperity, environmental quality and social equity drive business activities. This commitment is reflected in the Company’s Sustainable Development Policy. See further discussion on page 40.

Focus, Objectives and Business Strategy Falconbridge is focused on the production of nickel and copper, two metals that continue to have positive long-term fundamentals and near-term outlooks. Both of these metals have competitive attributes which have led to diversified usage in the world’s economy and have had an average annual long-term consumption growth rate of over 4% for nickel and 3% for copper. Falconbridge has a unique position in these markets as one of the world’s largest producers of both metals, as well as substantial operational, technical, exploration and development experience. In addition, the Company has the potential to increase its production as a result of the development of a number of new projects. Falconbridge’s objective is to increase returns to shareholders as measured by returns on net assets and on shareholders’ equity. To achieve this goal, Falconbridge’s business strategy is to continuously improve operating efficiencies to reduce costs, obtain maximum returns on existing assets and acquire, develop and mine high quality ore reserves. The Company believes that a conservative financial structure and financial flexibility are important in order to accommodate the capital intensive and cyclical nature of the business.

Nature of Business and Markets Falconbridge’s business is international and, in essence, is the production and marketing of a com- modity and the treatment of custom feed material. As a result, profitability and cash flows from operations are determined primarily by the price of the metals sold and the Company’s ability to produce at a low cost.

Price and Markets Historically, the Company has experienced and expects to continue to be subject to volatile prices, which are influenced primarily by the world supply-demand balance for products and services, and related factors such as speculative activities, production activities by competitors, political and economic conditions, as well as production costs in major producing regions. Since the Company’s

MANAGEMENT’ S DISCUSSION AND ANALYSIS 25 products are marketed in all major geographical markets, the realized price for metals is also influenced by regional supply-demand factors, the availability and price of secondary or metal containing scrap material, and other substitute commodity products. Falconbridge generally accepts market prices and does not hedge the price it realizes on the sale of its own production. A detailed analysis of relevant metal markets is discussed on page 52 – Markets.

Production Costs The other primary determinant of profitability and cash flow from operations is the Company’s ability to produce at a low cost. Production costs are largely influenced by ore grades, mine planning, processes technology and the by-product credit revenues.

Business Risks The primary risks facing Falconbridge are: ■ Changes in metal prices ■ Reliance on third-party feed ■ Mining and processing risks ■ Environmental risks ■ Labour relations ■ Uncertainty of reserve and production estimates ■ Exchange rate fluctuations ■ Interest rate and counter-party risks ■ Energy supply and prices ■ Foreign operations ■ Treatment and refining charges ■ Legal proceedings The nature, implications and tools used to manage these risks are discussed fully starting on page 54 – Trends, Risks and Uncertainties.

Capital Falconbridge’s business is capital intensive with significant costs involved in exploration activities, and the development of mining and metallurgical facilities. As such, securing low-cost capital is instrumental in profitability. Historically, Falconbridge has sourced capital from common and preferred equity markets, public debt markets and bank debt.

OVERALL PERFORMANCE Earnings, Cash Flows and Financial Condition Falconbridge had a record year in 2004, capitalizing on a buoyant metals commodity market and achieving or exceeding most production targets. Earnings for 2004 were $672 million or $3.71 of basic earnings per common share ($3.69 per share on a diluted basis), an increase of 252% from $191 million or $1.03 of basic earnings per common share reported at the end of 2003. Opera- ting income in 2004 was $969 million, compared to $301 million for 2003. Cash generated from operating activities before working capital changes totaled $1,067 million, compared to $445 million for 2003. All of these increases reflect higher average realized nickel, copper and zinc prices, which increased 45%, 61% and 24%, respectively, over the same period in 2003, and higher copper sales volumes, offset in part by lower nickel sales volumes and the impact of the stronger Canadian dollar, which when compared to the U.S. dollar was up 8% compared to the 2003 average. There are many factors that influence the price received for commodities (see Markets discussion on page 52). Growing worldwide industrial production and continued strong growth from China has increased demand for metals. Falling inventories, combined with little new additional supply have been the catalyst for the rising metal prices. The Company’s balance sheet improved in 2004, as the ratio of net debt to net debt plus equity improved to 24% from 27% at September 30, 2004 and from 37% at December 31, 2003. Cash and cash equivalents were $645 million at December 31, 2004. Falconbridge believes that although metal prices will be volatile, they remain fundamentally strong; therefore its balance sheet should continue to improve and that cash flows will be sufficient to cover all of its obligations for 2005.

26 FALCONBRIDGE • 2004 ANNUAL REPORT Consolidated Statement of Earnings (AUDITED – $ MILLIONS, EXCEPT PER SHARE DATA) Years ended December 31 2004 2003

Restated

Revenues $ 3,070 $ 2,083 Operating expenses Costs of sales Costs of metal and other product sales 1,682 1,413 Depreciation and amortization of property, plant and equipment 274 249 1,956 1,662 Selling, general and administrative 108 86 Exploration 20 23 Research and process development 12 13 Other expenses/(income) 5 (2) 2,101 1,782 Operating income 969 301 Interest 37 43 Earnings before taxes and non-controlling interest 932 258 Income and mining taxes 248 63 Non-controlling interest in earnings of subsidiary 12 4 Earnings for the year $ 672 $ 191 Dividends on preferred shares 7 9 Earnings attributable to common shares $ 665 $ 182 Basic earnings per common share $ 3.71 $ 1.03 Diluted earnings per common share $ 3.69 $ 1.02

RESULTS OF OPERATIONS The significant increase in operating income and earnings is attributable to the following factors: ■ Consolidated revenues of $3,070 million increased from $2,083 million in 2003. EARNINGS The increase reflects higher average realized prices of nickel, copper, zinc and silver, higher precious metal revenues from the Integrated Nickel Operations and higher ($ MILLIONS) volumes of copper and zinc sales. This was partially offset by lower sales volumes of 600 nickel and silver. ■ Costs of metal and other product sales of $1,682 million increased by $269 million 500 over 2003. The increase reflects higher mining costs, higher acquisition costs for 400 custom feed, the impact of a stronger Canadian dollar and Chilean peso relative to the U.S. dollar, and higher copper and zinc sales volumes. This was partially offset by 300 lower sales volumes of nickel and silver. 200 ■ Depreciation and amortization of property, plant and equipment of $274 million increased from $249 million in 2003. The increase of $25 million is attributable to 100 higher units of production and larger asset bases at Canadian and Chilean operations. 0 ■ Selling, general and administrative costs increased to $108 million from $86 million 00 01 02 03 04 in 2003, primarily as a result of the impact of the stronger Canadian dollar in 2004 versus 2003, and higher freight costs. Direct selling expenses were higher at Chile and Kidd in 2004, over 2003. ■ Exploration expenditures of $20 million decreased from $23 million in 2003. This decrease is attributable to the increased sharing of exploration costs with joint-venture partners, offset in part by the impact of a weaker U.S. dollar. ■ Research and process development expenditures of $12 million decreased marginally by $1 million over the corresponding period of 2003.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 27 ■ Other expenses of $5 million in 2004 compared with other income of $2 million in 2003. The $7 million change is primarily attributable to the following: metals trading generated $2 million of losses in 2004 compared to gains of $11 million in 2003. This was offset in part by the recognition of $5 million of net interest income on interest rate swaps not eligible for hedge accounting and $2 million in gains on energy positions not eligible for hedge accounting.

Income and expenses were provided from the following non-operating sources: ■ Net interest expense was $37 million in 2004, compared to $43 million in 2003. This decrease is attributable to higher capitalized interest related to projects and increased interest income due to higher cash balances. ■ Income and mining tax expense of $248 million in 2004 compared to an expense of $63 million in 2003. This $185 million increase resulted primarily from higher levels of earnings in 2004. ■ Non-controlling interest in earnings of subsidiary increased by $8 million, reflecting higher earnings at Falcondo.

Earnings by Segment The following table summarizes audited segmented results of operations: (AUDITED – $ MILLIONS) Years ended December 31 2004 2003

Restated Principal operations – Integrated Nickel Operations (INO) $ 442 $ 224 Falconbridge Dominicana, C. por A. 181 59 Nickel Operations 623 283 Kidd Creek Operations (45) (68) Collahuasi 361 115 Lomas Bayas 95 32 Copper Operations 411 79 Corporate costs 65 61 Operating income 969 301 Interest 37 43 Income and mining taxes 248 63 Non-controlling interest in earnings of subsidiary 12 4 Earnings for the year $ 672 $ 191 Dividends on preferred shares 7 9 Earnings attributable to common shares $ 665 $ 182

NICKEL OPERATIONS Falconbridge is the third-largest producer of refined nickel in the world, accounting for roughly 8% of world supply in 2004. For 2004, operating income for the nickel business was $623 million, compared to $283 million for the same period in 2003. Refined nickel production was 100,887 tonnes in 2004, compared to 104,410 tonnes in the same period in 2003. The operating cash cost per pound of mined nickel for all of Falconbridge was $2.93 in 2004, compared with $2.78 in 2003. Falconbridge has two nickel divisions. The INO produces London Metals Exchange (LME)- registered nickel and Falcondo produces ferronickel.

Integrated Nickel Operations (INO) The INO includes mines and plants at Sudbury, Raglan and Montcalm in Canada, a smelter in Sudbury, a refinery at Kristiansand in Norway and a significant custom feed business. The following table sets forth certain unaudited financial data with respect to Falconbridge’s Integrated Nickel Operations for the years indicated.

28 FALCONBRIDGE • 2004 ANNUAL REPORT Years ended December 31 2004 2003 2002 Sales (tonnes) Nickel 71,374 78,978 71,153 Copper 51,057 59,208 54,495 Cobalt 3,648 3,401 2,932 Revenues ($ millions) 1,429 1,046 692 Realized price ($/lb. of nickel) 6.40 4.40 3.14 Operating cash cost ($/lb. of nickel) 2.57 2.64 1.96 Operating income ($ millions) 442 224 86

Revenues: In 2004, sales volumes of nickel and copper decreased by 10% and 14%, respectively, as a result of lower metal deliveries resulting from the strike at Sudbury operations and reductions from custom shippers. Cobalt sales increased 7% from 2003 levels due to increases in production related to custom feeds. Realized nickel, copper and cobalt prices increased by 45%, 59% and 139%, respectively, in 2004. Precious metals revenues increased by $12 million to $99 million. In 2004, consolidated revenues for the INO increased 37%, to $1,429 million from $1,046 million in 2003.

Costs: In 2004, the operating cash cost of producing a pound of nickel from INO mines was $2.57. The $0.07, or 3%, decrease from 2003 costs was the result of increased mine production and higher by-product credits due to the increase in metal prices, which offset lower ore grades and increased costs to access the ore at Canadian operations due in part to the stronger Canadian dollar.

Operating Income: For 2004, the INO’s operating income was $442 million compared with $224 million for 2003. The $218 million increase was mainly due to higher metal prices, lower unit costs, and lower depreciation and amortization charges, which were partially offset by lower sales volumes for nickel and copper and increased administrative charges, again caused in part by the strengthening of the Canadian dollar.

Production: During 2004, Sudbury mines nickel production was 22,602 tonnes, compared with 24,143 tonnes in 2003. The shortfall in nickel production was attributable to the three-week labour strike in the first quarter of 2004, which reduced the annual production by 3,500 tonnes. For 2005, nickel in concentrate production at Sudbury is forecast at 22,500 tonnes. For 2004, Raglan’s nickel in concentrate production was a record 26,552 tonnes and copper production was 6,867 tonnes, compared with 25,110 tonnes of nickel and 6,628 tonnes of copper in 2003 as increased ore tonnages offset the impact of lower ore grades. For 2005, nickel in concentrate production at Raglan is forecast to decline to 20,700 tonnes due to anticipated lower nickel grades and lower mill throughput resulting from a two-week shutdown for the conversion from an autogenous grinding mill to a semi-autogenous grinding mill. Sudbury smelter production of nickel in matte was 52,595 tonnes in 2004, compared with 59,831 tonnes in 2003, largely as a result of the strike at Sudbury and lower concentrate grades. At Nikkelverk, 2004 nickel production of 71,410 tonnes was lower than the 77,183 tonnes produced in 2003 due to lower shipments of material from Sudbury during the labour disruption. During the year, Nikkelverk achieved record cobalt production of 4,670 tonnes. For 2005, refined nickel and copper production forecasts at Nikkelverk are 85,000 tonnes and 37,000 tonnes, respectively. This nickel production forecast reflects expected higher volumes of available feed primarily as a result of the newly-constructed Montcalm mine.

INO Production and Sales The following table sets forth certain segmented sales and production data with respect to Falconbridge’s Integrated Nickel Operations for the periods indicated.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 29 Integrated Nickel Operations 2004 2003 Ore tonnes Ni Cu Ore tonnes Ni Cu (x 1,000) % % (x 1,000) % % Production Sudbury – Mine Craig 807 1.53 0.45 889 1.54 0.46 Fraser 693 1.00 2.39 686 1.05 2.99 Lindsley 462 1.14 1.24 429 1.16 1.36 Lockerby 187 1.91 0.91 225 1.88 1.15 Total mined 2,149 2,229 Total – ore processed 2,259 1.31 1.28 2,261 1.35 1.48 Raglan mine 935 3.31 0.94 834 3.47 0.99 Montcalm mine 220 1.32 0.68 ———

Ni Cu Co Ni Cu Co Metal in concentrate (tonnes) Sudbury mine output 22,602 24,694 565 24,143 29,161 611 Raglan mine output 26,552 6,867 404 25,110 6,628 381 Montcalm mine output* 2,152 1,188 66 ——— Metal in copper concentrate 75 17,598 — 110 21,874 — Smelter, refinery Smelter (tonnes) Mines – Sudbury 18,653 5,806 427 24,687 8,139 658 – Raglan 23,849 6,331 313 28,708 7,678 463 – Montcalm* 1,828 403 50 ——— Custom 8,265 5,861 1,048 6,436 4,962 1,075 Total 52,595 18,401 1,838 59,831 20,779 2,196 Refinery (tonnes) Mines – Sudbury 19,849 6,751 421 25,351 8,862 688 – Raglan 26,248 7,523 330 27,020 6,895 437 – Montcalm* 1,131 179 30 ——— Custom 24,182 21,190 3,889 24,812 20,095 3,431 Total 71,410 35,643 4,670 77,183 35,852 4,556

Ni Cu Co Ni Cu Co Sales (tonnes) Mines – Sudbury 19,780 21,790 440 26,278 32,767 667 – Raglan 26,815 7,521 338 26,627 6,820 412 – Montcalm* 774 461 12 ——— Custom 23,801 21,285 2,858 25,775 19,621 2,322 Purchased product 204—— 298 —— Total 71,374 51,057 3,648 78,978 59,208 3,401

*Includes pre-production material

Other Developments In the fourth quarter of 2004, the Board of Directors approved Phase I of the Raglan Optimization program – an expansion that will increase annual production by approximately 5,000 tonnes of nickel per year. The capital cost for Phase I is estimated at $28 million and involves the conversion from autogenous to semi-autogenous grinding, which will increase the level of annual throughput to approximately 1.0 million tonnes and increase the mill’s ability to process harder ore. Engineering work on Phase II is underway, with changes to the grinding circuit and other concentrator equipment to further increase annual production rates being assessed. The development of the Montcalm nickel mine in Timmins, Ontario was completed in December 2004, under budget and two months ahead of schedule. In 2004, Montcalm produced

30 FALCONBRIDGE • 2004 ANNUAL REPORT 2,152 tonnes of nickel and reached full production by the end of the year. Beginning in 2005, production at Montcalm is expected to be 9,000 tonnes per year.

Reserves & Exploration: At planned operating rates, the proven and probable mineral reserves at Sudbury are equal to approximately six years of production. Production is expected to be extended as it is anticipated that a significant portion of the mineral resources will be converted to mineral reserves and will lengthen the life of the operation. In 2004, the Sudbury division’s proven and probable mineral reserves decreased by an additional 200,000 tonnes after production of 2.0 million tonnes. The loss of reserves mainly resulted from re-estimation of stopes in Zones 6 and 7 at Fraser mine. This loss was mostly offset by gains in reserves at the Thayer Lindsley mine due to a lowering of the cut-off grade. At December 31, 2004, total proven and probable reserves were 11.9 million tonnes. Total mineral resources increased again in 2004, from 49.4 million to 51.5 million tonnes with additions at Nickel Rim South and Fraser Morgan. A small overall loss occurred in the mines. Approximately 1.7 million tonnes were added at Nickel Rim South in 2004. The Nickel Rim South deposit is now estimated to contain 13.4 million tonnes of 1.8% nickel, 3.3% copper, 1.8 grams/tonne platinum, 2.0 grams/tonne palladium and 0.8 grams/tonne gold. Fraser Morgan Zones 8, 9, 10 and 11 increased by 700,000 tonnes to measured and indicated resources of 4.9 million tonnes and inferred resources of 2.1 million tonnes. At Raglan, the mineral reserves are equal to approximately 17 years of production at current operating rates. Mineral reserves decreased by 2.0 million tonnes as a result of annual production, write-downs and reclassification to resources. At December 31, 2004, total proven and probable reserves at Raglan were 15.7 million tonnes. Mineral resources were increased by 1.8 million tonnes, primarily a result of discoveries and additions at Zone 3, Zones 5-8, West Boundary and Donaldson through exploration. At planned operating rates, the mineral reserves at Montcalm are equal to approximately seven years of production. Mineral reserves decreased from 5.1 million tonnes to 4.9 million tonnes due to the start of production in 2004. Inferred resources totaling 0.7 million tonnes remain as before.

Falcondo Located in the Dominican Republic, Falcondo mines, mills, smelts and refines its own nickel laterite ores. Falconbridge owns 85.26% of Falcondo. The following table sets forth certain unaudited financial data with respect to Falcondo for the periods indicated.

Years ended December 31 2004 2003 2002 Sales of ferronickel (tonnes) 28,936 27,133 21,446 Production (tonnes) 29,477 27,227 23,303 Revenues ($ millions) 406 252 149 Realized price ($/lb. of ferronickel) 6.37 4.20 3.16 Operating cash cost ($/lb. of ferronickel) 3.50 3.04 2.76 Operating income/(loss) ($ millions) 181 59 (1)

Revenues: In 2004, revenues of $406 million at Falcondo were 61% higher compared to $252 million in 2003. Revenues were positively impacted by the 7% increase in sales volumes to 28,936 tonnes, from 27,133 tonnes in 2003 and a 52% increase in the realized ferronickel price in 2004, compared to 2003.

Costs: In 2004, Falcondo’s operating cash cost per pound of ferronickel was $3.50, compared with $3.04 in 2003. The increase in costs was largely due to the increase in the oil price and costs for extra power generation during periods of power plant maintenance. Falcondo’s delivered oil costs rose from $29.42 per barrel in 2003 to $36.63 in 2004, which represents a discount to West Texas Intermediate (WTI) of $1.68 and $5.15 per barrel, respectively, due to procurement strategies and partial use of low-cost heavy oil.

Operating Income: Falcondo’s 2004 operating income was $181 million, compared with $59 million in 2003. The $122 million higher contribution reflects a higher ferronickel selling price and increased sales volumes reduced by the impact of higher oil costs.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 31 Production: For 2004, Falcondo increased production by 8% to 29,477 tonnes of nickel in ferronickel compared to 27,227 tonnes in 2003. For 2005, production at Falcondo is forecast at 28,000 tonnes.

Reserves & Exploration: At planned operating rates, the proven and probable mineral reserves are equal to approximately 16 years of production. The proven and probable mineral reserves at Falcondo showed a total decrease of 3.5 million tonnes after production of 3.7 million tonnes in 2004. After production, most adjustments in the proven and probable reserve categories were due to a drilling campaign on the Barmac Reject Stockpile. At December 31, 2004, total proven and probable reserves were 57.4 million tonnes.

COPPER OPERATIONS Falconbridge is also an important copper producer, ranking twelfth in the world in mined produc- tion during 2004. The Company’s copper operations include Kidd Creek in Canada and Collahuasi and Lomas Bayas in Chile. Operating income of the copper business totaled $411 million in 2004, compared with $79 million in 2003. Copper production from Kidd Creek and South American operations was 308,186 tonnes in 2004, compared with 275,414 tonnes in 2003. The operating cash cost per pound of copper was $0.58 in 2004, compared with $0.53 in 2003.

Collahuasi Compañía Minera Doña Inés de Collahuasi S.C.M., in which Falconbridge holds a 44% interest, operates the Collahuasi mine in northern Chile. Collahuasi mines and mills copper sulphide ores into concentrate and mines and leaches copper oxide ores to produce cathodes. The following table sets forth certain unaudited financial data with respect to Collahuasi for the periods indicated.

Falconbridge’s 44% share Years ended December 31 2004 2003 2002 Sales of copper (tonnes) 204,636 168,147 187,524 Production (tonnes) 205,116 168,578 185,014 Revenues ($ millions) 566 275 246 Realized price ($/lb. of copper) 1.30 0.80 0.71 Operating cash cost ($/lb. of copper) 0.45 0.38 0.39 Operating income ($ millions) 361 115 83

Revenues: In 2004, Falconbridge’s share of Collahuasi revenues was $566 million, compared to $275 million in 2003. This $291 million increase in revenue is attributable to both higher copper prices and higher sales volumes, compared with 2003.

Costs: In 2004, the operating cash cost was $0.45/lb. of copper compared to $0.38/lb. in 2003. This increase resulted from higher realization costs, including treatment and refining charges and freight, and the strengthening of the Chilean peso against the U.S. dollar.

Operating Income: In 2004, Falconbridge’s share of operating income was $361 million compared with $115 million in 2003. The positive variance is mostly attributable to higher copper prices and sales volumes, partially offset by higher production costs.

Production: In 2004, Falconbridge’s share of copper production totaled 205,116 tonnes, 22% higher than the production of 168,578 tonnes in 2003. The increase was driven by the added production that resulted from the Ujina-Rosario transition and the concentrator expansion, completed during the year. Copper production in 2005 is forecast at 220,000 tonnes.

Other Developments In 2004, the construction of a new grinding circuit at the Ujina concentrator and the shifting of mining operations from the Ujina to the Rosario orebody were completed ahead of schedule and under budget. This project increased Collahuasi’s concentrator design capacity to 110,000 tonnes per day from 70,000 tonnes per day, compensating for an expected decline in ore grade and thereby enabling Collahuasi to maintain copper production at current levels. The total capital cost

32 FALCONBRIDGE • 2004 ANNUAL REPORT of the transition and concentrator expansion project was $584 million, with Falconbridge’s 44% share of this cost totaling $257 million. Conceptual study of the second expansion of the copper concentrator is on track. This project would involve adding a grinding line similar to the last expansion and accelerating the production rate at the Rosario pit, where grades are higher than at Ujina. This expansion would potentially increase total Collahuasi copper production by 175,000 tonnes, of which Falconbridge’s share would be 77,000 tonnes. First production could be expected in 2007 at the earliest. In the first quarter of 2005, construction of a new molybdenum flotation plant will begin at Collahuasi. Mining operations have now shifted to the Rosario orebody, which contains economic molybdenum grades at the top of the mine, with increasing molybdenum grades as the orebody deepens. The new molybdenum plant will enable Collahuasi to capture the value of the molybdenum in the ore, and take advantage of high molybdenum prices, which are currently over $30/lb. The plant’s average capacity will be 12,000 tonnes of molybdenum concentrate annually. Operations will begin in late 2005, with 2006 production of molybdenum in concentrate expected to be approximately 4,000 tonnes. This production will increase over time, as a result of the increase in molybdenum grades at depth. The capital cost of the plant is forecast at $42 million, with Falconbridge’s share approximating $18 million.

Reserves & Exploration: The December 31, 2004 total proven and probable mineral reserves of 1,849.6 million tonnes at Collahuasi were increased by 41.4 million tonnes after production of 41.5 million tonnes. The overall increase of 82.9 million tonnes is due to revision of the resource models (76.5 million tonnes) based on new drill information and the addition of new exotic copper orebodies (6.4 million tonnes). At planned operating rates, the proven and probable mineral reserves are equal to over 40 years of production. In 2006, Collahuasi plans to produce a molybdenum concentrate from material mined at the Rosario deposit. At that time, the molybdenum grade of the Rosario reserves is estimated to be 0.03% molybdenum.

Lomas Bayas Compañía Minera Falconbridge Lomas Bayas mines and leaches copper oxide ores to produce cathodes. The following table sets forth certain unaudited financial data with respect to Lomas Bayas for the periods indicated. Years ended December 31 2004 2003 2002 Sales of copper (tonnes) 60,190 61,289 60,265 Production (tonnes) 62,041 60,427 59,304 Revenues ($ millions) 183 114 97 Realized price ($/lb. of copper) 1.38 0.84 0.73 Operating cash cost ($/lb. of copper) 0.52 0.47 0.45 Operating income ($ millions) 95 32 18

Revenues: In 2004, revenues were $183 million, compared to $114 million in 2003. The $69 million increase was attributable to higher copper prices.

Costs: In 2004, the operating cash cost was $0.52/lb. of copper, up from $0.47/lb. in the same period of 2003. The increase was driven by higher contractor costs (mainly maintenance and freight), higher fuel and acid costs, and the strengthening of the Chilean peso against the U.S. dollar.

Operating Income: In 2004, operating income was $95 million, up from $32 million in 2003. Higher sales prices more than offset the impact of higher production costs.

Production: In 2004, cathode production was 62,041 tonnes, compared to 60,427 tonnes in 2003. Copper production in 2005 is forecast at 62,000 tonnes.

Reserves & Exploration: At planned operating rates, the proven and probable mineral reserves are equal to approximately 10 years of production. The mineral reserves decreased by 21.2 million tonnes due to mine production of 29.6 million tonnes and positive reserve adjustments of 8.4 million tonnes due to a revised reserve estimation model and additional diamond drill information. The December 31, 2004 mineral reserves total was 342.7 million tonnes of 0.34% copper.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 33 An option to purchase is held on the Fortuna de Cobre deposit which is located near Lomas Bayas and contains measured plus indicated mineral resources totaling 470.3 million tonnes of 0.29% copper. It is thought that low acid consumption and rapid leach times will compensate for the low copper grades and allow economic extraction. An evaluation of the project is underway to determine the future course of action on the property.

Consolidated Kidd Creek Operations Kidd Creek is an integrated processing facility engaged in the mining, milling, smelting and refining of its own copper and zinc ores and in the processing of custom feed. The following table sets forth certain unaudited financial data with respect to Falconbridge’s Kidd Creek operations for the periods indicated. Years ended December 31 2004 2003 2002 Sales (tonnes) Copper (in metal and concentrate) 90,286 105,162 110,575 Zinc (in metal and concentrate) 135,259 110,592 148,418 Revenues ($ millions) 486 396 340 Realized copper price ($/lb. of copper) 1.32 0.83 0.74 Realized zinc price ($/lb. of zinc) 0.51 0.41 0.39 Operating cash cost ($/lb. of copper) 0.93 0.83 0.68 Operating loss ($ millions) (45) (68) (46)

Revenues: In 2004, revenues totaled $486 million, up 23% from revenues of $396 million for the same period of 2003. Higher metal prices, by-product revenues and zinc sales volumes largely accounted for this variance.

Costs: In 2004, operating cash costs at the Kidd Mine were $0.93/lb. of copper compared to $0.83/lb. in 2003. The majority of this increase relates to reduced tonnes milled/hoisted, combined with increased spending for contracted services and mine supplies, and the impact of the stronger Canadian dollar.

Operating Income: Kidd Creek reported an operating loss of $45 million for 2004, compared to an operating loss of $68 million in the same periods for 2003.

Production: In 2004, copper and zinc in concentrate production at Kidd Mine totaled 41,029 tonnes and 87,847 tonnes, respectively, compared to 46,409 tonnes and 75,528 tonnes, respectively, during 2003. Lower copper volumes were the result of lower tonnage and lower ore grades; mean- while, higher zinc volumes benefited from higher ore grades, partially offset by lower tonnage. At the Kidd Mining division, ore mined and milled in 2004 was 2,094 thousand tonnes and 2,063 thousand tonnes, respectively, slightly below 2003 levels. In 2004, concentrator throughput was 3% below that of 2003, due mainly to ore availability in the first half of the year and an ore car derailment in the third quarter that damaged and closed the main haulage line for one week. Tie-ins for the Montcalm circuit also adversely impacted production. In 2004, copper and zinc head grades were 2.1% and 5.0%, respectively, compared to 2.3% and 4.3% last year. The copper and zinc mine production forecast for 2005 has been estimated at 46,000 tonnes and 100,000 tonnes, respectively. In 2004, copper cathode and refined zinc production totaled 115,578 tonnes and 121,557 tonnes, respectively, compared to 132,364 tonnes and 94,719 tonnes, respectively, in 2003. The copper plant variance was due mainly to an extended shutdown resulting from the premature failure of the C furnace in May and restricted volumes resulting from acid plant operational issues related to the interpass tower. The zinc plant’s favourable output was a function of higher throughput volumes and the reduction of the annual shutdown to seven weeks in 2004, versus 13 weeks in 2003. For 2005, refined copper production is expected to be approximately 130,000 tonnes, and zinc production approximately 135,000 tonnes.

Other Developments In the fourth quarter of 2004, commissioning of the Montcalm nickel circuit began in the Kidd Creek concentrator. The first ore was processed on October 17 and achieved commercial operating rates several months ahead of schedule.

34 FALCONBRIDGE • 2004 ANNUAL REPORT In April 2004, Falconbridge reached an agreement with Agnico Eagle for a life-of-mine contract to process the majority of its annual production of zinc concentrate from its LaRonde mine. This will ultimately provide the zinc operations at Kidd Creek with an annual supply of over 100,000 tonnes of precious metal-bearing zinc concentrate, and will enable it to run with improved margins at full capacity. In the fourth quarter of 2004, the zinc plant successfully commissioned the precious metal recovery circuit on time and on budget. Tie-ins and equipment commissioning began in the second week of October with the first tonnes of LaRonde zinc concentrate processed before the end of October and first shipments of precious metals residue sent to Noranda’s Brunswick smelter the following week. Kidd continues to develop Mine D, the depth extension of Kidd mine orebody. At Mine D, commissioning of the ore handling system was completed in 2004, with first ore hoisted up the shaft in July, ahead of the feasibility schedule. The shaft is now below the 8800 level. The Operations group has assumed control of the Block 1 Ore Handling System. In 2004, $127 million, including capitalized interest, was spent on Mine D development (2003 – $85 million), with a total of $404 million spent to date. Mine D will allow the mine to produce 2.4 million tonnes of ore annually once in full production. The cost of Mine D Stage I has been estimated at $500 million, excluding capitalized interest. The following table sets forth certain segmented sales and production data with respect to Falconbridge’s Kidd Creek operations for the periods indicated.

Kidd Creek Operations 2004 2003 Ore tonnes Ore tonnes (x 1,000) Cu % Zn % Au g/t (x 1,000) Cu % Zn % Au g/t Production Kidd Mining Division No. 1 and 2 Mines 674 2.27 6.63 156 737 2.36 6.12 87 No. 3 Mine 1,210 2.16 4.32 60 1,371 2.25 3.20 41 D Mine 210 1.04 4.69 26 ———— Total mined 2,094 2,108 Total ore milled 2,063 2,125

(tonnes except Cu Cu Cu Cu 000 troy ounces for Ag) Cu Cathode Blister Zn Ag Cu Cathode Blister Zn Ag Kidd Mining Division Metal in concentrate 41,029 — — 87,847 3,849 46,409 ——75,528 2,676

Kidd Metallurgical Division Mines 41,331 42,283 79,863 2,442 51,477 51,104 62,126 2,557 Custom – Sudbury 18,169 18,587 — 465 26,048 25,860 — 380 Custom – other 56,078 57,370 41,694 969 54,839 54,441 32,593 2,520 Total 115,578 118,240 121,557 3,876 132,364 131,405 94,719 5,457

(tonnes except Cu in Zn in Cu in Zn in 000 troy ounces for Ag) Cu conc. Zn conc. Ag Cu conc. Zn conc. Ag Sales Mines 38,990 — 71,072 15,724 2,849 47,184 — 63,963 11,964 4,130 Custom – other 51,296 — 48,463 — 1,027 57,978 — 34,665 — 1,193 Purchased metal ————— ————— Total 90,286 — 119,535 15,724 3,876 105,162 — 98,628 11,964 5,323

MANAGEMENT’ S DISCUSSION AND ANALYSIS 35 Reserves: At December 31, 2004, reserves totaled 18.1 million tonnes of 1.80% copper and 6.03% zinc. Mineral reserves decreased by 2.8 million tonnes resulting from production of 2.1 million tonnes and downward revisions of 678,000 tonnes, mainly the result of stope design revisions and the temporary re-categorization of 370,000 tonnes of copper stringer ore to inferred resources until diamond drilling is completed in the lower part of the mine. At planned operating rates, the mineral reserves at Kidd Mining division are equal to approximately seven years of production (averaging 2.4 million tonnes per year), not including the inferred resources which, if converted to reserves, could provide up to an additional six years of operations.

CORPORATE AND OTHER During the year ended December 31, 2004, corporate costs were $65 million, compared to $61 million for 2003. The increase in costs is primarily attributable to losses of $2 million on metals trading in 2004, compared to gains of $11 million in 2003, and $3 million in higher corporate general and administrative expenses, partly as a result of the stronger Canadian dollar. These costs were offset by $3 million in lower spending on exploration due to the increased sharing of exploration costs with joint-venture partners, offset in part by the impact of the stronger Canadian dollar. In addition, $5 million of net interest income on interest rate swaps not eligible for hedge accounting and $2 million in gains on energy positions not eligible for hedge accounting were recognized in 2004.

BUSINESS DEVELOPMENT Advanced Projects – Mineral Resources1 The table below sets forth mineral resource estimates and certain other data with respect to Falconbridge’s advanced development projects:

December 31, 2004 Resource Percentage Million Project location ownership Category tonnes % Nickel % Copper % Cobalt % Zinc Nickel deposits Nickel Rim South2 Sudbury 100% Inferred 13.4 1.8 3.3 0.04 — Fraser Morgan2 Sudbury 100% Measured 3.3 1.85 0.61 0.06 — Indicated 1.6 1.69 0.46 0.06 — Total 4.9 1.80 0.56 0.06 — Inferred 2.1 1.8 0.5 0.1 — Onaping Depth2 Sudbury 100% Indicated 14.6 2.52 1.15 0.06 — Inferred 1.2 3.6 1.2 0.07 — Koniambo3 New Caledonia 49% Measured 32.4 2.21 ——— Indicated 109.7 2.10 ——— Total 142.1 2.13 — — — Inferred 156.0 2.2 ——— Copper deposits Mine D4 Timmins 100% Inferred 15.3 — 3.0 — 4.6 Fortuna de Cobre5 Chile 100% Measured 125.2 — 0.31 —— Indicated 345.1 — 0.28 —— Total 470.3 — 0.29 — — Inferred 150.0 — 0.2 ——

Notes: 1. The mineral resource estimates were prepared in accordance with the CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by CIM Council on November 14, 2004, and the CIM Estimation of Mineral Resources and Mineral Reserves Best Practice Guidelines, adopted by CIM Council on November 23, 2003, using geostatistical and/or classical methods, plus economic and mining parameters appropriate to each project. The mineral resources have been compiled under the supervision of Chester Moore, Director, Mineral Reserve Estimation and Reporting, a member of the Professional Geoscientists of Ontario with over 30 years experience as a geologist. The mineral resources have reasonable prospects for economic extraction but have not yet had complete format evaluation, or do not have demonstrated economic viability under current conditions. 2. Also included as part of the Sudbury mineral resources on the Mineral Reserves and Mineral Resources table. 3. Option to earn. At a 2.0% nickel cut-off grade, the deposit contains Measured plus Indicated mineral resources of 75.6 million tonnes grading 2.47% nickel. 4. Also included as part of the Kidd Creek mineral resources on the Mineral Reserves and Mineral Resources table. 5. Option to purchase.

36 FALCONBRIDGE • 2004 ANNUAL REPORT Growth Opportunities Over the last decade, Falconbridge has assembled a significant portfolio of growth projects. Some are closer to its operations and easier to execute (e.g. brownfield projects); others are new projects unrelated to existing operations (e.g. greenfield projects).

Projects in Development Kidd Mine D, Timmins, Canada – (See page 35). Collahuasi Molybdenum Plant, Chile – (See page 33).

Brownfield projects NICKEL Nickel Rim South, Sudbury, Canada – This is a high-grade deposit, which was discovered in 2001, and is located close to existing operations. The updated inferred mineral resource estimate as of December 31, 2004, is 13.4 million tonnes of 1.8% nickel, 3.3% copper and significant palladium and platinum. In the first quarter of 2004, a five-year, $368 million underground definition program was approved, and site work is now in progress in preparation for shaft sinking, which began in the first quarter of 2005. This project has progressed on schedule and within budget. Once completed, a further $185 million will be required to bring the mine into production. After taking into account pre-production revenues of $141 million, the overall net capital cost is estimated at $412 million. Full production at Nickel Rim South is expected in late 2009 or early 2010.

Fraser Morgan, Sudbury, Canada – This deposit was discovered in 2001 and is accessible from existing Fraser Mine infrastructure. Exploration results were encouraging in 2004, with diamond drilling at the Fraser Mine resulting in measured resources of 3.3 million tonnes of 1.85% nickel and 0.61% copper, indicated mineral resources of 1.6 million tonnes of 1.69% nickel and 0.46% copper and inferred mineral resources of 2.1 million tonnes of 1.8% nickel and 0.5% copper. Diamond drilling continues in 2005.

Onaping Depth, Sudbury, Canada – Onaping Depth is a high-grade resource in Sudbury with 14.6 million tonnes of indicated high-grade resources at 2.52% nickel and 1.15% copper and inferred resources of 1.2 million tonnes at 3.6% nickel and 1.2% copper. This orebody, located below the Craig Mine, is accessible using Craig Mine infrastructure by deepening the existing shaft. In 2004, Falconbridge continued research on enabling technologies to mine safely at greater depths, and continues to make substantial progress.

Raglan, Nunavik, Quebec – The Company is evaluating the possibility of increasing annual production by 20% to 1.2 million tonnes of ore per year. A scoping study for this project is in progress. A focused exploration program continues on the Company’s large property holdings in the area of the Raglan mine.

COPPER Collahuasi, Chile – Currently the fourth-largest copper mine in the world, Collahuasi has sufficient reserves and resources for further expansion. A Phase II expansion was completed in 2004, and a Phase III expansion would increase copper production by approximately 175,000 tonnes, of which Falconbridge’s share would be 77,000 tonnes. This expansion would involve adding another grinding line and accelerating the production rate at the Rosario pit. A scoping study has been initiated to assess this growth opportunity, with start-up expected in 2007 at the earliest.

Lomas Bayas, Chile – The acquisition of an adjacent deposit, called Fortuna de Cobre, is being con- sidered. If developed, total annual production would increase by 50% to 90,000 tonnes and extend mine life by five years. A decision on the option to buy the deposit must be made by mid-2006.

Greenfield projects Kabanga, Tanzania – In early February 2004, Falconbridge and Barrick Gold Company reached a preliminary agreement under which Barrick would grant Falconbridge an option to acquire 50% of its interest in the Kabanga and Kagera nickel properties in Tanzania. Discussions on finalized terms are ongoing. Kabanga, located in western Tanzania about 1,500 kilometres from Dar Es Salaam,

MANAGEMENT’ S DISCUSSION AND ANALYSIS 37 has a high-grade mineral resource of more than 26 million tonnes at 2.6% nickel. Depending on the additional resources found during the exploration program, a mine could produce between 30,000 and 35,000 tonnes of nickel in concentrate annually.

Koniambo, New Caledonia – Work continued throughout the year on the Koniambo ferronickel project in the Northern Province of New Caledonia, near the provincial capital of Koné. At a 1.5% nickel cut-off grade, the deposit contains measured plus indicated resources totaling 142.1 million tonnes at 2.13% nickel. Together with additional inferred resources of 156.0 million tonnes at 2.2% nickel, Koniambo is one of the world’s largest and highest grade nickel laterite deposits. At a 2.0% nickel cut-off grade, the deposit contains measured plus indicated resources of 75.6 million tonnes at 2.47% nickel. In addition, the project has an inferred limonite resource estimated at 100 million tonnes at 1.6% nickel and 0.2% cobalt that could be developed at a later date. In 1998, Falconbridge entered into a joint-venture agreement with Société Minière du Sud Pacifique S.A. (SMSP) and its controlling shareholder, Société de Financement et d’Investissement de la Province Nord, for the evaluation and development of the 60,000 tonne-per-year nickel in ferronickel mining and smelting complex. By signing its joint-venture agreement with SMSP, Falconbridge became SMSP’s approved industrial partner under the Bercy Accord, with titles to the Koniambo orebody held in escrow until the conditions of the Bercy Accord are met. Upon satisfaction of the conditions in the Bercy Accord, SMSP and Falconbridge are to receive a 51% and 49% interest, respectively, in the project. The two conditions precedent are: 1) the completion of a positive technical study, and 2) firm orders of $100 million related to the project. These conditions must be met before the expiry of the Bercy Accord on January 1, 2006. The Bankable Feasibility Study (BFS) on the Koniambo ferronickel project in New Caledonia has now been completed. The BFS has increased the level of project definition, with engineering increasing from approximately 10% to 25%. Substantial analysis has been completed on many aspects of the project and included extensive third-party reviews. The project scope has remained essentially unchanged, with the work performed in the pre-feasibility study validated through the completion of the BFS. The costs of the inputs have increased as a result of changes in foreign currency exchange rates, and increased service and raw materials costs. As a result, the estimated capital cost of the project has increased to $2.2 billion. Working capital, cost escalation from 2004 to start-up, financing and arrangement fees and interest costs, for a total of approximately $500 million of other costs, are not included in the $2.2 billion. This cost estimate compares with a pre-feasibility estimate of $1.6 billion (in 2002 dollars). Estimated operating costs have increased to $1.65/lb., from $1.27/lb.

KEY ASSUMPTIONS FOR MINERAL RESOURCE AND RESERVE ESTIMATION Refer to Summary of Mineral Reserves and Mineral Resources on page 22 and Advanced Projects on page 36. Bulk density: The factor used to convert volume into tonnage. This factor is a function of the mineralogy and physical characteristics of a deposit. Formulae are developed using regression analyses on a suitably large number of individual determinations.

Cut-off grade: The grade that ensures the revenue from the metal content of the lowest grade parcel included in a deposit will be at least equal to the anticipated prime operating costs of producing this revenue. These costs include mining, milling, smelting, refining, selling and all transportation and administration costs. The cut-off grade will vary greatly from property to property due to a range of factors, including deposit size and shape, metal content and prime cost structure.

Exchange rate (US$ to Cdn$): 1.50

Long-term metal prices (US$ per pound): Nickel $3.25, Copper $0.90, Zinc $0.50

Minimum mining width: The smallest horizontal thickness used in an estimation based on the selected mining method and the mini- mum opening size required by mining equipment used. The grade across this minimum width must equal or exceed the cut-off grade.

Mining dilution*: All external material with grades lower than the cut-off grade that must be removed with the ore. The amount of this diluting material can vary considerably and depends upon mining method and the location, attitude, size, shape and wall rocks of the ore zone.

Mining recovery*: The proportion of the ore that is extracted after accounting for mining losses. The mining recovery can vary widely both within a single mine and from property to property, due to a range of factors, including deposit geometry and mining method.

*Used for mineral reserve estimation only.

38 FALCONBRIDGE • 2004 ANNUAL REPORT The capital cost of $2.2 billion includes the construction of a $600 million power station with an installed generating capacity of 390 MW. The remaining $1.6 billion relates to the metallurgical plant, mine development, and other infrastructure such as the port and road facilities. With the bankable feasibility study completed, the Company, with its partner SMSP and the French government, is focused on finalizing the financing structure for this project. The imple- mentation approach to this project continues to be assessed, with earliest possible start-up in 2009. If developed, Koniambo would be one of the largest nickel producers in the world with initial production of 60,000 tonnes per year. In addition, future expansion could take advantage of the large resource base, which has an estimated life in excess of 50 years.

EXPLORATION The objectives of the exploration team are aligned with those of the nickel and copper business units and are consistent with the corporate strategy of focusing primarily on copper and nickel growth opportunities worldwide. The philosophy adopted of consistently being a fair and honest partner by exhibiting strong technical skills and a solid track record with a “win-win” philosophy is consistent with the aim of being the most valued and sought-after partner in the mining and metals business. Joint-venture arrangements are pursued with both junior and senior mining companies to increase the level of focused exploration activity, thereby sharing cost and risk and improving the likelihood of success. The exploration team has the backing of an experienced mergers and acquisitions team and a capable project engineering team with a track record of building mines around the world. As a Founding Patron of the Association of Professional Geoscientists of Ontario and a Founding Partner of the Prospector and Developers Association’s Environmental Excellence in Exploration initiative, the team of geoscientists is committed to being fully compliant with National Instrument 43-101 requirements and in consistently conducting safe and environmentally responsible exploration worldwide. The forecast exploration expenditure for 2005 is $26 million including capitalized expenditures, compared to $25 million invested in 2004. Exploration activity is primarily focused on Canada, Brazil, Norway, Australia, and Africa. At Sudbury, the Nickel Rim South discovery has an estimated inferred mineral resource of 13.4 million tonnes of 1.8% nickel, 3.3% copper, 0.04% cobalt, 1.8 grams/tonne platinum, 2.0 grams/tonne palladium and 0.8 grams/tonne gold. Drilling on the Fraser Morgan zones in an area east of Fraser Mine has increased the mineral resources to 4.9 million tonnes of indicated resources at 1.80% nickel, 0.56% copper and 0.06% cobalt, plus inferred resources totaling 2.1 million tonnes of 1.8% nickel, 0.5% copper and 0.1% cobalt. This increased total includes 1.1 million tonnes of inferred resources at 2.1% nickel and 0.7% copper in the new Zone 11 discovery located 600 metres to the east of Zone 9. At Raglan, 1.9 million tonnes of mineral resources have been discovered as a result of the 2004 exploration program. This gain was offset by 2004 mine production and a mineral reserve write-down associated with the re-estimation of historical polygonal mineral reserves at Donaldson and East Lake. In the Espedalen area, 180 kilometres north-northwest of Oslo, Norway, diamond drilling has resulted in the greenfields discovery of significant new nickel sulphide mineralization referred to as the Stormyra discovery. Diamond drill hole ES2004-08 intersected 2.7 metres of 2.07% nickel and 1.20% copper at a depth of 56 metres. It is located approximately 200 metres along strike from drill hole ES2004-09 which intersected 14.6 metres of 1.73% nickel and 0.77% copper at a depth of 93 metres. Diamond drilling will resume during the first quarter of 2005. This is a joint venture with Blackstone Ventures Inc. At Collahuasi in Chile, diamond drilling of geophysical anomalies in the La Grande area, immediately southwest and south of the Rosario pit, has been encouraging. The immediate objectives of the ongoing exploration program are to better define La Grande mineralization to determine the economic potential of the zone and modifications, if any, to the mine plan. Assays have been received from two holes:

MANAGEMENT’ S DISCUSSION AND ANALYSIS 39 Hole From To Metres % Cu GC221 130 180 50 0.98 and 234 631 397 0.85 including 282 458 175 1.15 GC226 405 487 82 1.43

ENERGY In 2004, energy costs represented approximately 28% of the cash cost breakdown for all of Falconbridge’s operations. Significant quantities of electricity, natural gas, and petroleum products are procured from commodities markets and regulated energy providers in the U.S., Canada, Norway, the Gulf of Mexico and Chile. The Company’sprofitability is sensitive to energy prices. A corporate risk management committee stewards the procurement of energy from commodities markets in order to minimize price volatility and supply risk. Of particular concern in the mid term, are the sustained increases of average world oil prices, North American and European electricity prices, and North American natural gas prices. A formal strategy focused on building the capacity to manage energy use throughout Falconbridge’s operations is being implemented on a site-by-site basis. Within the implementation phase, employees are engaged at all levels through involvement in awareness workshops, and energy indicators are being developed to support the ability of operations to control energy consumption. In addition to the company-wide energy intensity improvement target of 1% per year, each facility establishes an annual energy cost reduction target. Six Sigma methodology and energy efficiency engineering practices are used to take actions to more effectively use energy and reduce energy costs. Examples of success include the improved efficiency of the power plant at operations in the Dominican Republic, the sale of recovered waste heat to the local community from the Norwegian refinery, and the reduction of energy used for ventilation at Sudbury mines.

SUSTAINABLE DEVELOPMENT Falconbridge is a strong proponent of sustainable development where economic prosperity, environmental quality and social equity drive business activities. This commitment is reflected in the Company’s Sustainable Development Policy. Providing a safe and healthy workplace is a priority at Falconbridge. Operations continue to implement effective safety training programs and management systems. Safety performance is strongly supported by senior management and the Board of Directors. Under the 2004 Safety, Health and Leadership program, four Falconbridge operations were visited by senior management to assess, promote and reinforce the importance of a safe workplace. These initiatives, among others, have resulted in enhanced safety performance in 2004 as the lost-time injury frequency (a measure of the number of compensable injuries per 200,000 hours worked) declined to 1.12 versus 1.26 in 2003. For more details on our progress towards sustainable development, please refer to the 2004 Noranda Inc./Falconbridge Limited Sustainable Development Report, which is available on the Company’s website.

SELECTED FINANCIAL DATA ($ MILLIONS, EXCEPT PER SHARE DATA) Years ended December 31 2004 2003 2002 Total revenues 3,070 2,083 1,525 Income 672 191 52 Basic net income per share (US$) 3.71 1.03 0.25 Diluted net income per share (US$) 3.69 1.02 0.24 Total assets 5,118 4,172 3,453 Long-term debt 1,437 1,427 1,280 Cash dividends declared – Common Shares (Cdn$) 0.40 0.40 0.40 – Common Shares (US$ equivalent) 0.31 0.29 0.25 – Preferred Share Series 1 (Cdn$) 0.08 0.08 0.08 – Preferred Share Series 2 (Cdn$) 0.7397 1.4688 1.4688 – Preferred Share Series 3 (Cdn$) 0.8589 ——

40 FALCONBRIDGE • 2004 ANNUAL REPORT Earnings were $672 million for the year ended December 31, 2004 compared to earnings of $191 million for 2003. The increase of $481 million is attributable to the following: ■ Higher realized prices for nickel, copper, zinc, cobalt, platinum, silver and sulphuric acid. ■ Higher sales volumes for copper, cobalt, precious metals and zinc, offset by lower sales volumes for nickel and silver. ■ Lower interest expense resulting from increased interest income due to higher cash balances and higher capitalized interest related to projects.

The above favourable items were offset by the following: ■ Higher mining costs and higher acquisition costs for custom feed. ■ The impact of a stronger Canadian dollar, relative to the U.S. dollar, on Canadian mining and administrative costs. ■ Higher income and mining taxes attributable to higher income in 2004 relative to 2003.

SUMMARY OF QUARTERLY RESULTS

December 31, September 30, June 30, March 31, (UNAUDITED – $ MILLIONS, EXCEPT PER SHARE DATA) 2004 2003 2004 2003 2004 2003 2004 2003 Total revenues 876 636 756 485 704 490 734 472 Earnings 194 95 155 19 139 39 184 38 Basic net income per share (US$) 1.07 0.52 0.85 0.10 0.77 0.21 1.02 0.20 Diluted net income per share (US$) 1.07 0.51 0.85 0.10 0.76 0.21 1.01 0.20

The financial results for the last eight quarters reflect rising realized prices for nickel, copper, zinc, cobalt, platinum, silver and acid, higher sales volumes for copper, cobalt, zinc, precious metals and acid, offset by lower sales volumes for nickel and silver and rising cash costs. These trends are discussed elsewhere in this report.

LIQUIDITY AND CAPITAL RESOURCES The Company’s cash position and changes in cash for the year ended December 31, 2004 compared to the year ended December 31, 2003 are summarized below:

($ MILLIONS) Years ended December 31 2004 2003 Cash provided by operating activities $ 968 $ 444 Cash used in investing activities (573) (388) Cash (used in) provided by financing activities (48) 77 Cash provided during the year 347 133 Cash and cash equivalents, beginning of the year 298 165 Cash and cash equivalents, end of the year $ 645 $ 298

Liquidity and Cash Flow Consolidated cash and cash equivalents increased by $347 million to $645 million at December 31, 2004. These items were invested primarily in high-quality short-term money market instruments and liquidity funds. During 2004, the Company’s balance sheet improved as the ratio of net debt to net debt plus equity improved to 24% from 37% at the end of 2003. Falconbridge has significant liquidity and financial flexibility, including unused bank lines of credit totaling $457 million. As a result, the Company has unused credit and cash available in excess of $1 billion. The Company has a $200 million debenture maturing on September 1, 2005. Working capital increased to $933 million at the end of December 2004 from $649 million at the end of December 2003. Cash generated from operations before working capital changes totaled $1,067 million at December 31, 2004, compared with $445 million at year-end 2003. The ratio of current assets to current liabilities was 2.5:1 at December 31, 2004. Based on planned production levels, estimated LME prices and forecasted Canadian/U.S. dollar exchange rates, it is anticipated that funds provided from operations, available cash, and proceeds from existing lines of credit will be sufficient to finance committed obligations, planned capital expenditures in 2005 and the dividends declared to date.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 41 SIGNIFICANT FUTURE OBLIGATIONS The following table sets out Falconbridge’s significant contractual obligations, as of December 31, 2004, for the period indicated:

($ MILLIONS) Significant future obligations by year Nature of obligation 2005 2006 2007 2008 2009 Thereafter Total Long-term debt 248 305 55 208 40 581 1,437 Asset retirement obligation 11 6 5 7 7 434 470 Operating leases 222221626 Total contractual obligations 261 313 62 217 49 1,031 1,933

Outstanding Indebtedness Total debt at December 31, 2004 was $1,437 million, compared to $1,427 million at the end of 2003. The $10 million increase was the result of a foreign exchange loss on Canadian dollar denominated debt, due to the strengthening of the Canadian currency. The current portion of long- term debt is $248 million. The ratio of net debt (debt minus cash and temporary investments) to net debt plus equity improved to 24% at the end of 2004 from 37% at the end of 2003.

Capital Resources and Financial Flexibility The Company believes that both a conservative financial structure and financial flexibility are important in order to accommodate the capital intensive and cyclical nature of the business. The Company has three-year committed revolving Credit Facilities with various banks totaling $475 million at December 31, 2004. Borrowings may be in many forms including Letters of Credit, which offset amounts available under certain Credit Facilities. As at December 31, 2004 the Company had no borrowings and had drawn Letters of Credit totaling $18 million. The Company also has additional Letters of Credit outstanding of $17 million. The Company has a Commercial Paper Program. Unused lines of credit and cash on hand are used to support the Commercial Paper Program. As at December 31, 2004 the Company had no Commercial Paper outstanding.

Capital Expenditures and Deferred Project Costs Expenditures in 2004 were directed towards development of Mine D at the Kidd Mining division, the Montcalm and Nickel Rim South projects at the INO division, evaluation work at Koniambo and to maintain and improve productive capacity at all locations. Expenditures for 2005 will primarily be used for the continued development of Mine D at Kidd, the development of the Nickel Rim South and Fraser Morgan projects, the Raglan Optimization project, continued evaluation work at Koniambo and to maintain and improve production capacity at all locations. Expenditures will be financed from internal sources and existing lines of credit. Expen- ditures for Canadian projects have been adversely impacted by the strengthening Canadian dollar. The following table summarizes the expenditures incurred or planned for the periods indicated:

($ MILLIONS) 2005F 2004 2003 Investment projects Nickel Montcalm 3 59 5 Koniambo 100 57 34 Nickel Rim South 61 96 5 Fraser Morgan 30 — — Raglan 21 — —

Copper Kidd 86 127 85 Collahuasi 18 65 151

Maintenance and other 181 169 90 500 573 370

42 FALCONBRIDGE • 2004 ANNUAL REPORT OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any unconsolidated affiliates. There are no off-balance sheet arrange- ments with special purpose entities in the normal course of business. The only significant off- balance sheet arrangements consist of Canadian dollar expenditure hedges discussed under the heading Financial Instruments and Other Instruments (page 48).

TRANSACTIONS WITH RELATED PARTIES At December 31, 2004 Noranda Inc. (Noranda) owned, directly and indirectly, approximately 58.8% of Falconbridge’s common shares. During 2002, a process was initiated to integrate certain operations of Noranda and Falconbridge with the objective of reducing costs and further extracting value from the respective assets. The initiatives undertaken have included the combination of various corporate support services and greater coordination between operations. Arrangements between Falconbridge and the Noranda Group of Companies are negotiated in the best interest of both parties, on an arm’s length basis at market terms. Falconbridge has entered into an agreement with a subsidiary of Noranda, whereby it acts as a sales agent for all products, other than sulphuric acid and indium, produced at Falconbridge’s Kidd Creek operations. Falconbridge has entered into a supply agreement with another subsidiary of Noranda, which will purchase and resell Falconbridge’s output of sulphuric acid. Accounts and metals settlements receivable, in the Consolidated Statements of Financial Position, include $43 million (2003 – $30 million) in receivables from Noranda relating to amounts being collected under the sales agreements and $nil (2003 – $13 million) from net purchases of material by Noranda. Falconbridge has agreements with various Noranda Group of Companies for the purchase of custom feeds; the toll treatment of copper concentrates, blister copper and refinery slimes; and the sale of metals. The following table details related party production and marketing transactions with Noranda Group of Companies:

($ MILLIONS) Years ended December 31 2004 2003 Sale of materials and technology to Noranda(a) 121 98 Purchase of materials from and smelting and refining fees paid to Noranda(b) 140 159 Commissions and agency fees paid to Noranda(c) 1 1 Net fees received relating to sulphuric acid from Noranda(a) 7 2

Included in Falconbridge’s Consolidated Statements of Earnings in (a) Revenues; (b) Cost of metal and other product sales; (c) Selling, general and administrative.

PROPOSED TRANSACTIONS During the third quarter of 2004, Noranda, 58.8% owner of Falconbridge, announced that it had entered into exclusive negotiations with China Minmetals Corporation concerning a proposal from Minmetals to acquire 100% of the outstanding common shares of Noranda. Falconbridge under- stands that Noranda’s exclusive negotiations with China Minmetals ended in December 2004 and continue on a non-exclusive basis. There are no other significant proposed transactions that have not been discussed elsewhere in this document.

FOURTH QUARTER RESULTS OVERVIEW Earnings of $194 million ($1.07 per common share on a basic and diluted basis) were reported for the fourth quarter of 2004, compared to $95 million ($0.52 and $0.51 on a basic and diluted basis, respectively) for the fourth quarter of 2003. Increased copper sales volumes of 21% over the fourth quarter of 2003 combined with the continued strong pricing environment led to this significant year-over-year increase. Fourth quarter operating income totaled $277 million, compared with operating income of $157 million for the same period of 2003. Consolidated revenues of $876 million increased from $636 million in the fourth quarter of 2003. Both increases reflect higher average realized nickel, copper and zinc prices, which were up 16%, 50% and 13%, respectively, assisted by higher copper sales volumes, offset by the impact of a higher U.S./Canadian exchange rate on Canadian operating

MANAGEMENT’ S DISCUSSION AND ANALYSIS 43 costs. Corporate costs of $11 million compared to $14 million in the same period last year. During the quarter, cash flow from operations before working capital improved to $308 million, compared to $164 million for the corresponding period of 2003. Metal prices were volatile in the fourth quarter and the Company believes that the volatility will continue throughout 2005; however, market fundamentals remain strong. Many of the same economic factors that are contributing to the current metal price environment are also contributing to increased input costs for Falconbridge’s operations and projects. Increases for energy and contractor labour, combined with the negative impact of foreign exchange on those costs, detract from the pricing gains.

CRITICAL ACCOUNTING ESTIMATES Management is required to make estimates in preparing its financial statements in conformity with Canadian GAAP. These estimates affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes to these estimates would result in material changes to these line items. The critical accounting estimates made by Falconbridge relate to its accounting for the following items: ■ Property, plant and equipment – The determination of mineral reserves – Impairment assessments of long-lived assets – Depreciation and amortization of property, plant and equipment ■ Employee future benefits ■ Asset retirement obligations ■ Income and mining taxes

Property, Plant and Equipment As of December 31, 2004, property, plant and equipment, with a carrying value of $3 billion, represented 62% of Falconbridge’s asset base. As such, the estimates used in accounting for property, plant and equipment and the related depreciation and amortization charges are critical and have a material impact on its financial condition and earnings. Property, plant and equipment and related capitalized interest and development and pre-production expenditures are recorded at cost and in addition, include the fair value amount related to asset retirement obligations. Property, plant and equipment are subject to impairment testing as discussed below.

Determination of Mineral Reserves One of the most significant estimates which impacts the accounting for property, plant and equipment and the related depreciation and amortization, is the estimate of proven and probable ore reserves. The process of estimating reserves is complex; requiring significant assumptions, estimates and decisions regarding economic (i.e. metal prices, production costs, and exchange rates), engineering, geophysical and geological data. A material revision to existing reserve estimates could occur because of changes to any of these inputs. Changes in reserves could result in impairment of the carrying amount of property, plant and equipment (see below) and a change in amortization expense (see below).

Impairment Assessments of Long-lived Assets A review and evaluation of long-lived assets for impairment is undertaken when events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no impairment losses on long-lived assets incurred in 2003 and 2004. Asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured and recorded based on recoverable minerals, expected commodity prices (considering current and historical prices, price trends and related factors), production levels, availability of custom feed, capital and reclamation costs, all based on detailed life-of-mine plans. The term “recoverable minerals” refers to the estimated amount of metal that will be obtained from proven and probable ore/mineral reserves, as well as value attributed to measured and indicated mineral resources, after taking into account losses during ore processing and treatment. Significant management judgment is involved in estimating these factors, which include inherent risks and uncertainties. The assumptions used are consistent with internal planning. Management periodically evaluates and updates the estimates

44 FALCONBRIDGE • 2004 ANNUAL REPORT based on the conditions that influence these factors. The variability of these factors depends on a number of conditions, including uncertainty about future events, and thus accounting estimates may change from period to period. If other assumptions and estimates had been used in the current period, the asset balances could have been materially impacted. If management uses different assumptions or if different conditions occur in future periods, future operating results could be materially impacted. In estimating future cash flows, assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups, taking into consideration movements of intermediate products to ensure the utilization of available capacity across operations. All assets at a particular operation are considered together for purposes of estimating future cash flows.

Depreciation and Amortization of Property, Plant and Equipment The Company generally depreciates plant and equipment on a straight-line basis over the lesser of their useful service lives or the lives of the producing mines to which they relate. At the Kidd Creek operations, mine facilities are amortized over the estimated lives of the mines based on the unit of production basis. Amortization of resource properties is provided over the estimated lives of the resources recoverable from the properties on the unit of production basis. Development and pre-production expenditures, together with certain subsequent capitalized development expendi- tures, are amortized over periods not exceeding the lives of the producing mines and properties. The most critical estimate which impacts the above accounting policy is the estimated quantity of proven and probable mineral reserves, which is the underlying basis for the calculation of the amortization of resource properties using the unit of production method. Changes in the quantity of reserves would result in changes in amortization expense in the periods subsequent to the revision.

Employee Future Benefits Pension fund assets are valued at fair market value. The expected return on plan assets, currently 7%, is based on current bond yields and expected long-term rate of return on equities. The long- term rate of return on assets assumption is reviewed on an annual basis. Plan obligations are determined as a present value of future anticipated cash flows using a discount rate that reflects the market yields, as of the measurement date, on high quality debt instruments with cash flows that match expected benefit payments. Differences between the estimated future results and actual future results are amortized (to the extent that the cumulative experience gain or loss is in excess of the permitted 10% corridor under Canadian GAAP) over the expected average remaining service life (EARSL) of the active members. This 10% corridor represents 10% of the greater of the post-retirement benefit obligations and the fair value of plan assets. The discount rate, salary and inflation assumptions used to value the plan obligations are reviewed annually and are determined based on a consistent framework from year to year. The most significant risk is that the assumption will prove to be either too high or too low in the long term. It is reasonable to assume that there will be a significant variation between the assumptions (which are set within the framework of a long-term commitment) and actual experience in any one year, but are expected to produce an appropriate reflection of costs over the long term. For post-employment benefits other than pensions, the discount rate is the same as for pensions. The inflation rate assumed for medical costs is based on the Company’s history of health care spend- ing. The assumption for the ultimate health care trend rates relates to the overall economic trends. Falconbridge currently estimates that a 0.5% increase or decrease in the return on assets assumption would result in a corresponding $4 million decrease or increase in annual pension expense. Changes to the return on asset assumption would have no significant effect on funding requirements, as contributions are primarily determined based on the applicable Canadian regulatory solvency funding requirements. Under this valuation methodology, liabilities for solvency valuation are based on market bond yields and the excess of liabilities over assets must be amortized over a five-year period. Falconbridge estimates that a 0.5% increase or decrease in the discount rate assumption would result in a corresponding $3 million decrease or increase in the pension expense.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 45 Asset Retirement Obligations (ARO) As a result of mining activities, Falconbridge incurs legal obligations associated with the retirement of tangible long-lived assets, from the acquisition, construction, development or normal operations of those assets, which an entity is required to settle as a result of an existing or enacted law or contract. CICA 3110 ARO, which was adopted January 1, 2004, requires that, when a legal obliga- tion is incurred, Falconbridge records as a liability the fair value of its estimated asset retirement obligations and a corresponding increase to the carrying amount of the related asset. The liability is accreted to full value over time through a charge to earnings. The asset is depreciated over the useful life of the associated asset. The fair value of the obligation as of December 31, 2004 was $149 million. Period-to-period adjustments due to circumstances or changes in estimates are recorded as determined. The fair value of these obligations is determined by discounting the projected cash flows required to settle the legal obligations at a credit adjusted risk free interest rate over the time periods over which the obligations were incurred. The future cash flows required to settle the obligations were determined by detailed engineering and environmental reviews assuming the most probable outcome based on present facts, circumstances and legislation. Critical estimates and judgments were made by management in the determination of the fair value of the obligation. Cash outflows to settle these obligations will be incurred during periods ranging from 1 to 62 years. Due to the combined effect of the uncertainty associated with such extended time periods, the estimated discount and inflation factors, and potential changes to applicable legislation, the fair value of the asset retirement obligations could materially change from period to period impacting the amount charged to operations. Under the accounting standard, a provision for asset retirement is not required to be recorded for assets with indeterminate lives until such time as sufficient information exists to estimate a range of settlement dates. As such, although the Company will be subject to asset retirement obligations for its refinery in Norway, its power plant at Falcondo, as well as for the metallurgical facilities at Sudbury and Kidd Creek, these assets are not included in the provision for asset retirement as sufficient information is not available at this time to estimate the timing of the settlement.

Income and Mining Taxes The provision or relief for income taxes is calculated based on the expected tax treatment of transactions recorded in the Company’s Consolidated Financial Statements. The objectives of accounting for income and mining taxes are to recognize the amount of taxes payable or refund- able for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in Falconbridge’s Consolidated Financial Statements or tax returns. In determining both the current and future components of income and mining taxes, the Company interprets tax legislation in a variety of jurisdictions, as well as makes assumptions about the expected timing of the reversal of future tax assets and liabilities. The Company also makes assumptions about the repatriation of its earnings or their redeployment offshore and the related withholding taxes thereon. If the interpretations or assumptions differ from those of tax authorities or if the timing of reversals is not anticipated, the provision or relief for income and mining taxes could increase or decrease in future periods. In estimating deferred income and mining tax assets, a valuation allowance is determined to reduce the future income tax assets to the amount that is more likely than not to be realized.

CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION Effective January 1, 2004, the Company adopted four new accounting standards and guidelines issued by the Canadian Institute of Chartered Accountants: Asset Retirement Obligations (CICA 3110), Hedging Relationships (AcG 13), Impairment of Long-lived Assets (CICA 3063) and Generally Accepted Accounting Principles (CICA 1100) .

Asset Retirement Obligations Under the previous policy, costs related to ongoing site restoration programs were expensed when incurred, while a provision for mine closure and site closure costs was charged to earnings over the life of the operations. Under the new standard, a long-term obligation, and corresponding increase

46 FALCONBRIDGE • 2004 ANNUAL REPORT to the carrying amount of the related asset, equal to the fair value of the legal obligation for asset retirement, determined at the date of adoption, was recorded. The key assumptions on which the fair value of the asset retirement obligations is based include the estimated future cash flows, the timing of those cash flows, and the credit-adjusted risk-free rate or rates at which the estimated cash flows have been discounted. The Company uses discount rates ranging from 5.0% to 6.5%. Under the accounting standard, a provision for asset retirement is not required to be recorded for assets with indeterminate lives until such time as sufficient information exists to estimate a range of settlement dates. As such, although the Company will be subject to asset retirement obligations for its refinery in Norway, its power plant at Falcondo, as well as for the metallurgical facilities at Sudbury and Kidd Creek, these assets are not included in the provision for asset retirement, as sufficient information is not available at this time to estimate the timing of settlement. As of December 31, 2004, with respect to the Company’s other asset retirement obligations, undiscounted cash outflows approximating $470 million are expected to occur over a period ranging from 1 to 62 years. The asset is being depreciated and charged to depreciation expense over the life of the associated asset. Interest on the obligation is being accreted with a corresponding charge to operating income. This standard has been applied retroactively with restatement of prior years. As of January 1, 2003, the cumulative impact of the adoption of the standard was to increase retained earnings by $14 million, increase property, plant and equipment by $69 million, increase accumulated depreciation by $13 million, increase the provision for asset retirement by $37 million, and increase future income taxes by $5 million. The adoption of this standard resulted in a decrease of $3 million to previously reported earnings for the year ended December 31, 2003. Consequently, the effect of this restatement on previously reported basic earnings per common share is a decrease of $0.02.

Hedging Relationships As of January 1, 2004, the Company adopted CICA guideline AcG 13 which establishes new standards for when hedge accounting may be applied. This standard is applied prospectively without restatement of prior period results. Under the provisions of the guideline, the Company’s interest rate swaps were deemed to be in a hedging relationship, as a fair value hedge of a portion of the Company’s debt, prior to, but not as at, the date of the guideline’s implementation. As such, on January 1, 2004, the Company recorded a deferred mark-to-market gain of $27 million on its interest rate hedges, while recording a long-term receivable and a long-term payable of $67 million and $40 million, for those contracts in a gain and loss position, respectively. Under the provision of the standard, the mark-to-market gain is amortized into income, as a reduction of interest expense, over the life of the underlying hedged debt. For the year ended December 31, 2004, $7 million of this deferred gain was amortized into income as an adjustment of interest expense. Subsequent to the implementation of the guideline, the Company has to prove hedge effectiveness in order to qualify for hedge accounting. The Company’s interest rate swaps did not qualify for hedge accounting until April 22, 2004. Upon qualification for hedge accounting, the long-term receivable and long-term payable, representing the fair value of the qualified hedges on April 22, 2004, are amortized into interest expense. For the year ended December 31, 2004, the Company recorded a mark-to-market loss of $1 million for those contracts that were not eligible for hedge accounting. For contracts that qualify for hedge accounting, the net interest received/paid on those positions is shown as a reduction from/addition to interest on the statement of earnings. For contracts that do not qualify for hedge accounting or for those which the Company does not seek hedge accounting, the net interest received/paid on those positions is not shown as a reduction from/addition to interest, on the statement of earnings, but as a component of other expenses/(income), together with the change in fair value of those contracts during the period. For energy price hedge contracts that were not eligible for hedge accounting, Falconbridge recorded at January 1, 2004, a deferred mark-to-market gain of $3 million. $2 million of this deferred gain was amortized into income during the year ended December 31, 2004. In addition, Falconbridge recorded a $1 million mark-to-market gain on those contracts during the year ended December 31, 2004.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 47 Under the provisions of the new guideline, the Company continues to be eligible for hedge accounting for forward contracts and option contracts used as a currency hedge of Canadian dollar operating costs. Falconbridge did not seek hedge accounting for forward contracts and option contracts used as an economic currency hedge of Canadian dollar denominated monetary assets and liabilities. These contracts continue to be marked to market.

Impairment Of Long-Lived Assets CICA section 3063 establishes standards for the recognition, measurement and disclosure of the impairment of long-lived assets. This standard is effective for fiscal years commencing on or after April 1, 2003, and as such was implemented by Falconbridge effective January 1, 2004. Under the provision of the standard, a two-step process determines impairment of long-lived assets held for use. The first step determines whether impairment exists, and if so, the second step measures the amount of the impairment. Impairment exists if the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. The amount of the impairment loss is determined as the amount by which the long- lived asset’s carrying value exceeds its fair value. Falconbridge has not incurred an impairment loss on any of its long-lived assets as a result of the implementation of this standard.

Generally Accepted Accounting Principles Effective January 1, 2004, Falconbridge adopted CICA 1100 which establishes standards for financial reporting in accordance with generally accepted accounting principles. This section describes what constitutes Canadian generally accepted accounting principles and its sources. The standard provides guidance on sources to consult when selecting accounting principles and determining appropriate disclosure when a matter is not dealt with explicitly in the primary sources of generally accepted accounting principles. The effect of any change in accounting policy made on adopting this section is applied to events and transactions occurring after the date of the change and to any outstanding related balances existing at the date of the change. No cumulative catch-up adjustment is made to such balances. Implementation of this standard has had no significant impact on the Company.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS Falconbridge uses financial and other instruments in the following instances.

Foreign Currency Exposure Falconbridge uses forward foreign exchange and option contracts to hedge the effect of exchange rate changes on identifiable foreign currency exposures. Falconbridge hedges up to 50% of its one-year operating costs and up to 25% of its subsequent year’s operating costs, each on a rolling 12-month basis. Falconbridge may enter into futures and forward contracts for the purchase or sale of currencies not designated as hedges. These contracts are carried at estimated fair values and gains or losses arising from the changes in the market values of these contracts are recognized in the earnings of the period in which the changes occur. Fair value of forward contracts is calculated by comparing the contract rate to the market forward rate obtained from electronic market data sources. The fair value of options is provided by the Company’s counter-parties. A summary of these positions is tabled on page 49.

48 FALCONBRIDGE • 2004 ANNUAL REPORT As at December 31 2004 2003 Expenditure hedges Forward exchange contracts Canadian dollar expenditures US$ forward contracts (millions) 198 426 Average price (US$) 1.3835 1.4941 Contract amount (in Cdn$ millions) 274 636 Fair value (in US$ millions) 30 62 With maturity dates up to: December 2005

Chilean peso expenditures US$ forward contracts (millions) 9 47 Average price (US$) 708 726 Contract amount (in CHP millions) 6,538 34,238 Fair value (in US$ millions) 3 10 With maturity dates up to: September 2005

Norwegian kroner expenditures US$ forward contracts (millions) — 33 Average price (US$) — 7.9841 Contract amount (in NOK millions) — 267 Fair value (in US$ millions) — 6

Option contracts Canadian dollar expenditures Option amount (in Cdn$ millions) 50 30 Fair value (in US$ millions) 1 1 With maturity dates up to: December 2005

Norwegian kroner expenditures Option amount (in NOK millions) 135 210 Fair value (in US$ millions) 1 1 With maturity dates up to: September 2005

Falconbridge has foreign currency denominated monetary assets and liabilities denominated in currencies other than the U.S. dollar. The Company uses foreign currency forward contracts to offset the exposure from fluctuations in foreign exchange rates. The following is a summary of foreign currency forward contracts.

As at December 31 2004 2003 Balance sheet economic hedges Canadian dollar net liability exposure US$ forward contracts (millions) 429 385 Average price (US$) 1.2120 1.3236 Contract amount (in Cdn$ millions) 520 510 Fair value (in US$ millions) 3 9 With maturity dates up to: March 2005

Commodity Price Exposure Generally, Falconbridge does not hedge the price it realizes on the sale of its own production and accepts realizations based on market prices prevailing around the time of delivery of metals to customers. Under certain circumstances, Falconbridge enters into futures and option contracts to hedge the effect of price changes on a portion of the commodities it sells. Gains and losses on these contracts are reported as a component of the related transactions. Falconbridge may enter into futures and forward contracts for the purchase or sale of commodities not designated as hedges for accounting purposes. These contracts are carried at estimated fair values and gains or losses arising from the changes in the market values of these contracts are recognized in the earnings of the period in which the changes occur.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 49 Interest Rate Management Falconbridge also enters into interest rate swap contracts, including foreign exchange cross currency swaps, to modify the interest characteristics of its outstanding debt. The differential to be paid or received, for interest rate swaps for which hedge accounting is applied, is accrued and recognized as an adjustment to interest expense related to the debt. The net interest on other swaps is reflected in the financial statements as other expenses/(income). The fair value of interest rate swaps is provided by the Company’s counter-parties. A summary of these positions is tabled below:

Interest rate swap contracts at December 31, 2004 Total 1 Maturity (2005) 400 Maturity (2006) 325 Maturity (2008)2 136 Maturity (2012) 350 Maturity (2015) 150 Fair value3 66

1. Notional principal amount of maturities and fair value are in millions of U.S. dollars. 2. Includes cross currency interest rate swaps (with a notional amount of $111 million) designated as a hedge of our Canadian dollar debenture. The total fair value of these instruments at December 31, 2004 was $46 million of which $34 million related to the currency component of the swap and $12 million related to the interest component. 3. Includes the total fair value of $34 million related to the cross currency interest rate swap discussed above.

Energy Price Management Falconbridge hedges a portion of the cost of electricity of its operations in Canada and Norway. The following tables summarize outstanding contracts as of December 31, 2004:

Canadian electricity contracts 2005 2006 2007 Rate Cdn$/MWh 50.82 52.78 52.65 Amount (MW) 125 92 21 Fair value (in Cdn$ millions) 5 3 1

Norwegian electricity contracts 2005 2006 2007 2008 2009 Thereafter Rate NOK/MWh 183.5 191.4 198.5 205.8 211.1 215.1 Amount (MW) 55.9 55.9 50.9 45.9 45.9 20.2 Fair value (in NOK millions) 8 15 11 8 9 38

RECONCILIATION OF FINANCIAL MEASURES Reconciliation of Cost of Metal and Other Product Sales to Operating Cash Cost Per Pound The Company has included operating cash cost per pound of nickel and copper data in Manage- ment’s Discussion and Analysis because certain investors use this information to assess the Company’s performance and cash-generating capabilities. In addition, management uses this information to monitor cost performance relative to budget and prior periods. Operating cash cost per pound is a non-GAAP measure. These measurements are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP. Operating cash cost includes all cash production and selling costs, net of by-product credits, but excludes interest, corporate, exploration costs and custom feed profits. Costs incurred during shutdowns or strikes are excluded. The following table sets forth a reconciliation of operating cash cost per pound of nickel and copper to GAAP cost of sales for the periods indicated:

50 FALCONBRIDGE • 2004 ANNUAL REPORT (UNAUDITED – $ MILLIONS, EXCEPT PER LB. DATA) Years ended December 31 2004 2003 Operating Costs INO 831 669 Falcondo 210 177 Kidd Creek 447 405 Collahuasi 126 99 Lomas Bayas 68 63 Costs of metal and other product sales, as reported 1,682 1,413 Integrated Nickel Operations 831 669 By-product credits (206) (144) Delivery expense 5 5 Purchased feed costs (420) (271) Strike costs (14) — Canadian dollar cost hedges 35 16 Other operating costs 55 8 Cash costs 286 283 Production – Nickel recoverable (000s lbs.) 111,045 108,584 Cash cost per lb. nickel (US$) 2.57 2.64 Falcondo 210 177 Delivery expense 5 5 Other operating costs 12 0 Cash costs 227 182 Production – Nickel recoverable (000s lbs.) 64,985 60,025 Cash cost per lb. nickel (US$) 3.50 3.04 Kidd Creek 447 405 By-product credits (113) (65) Delivery expense 2 — Feed acquisition costs (269) (255) Canadian dollar cost hedges 15 — Other operating costs (2) (1) Cash costs 80 84 Production – Copper recoverable (000s lbs.) 87,133 99,636 Cash cost per lb. copper (US$) 0.93 0.83 Collahuasi 126 99 Delivery expense 27 13 Realization costs 57 39 Other operating costs (8) (4) Cash costs 202 147 Production – Copper recoverable (000s lbs.) 453,234 383,275 Cash cost per lb. copper (US$) 0.45 0.38 Lomas Bayas 68 63 Other operating costs 4 (3) Cash costs 72 60 Production – Copper recoverable (000s lbs.) 136,777 128,133 Cash cost per lb. copper (US$) 0.52 0.47

Net Debt to Net Debt Plus Equity Net debt to net debt plus equity is not a standardized measure recognized under Canadian GAAP. Non-GAAP financial measures do not have standard definitions and therefore, may not be comparable to similar measures presented by other issuers. The Company believes the presentation of this measure is relevant and useful for investors when assessing the Company’s liquidity. In addition, the Company uses this measure to better assess its ability for growth and investment. The data is intended to provide additional information and is not intended to be a substitute for measures of performance in accordance with Canadian GAAP. This measure is not necessarily indicative of the Company’s liquidity as determined by Canadian GAAP.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 51 A reconciliation of debt to debt plus equity, the most directly comparable Canadian GAAP measure, is provided below:

December 31 2004 2003 Long-term debt (including current portion) (a) 1,437 1,427 Cash and cash equivalents (645) (298) Net debt (b) 792 1,129 Shareholders’ equity (c) 2,563 1,938 Net debt plus equity (d) = (b + c) 3,355 3,067 Net debt to net debt plus equity (b/d) 24% 37% Total debt to total debt plus equity (a/(a + c)) 36% 42%

OUTSTANDING SHARE DATA

December 31 2004 2003 Common shares 179,770,190 178,792,492 Preferred Share Series 1 89,835 89,835 Preferred Share Series 2 4,787,283 7,910,165 Preferred Share Series 3 3,122,882 —

The number of common shares outstanding as of January 31, 2005 was 179,780,890.

MARKETS Nickel After moving above the $4.00/lb. level in the second half of 2003, the nickel price continued to rise and peaked at $8.06/lb. in early January of 2004. For the balance of the year, nickel prices remained volatile, oscillating within a range of $4.78/lb. to $7.53/lb., breaking the trend of the previous decade when the nickel price managed to stay above the $4.00/lb. level only briefly. The average LME cash-settlement price for 2004 was $6.28/lb., 44% above the average price of $4.37/lb. for 2003. The increase in nickel prices was driven by constrained supply of both primary nickel and stainless steel scrap and strong demand from the stainless-steel sector, particularly in China. Stainless steel production grew an estimated 8% in 2004. Strong market fundamentals were further supported by investment-fund interest and activity. A continued strengthening of the global economy bolstered other nickel end-use sectors as well, including the high-performance nickel alloys used in jet-engine turbines. By the start of summer, already low LME nickel inventories fell to critical levels just below 8,000 tonnes. High prices and tight availability caused Chinese traders and consumers to begin de-stocking and also resulted in increased quantities of stainless-steel scrap appearing on the market. Some stainless steel producers, particularly in Asia, shifted their production focus onto ferritic grades of stainless steel and/or grades with lower nickel content. This action alleviated the pressure on a tight primary nickel supply, and caused the forecast deficit for 2004 to be reduced to 5,000 tonnes from an initial forecast of 25,000 tonnes. LME inventories began to reflect this increased availability, as a steady trickle of small warehouse deposits brought the exchange stocks back up to 20,898 tonnes by the end of the year. At December 31, 2004, LME nickel inventories had declined by 3,180 tonnes from the beginning of the year.

(AVERAGE PRICES – IN US$) Realized by Falconbridge London Metal Exchange Pricing unit 2004 2003 2004 2003 Nickel pound $ 6.40 $ 4.40 $ 6.28 $ 4.37 Ferronickel pound 6.37 4.20 — — Copper pound 1.32 0.82 1.30 0.81 Zinc pound 0.51 0.41 0.48 0.38 Cobalt pound 22.48 9.42 22.36* 8.94*

*As per Metal Bulletin 99.3%

52 FALCONBRIDGE • 2004 ANNUAL REPORT Copper After breaking through the $1.00/lb. level at the end of 2003, the copper price continued to rise steadily, reaching a high of $1.41/lb. in early April. Copper prices then retracted to the $1.20 – $1.30/lb. range until late September, after which they regained momentum, rising to a high of $1.49/lb. at year end. The average LME cash-settlement price for 2004 was $1.30/lb., 60% above the average price of $0.81/lb. in 2003. In 2004, the copper market was characterized by extraordinarily strong global consumption growth that, despite supply growth, caused the supply/demand deficit to exceed one million tonnes. Global copper consumption is forecast to have grown a hefty 8.7%, as Western consump- tion staged a recovery. Chinese consumption growth, having receded in the previous year, still grew at a very robust 18% year over year. During the first few years of the decade, when prices were significantly lower, copper producers exhibited discipline and curtailed copper mine and refinery output. However, the rapid rise in copper prices, which began in late 2003, has led to the restart of de-activated production as well as the emergence of new brownfield and greenfield projects. Copper mine production rose sharply in 2004, spurred by the combination of mine restarts and expansion projects. An estimated 865,000 tonnes of additional mined production entered the market in 2004, mostly from brownfield expansions. Despite the increased mine production, refinery utilization rates still were constrained at around 85%, as a significant portion of the additional mined production was absorbed into concentrate pipelines and smelter stock replenishments. Despite the increases on the supply side, the strong demand for copper metal outpaced the additional supply, forcing consumers and merchants to draw down physical stocks and exchange stocks in order to fulfill their needs. By year end, LME stocks decreased 384,000 tonnes to 49,000 tonnes. Total LME, Comex and Shanghai exchange stocks decreased by 672,000 tonnes over the course of the year.

Cobalt The start of 2004 saw a further strong recovery in the cobalt price, as the late 2003 surge carried over, with prices for high-grade material at or above $25.00/lb. for the first half of the year. Prices were supported by strong demand from the battery sector, with growth primarily powered by cobalt- containing lithium ion batteries. Higher cobalt prices eventually led to some price-sensitive substitution in this sector. The second half of 2004 saw a steady decline in prices to $18.00/lb. as the seasonal summer slowdown persisted. This softening of prices was attributed primarily to a build-up of inventories at battery manufacturers in Japan. Japanese consumers over-estimated cobalt demand growth for 2004 and, in anticipation of tight supplies, committed to high levels of contracted off-take for the year. Continued growth in Chinese cobalt supply arising from imports of low-grade intermediate feeds from the Democratic Republic of Congo accentuated the impact of declining Chinese consumption in the second half of 2004. The result was a small supply surplus of approximately 430 tonnes at the end of 2004.

MARKET OUTLOOK Nickel Current nickel-market fundamentals project a tight market again in 2005, with an expected deficit of 10,000 tonnes. Nickel production is set to increase. However, with no major new projects expected to come on-stream until 2006, supply will remain constrained. On the demand side, stainless steel production growth is forecast at 6%, while the high-nickel-alloy market is also expected to grow at an accelerated rate. As stainless-steel scrap volumes have been drawn down, the availability of scrap is not anticipated to keep pace with new production. In China, rising nickel imports point to consumer restocking and improved demand. Given the continued outlook for strong nickel demand versus a backdrop of supply-side constraints and low inventories, the nickel price likely will remain volatile within a historically high range. Nickel prices should remain well supported, as the market remains vulnerable to supply-side disruptions.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 53 Copper As a result of the higher prices, global copper mine production is forecast to increase by a further 1.6 million tonnes in 2005, with the continued ramp-up of brownfield expansions and the commissioning of a number of greenfield projects. With supply pipelines replenished and improved concentrate availability, global refined metal production is also forecast to increase by 1.6 million tonnes. As global economic growth is projected to ease slightly in 2005, the growth in copper consumption is forecast to slow to 4%, reflecting moderating demand in China and the United States. The projected market deficit is currently 170,000 tonnes for the year, significantly less than in 2004. But copper prices can be expected to remain at historically high levels while the supply/demand deficit is projected to persist in 2005.

Cobalt The supply/demand prospects for cobalt for 2005 are anticipating a balanced market. Global demand is forecast to grow 6%, reflecting a strong recovery in super-alloy demand for turbine engine manufacture for aviation and power generation, and a resumption of demand growth in China. New production from the Coral Bay project in the Philippines, and moderate supply growth from low-grade intermediate feeds processed in China, will help supply keep pace with demand. Downward price movement is expected to extend into first quarter 2005, and until such time as inventories at battery manufacturers in Japan fall to normal levels.

TRENDS, RISKS AND UNCERTAINTIES Sensitivities Falconbridge’s earnings are primarily sensitive to changes in metal prices, exchange rates and energy prices. The following tables illustrate the impact of a change in these variables on operating income, earnings and cash flow. The impact of a change in either variable assumes the other variables remain constant. Impact on Change in Realized Operating ($ MILLIONS) Price (US$) Income Earnings(a) Cash Flow Nickel $0.50 per pound 70 50 65 Ferronickel 0.50 per pound 30 15 15 Copper 0.10 per pound 83 58 78 Zinc 0.05 per pound 13 9 12 Cobalt 1.00 per pound 4 3 4 Platinum and Palladium 100.00 per ounce 14 10 13 Silver 1.00 per ounce 8 5 7 Oil 1.00 per bbl 4 2 2

Exchange rate (US$ vs. Cdn$) Cdn$0.01 4 3 4

(a) Difference between earnings and cash flow relates to deferred tax amount

Falconbridge periodically uses foreign exchange and options contracts to hedge the effect of exchange rate changes on identifiable foreign currency exposures. The sensitivity table above reflects the impact of such currency hedges. In addition, Falconbridge may use futures and option contracts to hedge the effect of price changes on a portion of the metals it sells. The above sensitivities could accordingly be affected if such hedging programs were to be put in place.

Fluctuating Metal Prices As substantially all of Falconbridge’s revenues are derived from the sale of nickel, copper, cobalt and zinc, its earnings are directly related to fluctuations in the prices of these metals. The prices of these metals are subject to volatile price movements over short periods of time. Falconbridge generally does not hedge prices of the metals it produces. Market prices can be affected by numerous factors beyond Falconbridge’s control, including expectations for inflation, speculative activities, relative exchange rates to the U.S. dollar, production activities of Falconbridge’s competitors, global and regional demand and supply, political and economic conditions and production costs in major producing regions. The prices for nickel, copper or other metals

54 FALCONBRIDGE • 2004 ANNUAL REPORT produced by Falconbridge may decline significantly from current levels. A reduction in the prices of one or more of these metals could materially adversely affect the value and amount of Falconbridge’s reserves, business, financial condition, liquidity and operating results.

Mining and Processing Risks The business of mining and processing of metals is generally subject to a number of risks and hazards, including unusual or unexpected geological conditions, ground conditions, phenomena such as inclement weather conditions, floods and earthquakes and the handling of hazardous substances and emissions of contaminants. Such occurrences could result in personal injury or death, damage to, or destruction of, mineral properties, processing or production facilities or the environment, monetary losses and possible legal liability. Falconbridge’s business, financial condition, liquidity and operating results could be materially adversely affected if any of these developments were to occur. Although Falconbridge maintains insurance to cover some of these risks and hazards to the extent available that Falconbridge believes is consistent with the industry practice, no assurance can be given that such insurance will continue to be available, or that it will be available at economically feasible premiums. Falconbridge’s property, business interruption and liability insurance may not provide sufficient coverage for losses related to these or other risks or hazards. In such event, Falconbridge’s business, financial condition, liquidity and results of operations could be materially adversely affected.

Environmental Risks Environmental legislation affects nearly all aspects of Falconbridge’s operations worldwide. This type of legislation requires Falconbridge to obtain operating licences and imposes standards and controls on activities relating to mining, exploration, development, production, closure and the refining, distribution and marketing of nickel and other metals products. Environmental assessments are required before initiating most new products or undertaking significant changes to existing operations. Compliance with environmental legislation can require significant expenditures, including expenditures for clean-up costs and damages arising out of contaminated properties. In addition to current requirements, Falconbridge expects that additional environmental regulations will likely be implemented to protect the environment and quality of life, given issues of sustainable development and other similar requirements which governmental and supra- governmental organizations and other bodies have been pursuing. Some of the issues currently under review by environmental regulatory agencies include reducing or stabilizing various emissions, including sulphur dioxide and greenhouse gas emissions, mine reclamation and restoration, and water, air and soil quality and absolute liability for spills and exceedances. Canada ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change in late 2002. The protocol will enter into force in February of 2005. Various levels of governments in Canada are developing a number of policy measures in order to meet Canada’s emission reduction obligations under the protocol. While the impact of the protocol and measures cannot be quantified at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation, restrict industrial emission levels, impose added costs for emissions in excess of permitted levels and increase costs for monitoring, reporting and financial accounting. Compliance with these initiatives could have a material adverse effect on Falconbridge’s business, financial condition, liquidity and operating results. Further changes in environmental laws, new information on existing environmental conditions or other events, including legal proceedings based upon such conditions or an inability to obtain necessary permits, could have a material adverse effect on product demand, product quality and methods of production and distribution, or could require increased financial reserves or compliance expenditures or otherwise have a material adverse effect on Falconbridge’s business, financial condition, liquidity and operating results. Failure to comply with environmental legislation may result in the imposition of fines and penal- ties, liability for clean-up costs, damages and the loss of important permits. There can be no assurance that Falconbridge will at all times be in compliance with all environmental regulations or the steps to bring Falconbridge into compliance would not materially adversely affect Falconbridge’s business, financial condition, liquidity or operating results.

MANAGEMENT’ S DISCUSSION AND ANALYSIS 55 In view of the uncertainties concerning future removal and site restoration costs on Falconbridge’s properties, the ultimate costs for future removal and site restoration to Falconbridge could differ from the amounts estimated by Falconbridge. The estimate for this future liability is subject to change based on amendments to applicable laws and legislation, the nature of ongoing operations and technological innovations. Future changes, if any, due to their nature and unpredictability, could have a significant impact and would be reflected prospectively as a change in an accounting estimate. In addition, regulatory authorities in various jurisdictions around the world may require Falconbridge to post financial security to secure in whole or in part future reclamation and restoration obligations in such jurisdictions. In some instances, Falconbridge has already provided this security. In other instances, such security may be required to be posted upon the occurrence of certain events including if Falconbridge ceases to maintain a minimum investment grade credit rating, if the regulatory authority ceases to accept alternative forms of comfort to secure the obligation or as a property nears the end of its operation. Although the posting of this security does not increase the future reclamation and restoration costs (other than costs associated with posting such security), a portion of Falconbridge’s credit may be required to back up these commitments, which could affect Falconbridge’s liquidity.

Labour Relations Collective agreements covering Falconbridge’s hourly rated employees at Falconbridge’s Sudbury operations, Nikkelverk operations, Collahuasi operations, Kidd metallurgical division, Raglan mine, Falcondo operations and Lomas Bayas operations are currently in place. Two collective agreements will expire in 2005. The contract covering the production and maintenance employees at the Kidd Metallurgical site will expire on September 30, 2005. The contract covering the production and maintenance employees at Falcondo will expire on November 30, 2005. Collective agreements covering Falconbridge’s unionized workers at Raglan, Lomas Bayas, Sudbury division, Nikkelverk and Collahuasi will expire between 2006 and 2007. Falconbridge cannot predict at this time whether it will be able to reach new agreements with these employees upon expiry of their current agreements without a work stoppage. Any lengthy work interruptions could materially adversely affect Falconbridge’s business, financial condition, liquidity and results of operations.

Uncertainty of Reserve Estimates and Production Estimates Falconbridge’s reported mineral reserves as of year-end 2004 are estimated quantities of proven and probable ore that under present and anticipated conditions can be legally and economically mined and processed by the extraction of their mineral content. Falconbridge determines the amount of its mineral reserves in accordance with the requirements of the applicable Canadian securities regulatory authorities and established mining standards. Falconbridge does not use outside sources to verify its reserves. The volume and grade of reserves actually recovered and rates of production from Falconbridge’s present mineral reserves may be less than geological measurements of the reserves. Market price fluctuations in nickel, copper, other metals and exchange rates, and changes in operating and capital costs may in the future render certain mineral reserves uneconomic to mine. In addition, short-term operating factors relating to the mineral reserves, such as the need for orderly development of ore bodies or the processing of new or different ore grades, may cause mineral reserves to be modified or Falconbridge’s operations to be unprofitable in any particular fiscal period. No assurance can be given that the indicated amount of ore will be recovered or that it will be recovered at the prices assumed by Falconbridge in determining mineral reserves. Mineral reserve estimates are based on limited sampling and, consequently, are uncertain because the samples may not be representative of the entire orebody. As more knowledge and understanding of the orebody is obtained, the reserve estimates may change significantly, either positively or negatively. Falconbridge prepares estimates of future production for particular operations. These production estimates are based on, among other things, reserve estimates; assumptions regarding ground conditions and physical characteristics of ores, such as hardness and presence or absence of particular metallurgical characteristics; and estimated rates and costs of mining and processing. Falconbridge’s actual production may vary from estimates for a variety of reasons, including actual

56 FALCONBRIDGE • 2004 ANNUAL REPORT ore mined varying from estimates of grade, tonnage, dilution and metallurgical and other characteristics; short-term operating factors relating to the mineral reserves, such as the need for sequential development of ore bodies and the processing of new or different ore grades; risks and hazards associated with mining, natural phenomena, such as inclement weather conditions, floods, and earthquakes; and unexpected labour shortages or strikes. No assurance can be given that production estimates will be achieved. Failure to achieve production estimates could have a material adverse impact on Falconbridge’s future cash flows, earnings, results of operations and financial condition.

Exchange Rate Fluctuations Fluctuations in currency exchange rates, principally the Canadian/U.S. dollar exchange rate and, to a lesser extent, Norwegian kroner, Chilean peso, Euro, Japanese yen and other exchange rates, can significantly impact Falconbridge’s earnings and cash flows. These exchange rates have varied substantially over time, including over the last five years. Most of Falconbridge’s revenues and debt are denominated in U.S. dollars, whereas most of the operating costs at its Canadian sites are incurred in Canadian dollars. The costs at Falcondo, Lomas Bayas, and Collahuasi are incurred principally in U.S. dollars, although there are costs denominated in the domestic currency, while Nikkelverk’s costs are incurred in Norwegian kroner. Falconbridge’s Consolidated Financial Statements are expressed in U.S. dollars. Fluctuations in exchange rates between the U.S. dollar and the Canadian dollar and other currencies may give rise to foreign currency exposure, either favourable or unfavourable, which has materially impacted and may in the future materially impact Falconbridge’s financial results. Falconbridge from time to time hedges a portion of its Canadian dollar and other currency requirements to limit any adverse effect of exchange rate fluctuations with respect to Falconbridge’s Canadian dollar and other costs, but such hedges have not eliminated the potential material adverse effect of such fluctuations.

Interest Rate and Counter-Party Risk Falconbridge’s exposure to changes in interest rates results from investing and borrowing activities undertaken to manage its liquidity and capital requirements. Falconbridge has entered into interest rate swap agreements to manage the interest rate risk associated with a portion of its fixed-rate debt. The interest rate swap changes Falconbridge’s exposure to interest risk by effectively converting a portion of Falconbridge’s fixed-rate debt to a floating rate. At December 31, 2004, approximately $828 million, or 58% of Falconbridge’s total debt of $1,437 million, was subject to variable interest rates. Falconbridge may elect in the future to enter into interest rate swaps to effectively convert floating-rate debt to fixed-rate debt and enter into additional fixed-rate to floating-rate swaps. There can be no assurance that Falconbridge will not be materially adversely affected by interest rate changes in the future, notwithstanding its use of interest rate swaps. To the extent that interest rate hedges are not eligible for hedge accounting, mark-to-market changes will impact reported results of operations. In addition, Falconbridge’s interest rate swaps, metals hedging and foreign currency and energy risk management activities expose Falconbridge to the risk of default by the counter-parties to such arrangements. Any such default could have a material adverse effect on Falconbridge’s business, financial condition and results of operation. Foreign currency and interest rate swap contracts are maintained with counter-parties with at least an “A” rating or better by a recognized national rating agency. As a result, Falconbridge does not anticipate that any counter-parties will fail to meet their obligation. If any outstanding foreign exchange or interest rate swap is terminated prior to maturity, then the contract would be settled at the fair value at the time.

Energy Supply and Prices Falconbridge’s operations and facilities are intensive users of natural gas, electricity and oil. Procurement of these types of energy sources can be affected by numerous factors beyond Falconbridge’s control, including global and regional supply and demand, political and economic conditions and problems related to local production and delivery conditions. Falconbridge’s supply contracts typically provide that suppliers may be released from their delivery obligations to Falconbridge if certain “force majeure” events occur. Falconbridge’s business operations could be

MANAGEMENT’ S DISCUSSION AND ANALYSIS 57 adversely affected, including loss of production and damage to Falconbridge’s plants and equip- ment, if, even temporarily, the supply of energy to one or more of its facilities was interrupted. A prolonged shortage of supply of energy used in Falconbridge’s operations could materially adversely affect its business, financial condition, liquidity and results of operations. As a sig- nificant portion of Falconbridge’s costs relate to energy consumption, its earnings are directly related to fluctuations in the cost of natural gas, electricity and oil. Energy prices can be affected by numerous factors beyond Falconbridge’s control, including global and regional demand and supply, and applicable regulatory regimes. The prices for various sources of energy Falconbridge uses may increase significantly from current levels. An increase in energy prices could materially adversely affect Falconbridge’s business, financial condition, liquidity and operating results.

Foreign Operations A large portion of Falconbridge’s activities and related assets are located in countries outside North America, some of which may be considered to be, or may become, politically or economic- ally unstable. Exploration or development activities in such countries may require protracted negotiations with host governments, international organizations and other third parties, including non-governmental organizations, and are frequently subject to economic and political considera- tions, such as taxation, nationalization, inflation, currency fluctuations and governmental regulation and approval requirements, which could adversely affect the economics of projects. These projects and investments could be adversely affected by war, civil disturbances and activities of foreign governments which limit or disrupt markets, restrict the movement of funds or supplies or result in the restriction of contractual rights or the taking of property, without fair compensation. Falconbridge performs a thorough risk assessment on a country-by-country basis when considering foreign activities, and attempts to conduct its business and financial affairs so as to protect against political, legal, regulatory and economic risks applicable to operations in the various countries where it operates, but there can be no assurance that Falconbridge will be successful in so protecting itself. These projects and investments could also be adversely affected by changes in Canadian laws and regulations relating to foreign trade, investment and taxation.

Treatment and Refining Charges Falconbridge receives fees (treatment and refining charges) calculated in U.S. dollars for processing concentrate into refined metal. Fluctuations in these treatment and refining charges result primarily from changes in the supply of, and demand for, concentrate, finished metal and by-products, all of which are beyond Falconbridge’s control. A shortage in the supply of concentrate will generally have a negative impact on the treatment and refining charges Falconbridge realizes.

Legal Proceedings The nature of Falconbridge’s business subjects it to numerous regulatory investigations, claims, lawsuits and other proceedings in the ordinary course of Falconbridge’s business. The results of these legal proceedings cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on Falconbridge’s results of operations in any future period, and a substantial judgment could have a material adverse impact on Falconbridge’s business, financial condition, liquidity and results of operations.

ADDITIONAL INFORMATION Additional information relating to Falconbridge, including Falconbridge’s annual information form, is on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

58 FALCONBRIDGE • 2004 ANNUAL REPORT Accounting Responsibilities, Procedures and Policies

The Board of Directors which, among other things, is responsible for Falconbridge’s Consolidated Financial Statements, delegates to management the responsibility for the preparation of the state- ments. Responsibility for their review is that of the Audit Committee. Each year the shareholders appoint independent auditors to audit and report directly to them on the financial statements. In preparing the Consolidated Financial Statements, great care is taken to use the appropriate generally accepted accounting principles and estimates considered necessary by management to present fairly and consistently the consolidated financial position and the results of operations. The principal accounting policies followed by Falconbridge are summarized on pages 65 to 68. The accounting systems employed by Falconbridge include appropriate controls, checks and balances to provide reasonable assurance that Falconbridge’s assets are safeguarded from loss or unauthorized use as well as facilitating the preparation of comprehensive, timely and accurate financial information. There are limits inherent in all systems based on the recognition that the cost of such systems should not exceed the benefits to be derived. Falconbridge believes its systems provide the appropriate balance in this respect. The Audit Committee is appointed by the Board of Directors annually and is currently comprised of four non-management, independent directors. The Committee meets with management and with the independent auditors (who have free access to the Audit Committee) to satisfy itself that each group is properly discharging its responsibilities and to review the financial statements and the independent auditors’ report. The Audit Committee reports its findings to the Board of Directors for consideration in approving the financial statements for issuance to the shareholders.

Neville Kirchmann Aaron Regent Michael Doolan Chairman of the Audit Committee President & Chief Executive Officer Senior Vice-President & Chief Financial Officer

ACCOUNTING RESPONSIBILITIES, PROCEDURES AND POLICIES 59 Auditors’ Report

To the Shareholders of Falconbridge Limited:

We have audited the Consolidated Statements of Financial Position of Falconbridge Limited (“Falconbridge”) as at December 31, 2004 and 2003, and the Consolidated Statements of Earnings, Shareholders’ Equity and Cash Flows for the years then ended. These financial statements are the responsibility of Falconbridge’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 Falconbridge 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.

Deloitte and Touche LLP Chartered Accountants

Toronto, Ontario January 31, 2005

60 FALCONBRIDGE • 2004 ANNUAL REPORT Consolidated Statements of Earnings

(IN MILLIONS OF US$) Years ended December 31 2004 2003 Restated – Note 2

Revenues $ 3,070 $ 2,083 Operating expenses Costs of sales Costs of metal and other product sales 1,682 1,413 Depreciation of plant and equipment 192 179 Amortization of development and preproduction expenditures 82 70 1,956 1,662 Selling, general and administrative 108 86 Exploration 20 23 Research and process development 12 13 Other expenses/(income) (Note 16) 5 (2) 2,101 1,782 Operating income 969 301 Interest (Note 11) 37 43 Earnings before taxes and non-controlling interest 932 258 Income and mining taxes (Note 7) 248 63 Non-controlling interest in earnings of subsidiary 12 4 Earnings for the year $ 672 $ 191 Dividends on preferred shares 7 9 Earnings attributable to common shares $ 665 $ 182 Basic earnings per common share (Note 10(c)) $ 3.71 $ 1.03 Diluted earnings per common share (Note 10(c)) $ 3.69 $ 1.02

(See accompanying Notes to Consolidated Financial Statements)

CONSOLIDATED STATEMENTS OF EARNINGS 61 Consolidated Statements of Financial Position

(IN MILLIONS OF US$) As at December 31 2004 2003 Restated – Note 2 ASSETS Current Cash and cash equivalents (Note 12) $ 645 $ 298 Accounts and metals settlements receivable (Note 15) 332 258 Inventories (Note 3) 573 442 Total current assets 1,550 998 Property, plant and equipment (Note 4) 3,195 2,970 Deferred expenses and other assets (Note 5) 373 204 Total assets $ 5,118 $ 4,172

LIABILITIES AND SHAREHOLDERS’ EQUITY Current Accounts payable and accrued charges (Note 15) $ 335 $ 255 Income and other taxes payable 34 23 Long-term debt due within one year (Note 6) 248 71 Total current liabilities 617 349 Long-term debt (Note 6) 1,189 1,356 Future income and mining taxes (Note 7) 355 205 Employee future benefits (Note 8) 112 150 Other long-term liabilities (Note 9) 247 147 Non-controlling interest 35 27 Total liabilities $ 2,555 $ 2,234 Commitments and contingencies (Notes 6, 9, 14, 17) Shareholders’ equity 2,563 1,938 Total liabilities and shareholders’ equity $ 5,118 $ 4,172

(See accompanying Notes to Consolidated Financial Statements)

On behalf of the Board:

David Kerr, Aaron Regent, Director Director

62 FALCONBRIDGE • 2004 ANNUAL REPORT Consolidated Statements of Shareholders’ Equity

(IN MILLIONS OF US$) 2004 2003 Years ended December 31 Number Amount Number Amount Restated – Note 2 Share capital Authorized Unlimited preferred shares Unlimited common shares

Issued Common shares Balance, beginning of year 178,792,492 $ 1,450 177,603,432 $ 1,430 Repurchased and cancelled (Note 10(d)) —— (600,000) (5) Issued pursuant to employee stock option plan (Note 10(a)) 977,698 16 1,789,060 25 Balance, end of year 179,770,190 1,466 178,792,492 1,450 Preferred shares Series 1 (Note 10(b)) Balance, beginning and end of year 89,835 1 89,835 1 Preferred shares Series 2 (Note 10(b)) Balance, beginning of year 7,910,165 129 7,910,165 129 Conversion of units (3,122,882) (51) —— Balance, end of year 4,787,283 78 7,910,165 129 Preferred shares Series 3 (Note 10(b)) Balance, beginning of year —— —— Conversion of units 3,122,882 51 —— Balance, end of year 3,122,882 51 ——

Contributed surplus Balance, beginning of year 2 2 Amortization of fair value of stock options 1 — Balance, end of year 3 2

Surplus (Deficit) Balance, beginning of year 139 (6) Adjustment for change in accounting standard Asset retirement obligations (Note 2) — 14 Earnings for the year 672 191 Dividends – Common shares (55) (50) – Preferred shares (7) (9) Loss on repurchase of common shares (Note 10(d)) — (1) Balance, end of year 749 139 Cumulative translation adjustment 215 217 Total shareholders’ equity $ 2,563 $ 1,938

(See accompanying Notes to Consolidated Financial Statements)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 63 Consolidated Statements of Cash Flows

(IN MILLIONS OF US$) Years ended December 31 2004 2003 Restated – Note 2 Operating activities Earnings for the year $ 672 $ 191 Add (deduct) items not affecting cash Depreciation of plant and equipment 192 179 Amortization of development and preproduction expenditures 82 70 Future income and mining taxes (Note 7) 152 25 Non-controlling interest in earnings of subsidiary 12 4 Other (5) 6 Contributions to pension fund in excess of amounts expensed (38) (30) Cash provided by operating activities before working capital changes 1,067 445 Net change in receivables, inventories and payables (99) (1) Cash provided by operating activities 968 444 Investing activities Capital investments and deferred project costs (573) (370) Proceeds on disposal of assets 1 — Other (1) (18) Cash used in investing activities (573) (388) Financing activities Long-term debt, including current portion (Note 6): Issued 60 246 Repaid (60) (130) Dividends paid – Common shares (55) (50) – Preferred shares (6) (8) – Minority shareholders of Falcondo (3) — Repurchase of common shares — (6) Issue of common shares (Note 10(a)) 16 25 Cash (used in) provided by financing activities (48) 77 Cash provided during the year 347 133 Cash and cash equivalents, beginning of year 298 165 Cash and cash equivalents, end of year $ 645 $ 298 Supplementary information: Cash paid for interest $63 $59 Cash paid for income and mining taxes $89 $17

(See accompanying Notes to Consolidated Financial Statements)

64 FALCONBRIDGE • 2004 ANNUAL REPORT Notes to Consolidated Financial Statements (TABULAR FIGURES IN MILLIONS OF US$, EXCEPT WHERE OTHERWISE NOTED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Consolidated Financial Statements of Falconbridge Limited have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), consistently applied (Note 2). In these Consolidated Financial Statements, references to the Corporation mean only Falconbridge Limited, the parent company, and references to Falconbridge include the Corporation and its consolidated subsidiaries. The principal accounting policies followed by Falconbridge are summarized hereunder.

Basis of Consolidation Falconbridge consolidates the financial statements of subsidiary companies and proportionately consolidates the financial statements of joint ventures.

Translation of Foreign Currencies Effective July 1, 2003, the functional currency of Falconbridge was changed from the Canadian to U.S. dollar. Concurrent with this change in functional currency, Falconbridge adopted the U.S. dollar as its reporting currency. Prior to the change, foreign currency balances and the financial statements of integrated foreign operations were translated into Canadian dollars using the temporal method. Under this method, monetary items are translated at the rate of exchange in effect at year-end. Non-monetary items are translated at historical exchange rates. Revenue and expense items are translated at the average exchange rates prevailing during the year, except for depreciation and amortization, which are translated at the same exchange rates as the assets to which they relate. Exchange gains and losses are included in income in the current year, except when hedged. Certain monetary items were hedged by foreign currency forward and option contracts. Financial statements of self- sustaining foreign operations were translated into Canadian dollars using the current rate method. Under this method, assets and liabilities are translated at the rate of exchange in effect at year- end while revenue and expense items (including depreciation and amortization) are translated at the average exchange rates prevailing during the year. Exchange gains and losses from the translation of such financial statements are deferred and disclosed as a separate component of shareholders’ equity. The Corporation used a combination of its U.S. dollar long-term debt and forward exchange contracts and options for the sale of U.S. dollars to fully hedge its net investments in self-sustaining foreign operations. Gains or losses on these hedge instruments are reported in the same manner as exchange gains and losses from the translation of the financial statements of its self-sustaining foreign operations. Subsequent to the change, the Corporation does not have any self-sustaining subsidiaries whose functional currency is not the U.S. dollar. Balances denominated in currencies other than the U.S. dollar, and the financial statements of integrated foreign operations, are translated into U.S. dollars using the temporal method described above. The economic exposure of certain foreign currency monetary items are managed through the use of foreign currency forward and option contracts.

Revenue Recognition Revenues are generated from the sale of refined metals, concentrates and ferronickel, and are recorded in the accounts when the ownership and control of goods passes to the buyer, which generally occurs upon shipment. Prices used for provisionally-priced sales are based on market prices prevailing at the time of shipment and are adjusted upon final settlement with customers pursuant to the terms of sales contracts.

Cash and Cash Equivalents Cash and cash equivalents include cash on account, demand deposits and short-term invest- ments with original maturities of three months or less and are stated at cost, which approximates market value.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 65 Valuation of Inventories Metals inventories are valued at the lower of cost, determined on a “first-in, first-out” basis, and net realizable value. Supplies inventories are valued at the lower of average cost of acquisition, less appropriate allowances for obsolescence, and replacement cost. Effective January 1, 2003, Falconbridge retroactively changed its accounting policy for inventory costing. Under the previous policy, depreciation and amortization of property, plant and equipment was treated as a period cost. Under the new policy depreciation and amortization is treated as a product cost and expensed when the inventory is sold.

Financial Instruments Falconbridge periodically uses forward foreign exchange and option contracts to hedge the effect of exchange rate changes on identifiable foreign currency exposures. Generally, Falconbridge does not hedge the price it realizes on the sale of its own production and accepts realizations based on market prices prevailing around the time of delivery of metals to customers. Under certain circumstances, Falconbridge enters into futures and option contracts to hedge the effect of price changes on a portion of the commodities it sells. Falconbridge also enters into interest-rate swap agreements, including foreign exchange cross currency swaps, to modify the interest characteristics of its outstanding debt. Falconbridge may enter into futures and forward contracts for the purchase or sale of commodities and currencies not designated as hedges. These contracts are carried at estimated fair values and gains or losses arising from the changes in the market values of these contracts are recognized in the earnings of the period in which the changes occur. Financial instruments designated as hedges are tested for effectiveness on a quarterly basis. Gains and losses on those contracts that are proven to be effective are reported as a component of the related transactions. The net interest received/paid on interest rate swap agreements that qualify for hedge accounting is reflected as a reduction from/addition to interest on the statement of earnings. For contracts that do not qualify for hedge accounting, or for those which Falconbridge does not seek hedge accounting, the net interest received/paid on those positions is not shown as a reduction from/addition to interest, on the statement of earnings, but is shown as a component of other expenses/(income) together with the change in fair value of those contracts during the period (see Note 2 – Accounting changes; Note 16 – Other expenses/(income); and Note 11 – Interest).

Interest Falconbridge capitalizes a portion of its interest costs incurred on corporate debt to all major projects prior to commencement of commercial production. Interest costs incurred after the commencement of commercial production are expensed.

Property, Plant and Equipment Property, plant and equipment and related capitalized interest and development and preproduc- tion expenditures are recorded at cost. Repairs and maintenance expenditures are charged to operations; major betterments and replacements are capitalized. Under the provisions of the new standard for asset retirement obligations, an increase to the carrying amount of the related asset equal to the fair value of the legal obligation for asset retirement is recorded as incurred (see Note 2 – Accounting changes). Falconbridge generally depreciates plant and equipment on a straight-line basis over the lesser of their useful service lives or the lives of the producing mines to which they relate. At the Kidd Creek operations, mine facilities are depreciated over the estimated lives of the mines based on the unit of production basis. Reduction and refining facilities are depreciated on the straight-line basis over the life of the related asset. Generally, Falconbridge calculates depreciation on a straight-line basis at rates varying from 5% to 25%. Assets are depreciated and charged to depreciation expense on the straight-line basis over the life of the associated asset. Amortization of resource properties is provided over the estimated lives of the reserves recoverable from the properties on the unit of production basis. Development and preproduction expenditures are capitalized until the commencement of commercial production. These, together with certain subsequent development expenditures, which are also capitalized, are amortized over periods not exceeding the lives of the producing mines and properties.

66 FALCONBRIDGE • 2004 ANNUAL REPORT Annually, or as required, Falconbridge assesses its long-lived assets for impairment. The first step in this assessment determines whether impairment exists, and, if so, the second step measures the amount of the impairment. Impairment exists if the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. The amount of any impairment loss, determined as the amount by which the long-lived asset’s carrying value exceeds its fair value, is charged to earnings with a corresponding reduction in the book value of the related asset (see Note 2 – Accounting changes).

Exploration Exploration costs incurred to the date of establishing that a property has reserves, which have the potential of being economically recoverable, are expensed. Costs incurred subsequent to the determination of economically recoverable reserves, including allocated interest costs, are deferred. Upon reaching commercial production, such deferred costs are amortized as appropriate under the policy for property, plant and equipment as described above.

Employee Future Benefits The costs of retirement benefits and other benefit obligations are recognized over the period in which employees render services in return for the benefits. Pension expense recorded for Falconbridge’s defined benefit plans is the net of management’s best estimate of the cost of benefits provided, the interest cost of projected benefits, return on pension plan assets and amortization of experience gains or losses and other pension plan surpluses or deficits. Plan obligations are discounted using rates that reflect the market yields, as of the measurement date, on high-quality debt instruments with cash flows that match expected benefit payments. The return on plan assets assumption and the discount rate, salary and inflation assumptions used to value the plan obligations are reviewed annually. The assumption is based on expected returns for the various asset classes. Pension fund assets are presented at fair market value. Pension plan surpluses or deficits, experience gains or losses and the cost of pension plan improvements are amortized, on a straight- line basis, over the expected average remaining service life (EARSL) of the employee group or the term of the employment contract to which the items relate, depending on the nature of the item. Funding is subject to applicable government regulations. Under its defined contribution retirement savings program, Falconbridge makes payments based on employee earnings and partially matches employee contributions, to a defined maximum. Employees may receive profit sharing credits based on earnings. Falconbridge also provides certain health care and life insurance benefits for retired employees and their dependents. The cost of these benefits is expensed over the period in which the employees render services in return for the benefits.

Income and Mining Taxes Current income taxes are recognized for the estimated income and mining taxes payable for the current year. Future income tax assets and liabilities are recognized for temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses, available to be carried forward to future years for tax purposes, that are likely to be realized. Where appropriate, income and withholding taxes are provided on the portion of any interest in consoli- dated foreign subsidiaries’ undistributed net income, which it is reasonable to assume, will be transferred in a taxable distribution.

Asset Retirement Obligations Falconbridge records a liability for its long-term asset retirement obligations, equal to the fair value of the legal obligation for asset retirement, and records a corresponding increase to the carrying amount of the related asset. The asset is depreciated and charged to depreciation expense over the life of the associated asset. Interest on the obligation is accreted over the period of expected cash flows with a corresponding charge to operating income. The fair value of the legal obligation for asset retirement is assessed annually.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 67 A provision for asset retirement is not recorded for assets with indeterminate lives until sufficient information exists to estimate the timing of settlement. As such, although Falconbridge will be subject to asset retirement obligations for its refinery in Norway, its power plant at Falcondo, as well as for the metallurgical facilities at Sudbury and Kidd Creek, these assets are not included in the provision for asset retirement as sufficient information is not available at this time to estimate the timing of settlement (see Note 2 – Accounting changes).

Stock Option Plan Falconbridge accounts for stock options using the fair value method. Compensation expense for stock options is measured at the fair value at the grant date using the Black-Scholes valuation model and is recognized over the vesting period of the options granted.

Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the report- ing period. Falconbridge primarily uses estimates in the determination of asset lives to compute depreciation, asset impairment, the cost of employee future benefits, asset retirement obligations, mineral reserves, taxes, derivatives and allowances for unrecoverable receivables. Actual results could differ from those estimates.

2. ACCOUNTING CHANGES Adoption of New Accounting Standards Effective January 1, 2004, Falconbridge adopted four new accounting standards and guidelines issued by the Canadian Institute of Chartered Accountants (CICA); Asset Retirement Obligations (CICA 3110), Hedging Relationships (AcG 13), Impairment of Long-lived Assets (CICA 3063), and Generally Accepted Accounting Principles (CICA 1100).

Asset Retirement Obligations Under the previous policy, costs related to ongoing site restoration programs were expensed when incurred, while a provision for mine closure and site closure costs was charged to earnings over the life of the operations. Under the new standard, a long-term obligation, equal to the fair value of the legal obligation for asset retirement and a corresponding increase to the carrying amount of the related asset, determined at the date of adoption, is recorded. The key assumptions on which the fair value of the asset retirement obligations is based, include the estimated future cash flows, the timing of those cash flows, and the credit-adjusted risk-free rate or rates at which the estimated cash flows have been discounted. Falconbridge uses discount rates ranging from 5.0% to 6.5%. Under the accounting standard, a provision for asset retirement is not required to be recorded for assets with indeterminate lives until such time as sufficient information exists to estimate a range of settlement dates. As such, although Falconbridge will be subject to asset retirement obligations for its refinery in Norway, its power plant at Falcondo, as well as for the metallurgical facilities at Sudbury and Kidd Creek, these assets are not included in the provision for asset retirement as sufficient information is not available at this time to estimate the timing of settlement. As of December 31, 2004, with respect to Falconbridge’s other asset retirement obligations, undiscounted cash outflows approximating $470 million are expected to occur over a period ranging from 1 to 62 years. The asset is being depreciated and charged to depreciation expense over the life of the associated asset. Interest on the obligation is being accreted with a corresponding charge to operating income. This standard has been applied retroactively with restatement of prior years. As of January 1, 2003, the cumulative impact of the adoption of the standard was to increase retained earnings by $14 million, increase property, plant and equipment by $69 million, increase accumulated depreciation by $13 million, increase the provision for asset retirement by $37 million, and increase future income taxes by $5 million. The adoption of this standard resulted in a decrease of $3 million to previously reported earnings for the year ended December 31, 2003. Consequently, the effect of this restatement on previously reported basic earnings per common

68 FALCONBRIDGE • 2004 ANNUAL REPORT share is a decrease of $0.02. Further disclosure regarding asset retirement obligations is presented in Note 9 – Other long-term liabilities.

Hedging Relationships As of January 1, 2004, Falconbridge adopted CICA guideline AcG 13 which establishes new standards for when hedge accounting may be applied. This standard is applied prospectively without restatement of prior period results. Under the provisions of the guideline, Falconbridge’s interest rate swaps were deemed to be in a hedging relationship, as a fair value hedge of a portion of the Corporation’s debt, prior to, but not as at, the date of the guideline’s implementation. As such, on January 1, 2004, Falconbridge recorded a deferred mark-to-market gain of $27 million on its interest rate hedges, while recording a long-term receivable and a long-term payable of $67 million and $40 million, for those contracts in a gain and loss position, respectively. Under the provision of the standard the mark-to-market gain is amortized into income, as a reduction of interest expense, over the life of the underlying hedged debt (see Note 11 – Interest). For the year ended December 31, 2004, $7 million of this deferred gain was amortized into income as part of interest expense. Subsequent to the implementation of the guideline, Falconbridge has to prove hedge effectiveness in order to qualify for hedge accounting. Falconbridge’s interest rate swaps did not qualify for hedge accounting until April 22, 2004. Upon qualification for hedge accounting, the long-term receivable and long-term payable, representing the fair value of the hedges which qualified on April 22, 2004, are amortized into interest expense (see Note 11 – Interest). For the year ended December 31, 2004, a mark-to-market loss of $1 million was recorded for those contracts that were not eligible for hedge accounting. For contracts that qualify for hedge accounting, the net interest received/paid on those positions is shown as a reduction from/addition to interest on the statement of earnings. For contracts that do not qualify for hedge accounting or for those which Falconbridge does not seek hedge accounting, the net interest received/paid on those positions is not shown as a reduction from/addition to interest, on the statement of earnings, but is shown as a component of other expenses/(income) together with the change in fair value of those contracts during the period (see Note 16 – Other expenses/(income) and Note 11 – Interest). For energy price hedge contracts not eligible for hedge accounting, Falconbridge recorded at January 1, 2004, a deferred mark-to-market gain of $3 million. $2 million of this deferred gain was amortized into income during the year ended December 31, 2004. In addition, Falconbridge recorded a $1 million mark-to-market gain on those contracts during the year ended December 31, 2004. Under the provisions of the new guideline, Falconbridge continues to be eligible for hedge accounting for forward contracts and option contracts used as a currency hedge of Canadian dollar operating costs. Falconbridge did not seek hedge accounting for forward contracts and option con- tracts used as an economic currency hedge of Canadian dollar denominated monetary assets and liabilities. These contracts continue to be marked to market (see Note 14 – Financial instruments).

Impairment of Long-lived Assets CICA section 3063 establishes standards for the recognition, measurement and disclosure of the impairment of long-lived assets. This standard is effective for fiscal years commencing on or after April 1, 2003, and as such was implemented by Falconbridge effective January 1, 2004. Under the provision of the standard, a two-step process determines impairment of long-lived assets held for use. The first step determines whether impairment exists, and if so, the second step measures the amount of the impairment. Impairment exists if the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. The amount of the impairment loss is determined as the amount by which the long- lived asset’s carrying value exceeds its fair value. Falconbridge has not incurred an impairment loss on any of its long-lived assets as a result of the implementation of this standard.

Generally Accepted Accounting Principles Effective January 1, 2004, Falconbridge adopted CICA 1100, which establishes standards for financial reporting in accordance with generally accepted accounting principles. CICA 1100 describes what constitutes Canadian generally accepted accounting principles and its sources. The standard provides guidance on sources to consult when selecting accounting principles and determining appropriate disclosure when a matter is not dealt with explicitly in the primary sources of generally accepted accounting principles. The effect of any change in accounting policy made on adopting this section is applied to events and transactions occurring after the date of the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 69 change and to any outstanding related balances existing at the date of the change. No cumulative catch-up adjustment is made to such balances. Implementation of this standard has had no significant impact on Falconbridge.

Change in Functional and Reporting Currency Effective July 1, 2003, the functional currency of Falconbridge was changed from the Canadian to the U.S. dollar. In general, this change resulted from a gradual increase in the overall proportion of business activities conducted in U.S. dollars. Concurrent with this change in functional currency, Falconbridge adopted the U.S. dollar as its reporting currency. In accordance with Canadian GAAP, the change was effected by translating assets and liabilities, at the end of prior reporting periods, at the existing U.S./Canadian dollar foreign exchange spot rate, while earnings for those periods were translated at the average rate for each period. Equity transactions have been translated at historic rates, with opening equity on January 1, 1999, restated at the rate of exchange on that date. The resulting net translation adjustment has been credited to the cumulative translation adjustment account.

3. INVENTORIES Inventories consist of the following:

As at December 31 2004 2003 Metals in process $ 294 $ 218 Finished metals 157 123 Supplies 115 85 Raw materials 7 16 $ 573 $ 442

4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:

As at December 31 2004 2003 Accumulated Accumulated depreciation and Net depreciation and Net Cost amortization book value Cost amortization book value Plant and equipment: Mines, mining plants and ancillary mining assets $ 2,986 $ 1,413 $ 1,573 $ 2,771 $ 1,277 $ 1,494 Smelters 548 348 200 535 328 207 Refineries 692 432 260 673 405 268 Other 186 125 61 165 118 47 4,412 2,318 2,094 4,144 2,128 2,016 Land and properties 297 171 126 292 159 133 $ 4,709 $ 2,489 $ 2,220 $ 4,436 $ 2,287 $ 2,149 Development and preproduction expenditures, net 975 821 $ 3,195 $ 2,970

70 FALCONBRIDGE • 2004 ANNUAL REPORT 5. DEFERRED EXPENSES AND OTHER ASSETS Deferred expenses and other assets consist of the following:

As at December 31 2004 2003 Deferred pre-development costs $ 186 $ 130 Unrealized gain on interest rate swap contracts 89 — Unrealized gain on Canadian debt hedge contract 31 24 Inventories and supplies 23 14 Debt discount and issue expenses, net 8 10 Water rights 7 7 Employee housing advances 3 4 Other 26 15 $ 373 $ 204

6. LONG-TERM DEBT Long-term debt consists of the following:

As at December 31 2004 2003 Falconbridge Limited: 7.35% Debentures, due November 1, 2006 (a) $ 250 $ 250 7.35% Debentures, due June 5, 2012 (a) 250 250 5.375% Debentures, due June 1, 2015 (a) 250 250 7.375% Debentures, due September 1, 2005 (a) 200 200 8.50% Debentures, due December 8, 2008 (Cdn$175.0 million) (b) 145 135 Compañía Minera Doña Inés de Collahuasi S.C.M.: Senior Debt (c) 282 282 Compañía Minera Lomas Bayas: Term Loan (d) 60 60 Total 1,437 1,427 Less: long-term debt due within one year 248 71 $ 1,189 $ 1,356

(a) The Corporation has entered into a number of interest rate swap and option transactions with terms up to 11 years. As a result of these transactions, at December 31, 2004, interest costs on $550 million (2003 – $550 million) of the debentures were swapped to an average fixed interest rate of 6.01% (2003 – 6.01%) and interest costs on $400 million (2003 – $400 million) were swapped to a floating rate basis at an average interest rate of 4.45% (2003 – 3.28%). The weighted average interest rate on these debentures at December 31, 2004, was 5.35% (2003 – 4.86%). If these positions had been settled at December 31, 2004, the Corporation would have received $21 million (2003 – received $24 million).

(b) The Corporation has entered into several cross currency interest rate swap transactions with terms of four years. As a result of these transactions, at December 31, 2004, interest costs on $86 million (2003 – $86 million) of the debentures were swapped to an average floating interest rate of 6.74% (2003 – 5.32%) and interest costs on $25 million (2003 – $25 million) were swapped to a fixed interest rate of 5.00% (2003 – 5.00%). If these positions had been settled at December 31, 2004, the Corporation would have received $45 million (2003 – received $31 million).

(c) In December 2004, Collahuasi renegotiated the terms of their outstanding senior debt. The term has been extended to December 15, 2011. The principal is repayable in equal semi-annual install- ments. The weighted average interest rate on the senior debt outstanding at December 31, 2004, was 2.88% (2003 – 2.52%).

(d) In December 2004, Lomas Bayas repaid their existing loan and entered into a new Term Loan in the amount of $60 million. The loan is due January 2, 2008 and has semi-annual principal repayments of $7.5 million, commencing July 2, 2005. The interest rate on the loan at December 31, 2004 was 3.62% (December 31, 2003 – 3.66%).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 71 Available Financing Facilities The Corporation has unsecured committed Credit Facilities with various banks outstanding at December 31, 2004 (individually a “Credit Facility” and collectively the “Credit Facilities”). These three-year revolving Credit Facilities mature on December 13, 2007. The aggregate principal amount of the Credit Facilities is $475 million (2003 – $405 million). The revolving period of the Credit Facilities may be renewed and extended annually to maintain the three-year term of the revolver. Borrowings may be made under the Credit Facilities in Canadian dollars in the form of prime rate loans or bankers’ acceptances or in U.S. dollars in the form of U.S. base rate loans or LIBOR loans. In some cases, borrowings may be in the form of letters of credit, which offset amounts available under the Credit Facility. As at December 31, 2004, the Corporation had no borrowings (2003 – nil) and had drawn letters of credit totaling $18 million (2003 – $17 million) under a Credit Facility, leaving an unused balance of $457 million. The Corporation also has an uncommitted letter of credit facility of $21 million. At December 31, 2004, $17 million (2003 – $15 million) of letters of credit had been issued under this facility. The Corporation has also established a Commercial Paper Program. Unused lines of credit and cash on hand are used to support the Commercial Paper Program. As at December 31, 2004, the Corporation had no Commercial Paper outstanding (2003 – nil).

Long-term debt will mature as follows: Years ending December 31, 2005 $ 248 2006 305 2007 55 2008 208 2009 40 thereafter 581 $ 1,437

The weighted average interest rate on the long-term debt portfolio, including the effect of interest rate swap agreements, at December 31, 2004, was 4.87% (2003 – 4.37%). At December 31, 2004, the fair market value of Falconbridge’s total debt, excluding the effect of interest rate swap agreements, was $1,507 million (2003 – $1,521 million). On January 6, 2004, the Corporation filed a short form base shelf prospectus that provided for the issuance, during a twenty-five month period ending February 2006, of debt securities of up to $600 million. To date no amounts have been drawn under this arrangement.

7. INCOME AND MINING TAXES (a) Consolidated income and mining taxes consist of the following:

Years ended December 31 2004 2003 Current Federal and provincial income taxes $ 5 $4 Foreign taxes 91 34 96 38 Future Federal and provincial income taxes 38 (6) Provincial mining taxes 16 4 Foreign taxes 98 27 152 25 $ 248 $63

(b) The difference between the amount of the reported consolidated income and mining taxes and the amount computed by multiplying the earnings before taxes by the Corporation’s applicable tax rates is reconciled as follows:

72 FALCONBRIDGE • 2004 ANNUAL REPORT Years ended December 31 2004 2003 Taxes computed using the Corporation’s tax rates* $ 358 $ 101 Adjust for – Foreign tax rates, net (i) (83) (41) Currency translation adjustments 13 12 Resource and depletion allowances (22) (11) Mining taxes 16 6 Non-claimable expenses 12 8 Non-taxable income (4) (3) Canadian income tax rate changes — (9) Establishment of a previously unrecognized tax asset – Lomas Bayas (14) — Other (28) — Income and mining taxes $ 248 $63 *Federal and provincial income tax rates 38.44% 39.12%

(i) The Corporation has foreign subsidiaries that have undistributed earnings on which no taxes have been provided. These earnings, which amount to approximately $541 million (2003 – $411 million), have been permanently reinvested outside Canada and are used to finance non-Canadian investments, and exploration and development projects.

(c) The components of the future income tax liability are as follows:

As at December 31 2004 2003 Future income and mining tax liabilities Development and preproduction $ 210 $ 175 Property, plant and equipment 205 219 Foreign exchange 33 9 Accrued witholding taxes 67 32 Pensions 23 5 Exploration — 2 Other 22 5 560 447 Future income and mining tax assets Non-capital losses 32 129 Post-retirement benefits 66 58 Reclamation provisions 45 19 Exploration 15 — Research and development 21 16 Inventory obsolescence 10 9 Other 16 11 205 242 Net future income and mining tax liability $ 355 $ 205

8. EMPLOYEE FUTURE BENEFITS Falconbridge has a number of defined benefit plans providing pension, health, dental and life insurance benefits for certain salaried and hourly-rated employees. Pension benefits are calculated based upon length of service and either final average pensionable earnings or a specified amount per year of service. Funding and pension plan assets (which consist principally of cash, equity securities and fixed income securities) for the defined benefit plans are primarily governed by the Ontario Pension Benefits Act. Falconbridge also has a number of capital accumulation plans. The Kidd Creek operations and Société Minière Raglan du Québec Ltéé make monthly contributions on behalf of employees under a deferred profit sharing plan and a group RRSP respectively. In 2003, Falconbridge offered certain groups of office employees at the corporate office and Sudbury divisions the opportunity to switch from the current defined benefit plan to a defined contribution plan. Approximately 30% of eligible employees chose to make the switch with $7 million in assets to be allocated to the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 73 defined contribution plan. Effective January 1, 2003, all new office employees are only eligible to join the defined contribution plan. Under the terms of this plan, Falconbridge contributes 5% of the employee’s pensionable earnings and matches 50% of employee’s contributions, up to 2% of the employee’s pensionable earnings. The funded status of Falconbridge’s defined benefit pension plans and post-employment benefit plans other than pensions, are as follows:

Defined Benefit Pension Plans

As at December 31 2004 2003 Plans where Plans where Plans where Plans where assets exceed benefits exceed assets exceed benefits exceed benefits assets Net benefits assets Net Plan assets at fair value $ 25 $ 763 $ 788 $ 65 $ 587 $ 652 Projected benefit obligations 12 957 969 51 787 838 Plan assets in excess of (less than) projected benefit obligations $ 13 $(194) $(181) $ 14 $(200) $(186)

Other Benefit Plans

As at December 31 2004 2003 Plans where Plans where Plans where Plans where assets exceed benefits exceed assets exceed benefits exceed benefits assets Net benefits assets Net Plan assets at fair value $ 22 $ — $ 22 $ 18 $ — $18 Projected benefit obligations 17 269 286 16 229 245 Plan assets in excess of (less than) projected benefit obligations $ 5 $(269) $(264) $ 2 $(229) $(227)

The accrued asset, net of valuation allowance (liability) for employee future benefits on the Consolidated Statements of Financial Position, are as follows:

As at December 31 2004 2003 Defined pension plans $80 $21 Other benefit plans (192) (171) Employee future benefits $(112) $(150)

Falconbridge’s post-retirement benefit expense included the following components:

Years ended December 31 2004 2003 Pension Other Pension Other benefit benefit benefit benefit plans plans plans plans Current service cost $ 10 $ 5 $11 $ 3 Interest cost 52 15 52 13 Expected return on plan assets (46) (1) (40) (1) Amortization of: Past service costs 2— 3 — Net actuarial losses 13 3 14 2 Valuation allowance provided against plan asset (5) — (3) — Settlement losses —— 2 — Defined benefit plan expense 26 22 39 17 Defined contribution plan expense 8— 8 — Post-employment benefit expense $ 34 $ 22 $47 $17

74 FALCONBRIDGE • 2004 ANNUAL REPORT Reconciliation of Defined Benefit Expense recognized with Defined Benefit Expense Incurred In accordance with Section 3461 of the CICA Handbook, the expense recognized in the financial statements includes the amortization of gains and losses as well as past service costs arising in the current and prior periods. The table below reconciles the expense recognized with the expense incurred in each period. The expense incurred reflects the full amount of gains and losses and past service costs arising in the current period, and does not include the amortization of amounts realized in previous periods.

Years ended December 31 2004 2003 Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans Defined benefit expense recognized $ 26 $ 22 $39 $17 Difference between: Expected and actual return on plan assets (18) — (32) — Actuarial losses (gains) amortized and actuarial losses (gains) arising 44 12 38 41 Past service costs amortized and past service costs arising 4—(3) 1 Change in valuation allowance 5— 2 — Post-employment benefit expense “incurred” $61 $ 34 $44 $59

The change in the funded status of Falconbridge’s post-retirement benefit plans was as follows:

As at December 31 2004 2003 Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans Projected benefit obligations Balance at beginning of year $ 838 $ 246 $ 657 $ 165 Current service cost 10 5 11 3 Benefits paid (61) (14) (58) (13) Interest cost 52 15 52 13 Actuarial losses 56 14 52 43 Settlements ——(8) — Amendments 6——— Curtailments 1——— Net transfers in —— 1 — Effect of exchange rate changes 67 20 131 34 Projected benefit obligations at end of year $ 969 $ 286 $ 838 $ 245 Plan assets Balance at beginning of year $ 652 $ 18 $ 481 $ 10 Actual return on plan assets 63 1 72 1 Employer contributions 79 15 65 18 Benefits paid (61) (14) (55) (13) Settlements ——(6) — Net transfers in —— 1 — Effect of exchange rate changes 55 2 94 2 Fair value of plan assets at end of year $ 788 $ 22 $ 652 $ 18 Plan deficit $ 181 $ 264 $ 186 $ 227

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 75 The total cash payments for the year made by Falconbridge to the benefit plans were as follows:

As at December 31 2004 2003 Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans Defined benefit $79 $15 $65 $18 Defined contribution 8— 8 — Total $87 $15 $73 $18

A breakdown of the plan assets by major asset category was as follows:

As at December 31 2004 2003 Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans Equity securities 50% — 55% — Debt securities 50% 100% 45% 100% Total 100% 100% 100% 100%

The measurement date used for financial reporting purposes of the plan assets and benefit obligations is December 31. With respect to the significant Canadian pension plans, the most recent actuarial valuations required for funding purposes were prepared as of January 1, 2004 and the effective date of the next required funding actuarial valuations is January 1, 2005.

As at December 31 2004 2003 Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans Reconciliation of projected benefit obligation to deficit Accrued benefit (asset)/liability $ (80) $ 192 $ (21) $ 171 Unamortized past service costs 5 (1) 11 Unamortized net actuarial losses 256 73 212 55 Accrued benefit liability 181 264 192 227 Valuation allowance ——(6) — Plan deficit $ 181 $ 264 $ 186 $ 227

The significant actuarial assumptions used in measuring Falconbridge’s pension and other benefit obligations and expense were as follows:

As at December 31 2004 2003 2004 2003 Pension Pension Other Other benefit plans benefit plans benefit plans benefit plans Weighted average assumptions used to calculate benefit expense Discount rate 6.25% 6.75% 6.25% 6.75% Expected long-term rate of return on plan assets 7.00% 7.00% Rate of compensation increase 3.50% 3.50% Weighted average assumptions used to calculate benefit obligation at end of year Discount rate 5.75% 6.25% 5.75% 6.25% Rate of compensation increase 3.50% 3.50% Effect of 1% increase in assumed health care cost trend rates Total of service and interest cost components $3 $2 Post-employment benefit obligation 37 31 Effect of 1% decrease in assumed health care cost trend rates Total of service and interest cost components $ (2) $ (2) Post-employment benefit obligation (30) (26)

The health care cost trend rate is assumed to start at 8.5% for 2004 (2003 – 9.0%), decreasing to an ultimate medical trend rate of 4.5% (2003 – 4.5%).

76 FALCONBRIDGE • 2004 ANNUAL REPORT 9. OTHER LONG-TERM LIABILITIES Other long-term liabilities consist of the following:

As at December 31 2004 2003 Asset retirement obligations (a) $ 149 $ 132 Unrealized loss on interest rate swap contracts 67 — Unamortized deferred fair value loss on interest rate swaps 20 — Other 11 15 $ 247 $ 147

(a) The business conducted by Falconbridge has been, and may in the future be, affected by changes in environmental legislation and other requirements including those related to asset retirement obligations and progressive site restoration costs. As Falconbridge operates in many countries, both the likelihood of changes in legislation and its impact upon Falconbridge are not predictable. Falconbridge’s policy is to meet and, if possible, surpass standards set by relevant legislation, through the application of innovative and technically proven economical measures in advance of prescribed deadlines. Falconbridge incurs substantial removal and site restoration costs on an ongoing basis, which, it believes, will mitigate future removal and site restoration costs. A long-term obligation, equal to the fair value of the legal obligation for asset retirement is recorded based on an annual assessment of projected asset retirement and progressive reclamation costs. The key assumptions on which the fair value of the asset retirement obligations is based include the estimated future cash flows, the timing of those cash flows, and the credit-adjusted risk-free rate or rates at which the estimated cash flows have been discounted. Falconbridge uses discount rates ranging from 5.0% to 6.5%. As of December 31, 2004, undiscounted cash outflows approximating $470 million are expected to occur over a period ranging from 1 to 62 years. Falconbridge will be subject to asset retirement obligations for its refinery in Norway, its power plant at Falcondo, as well as for the metallurgical facilities at Sudbury and Kidd Creek. However, these assets are not included in the provision for asset retirement as sufficient information is not available at this time to estimate the timing of settlement. In view of the uncertainties concerning future asset retirement and progressive reclamation costs, the ultimate costs to Falconbridge could differ materially from the amounts estimated. The estimate for the future liability is subject to change based on amendments to applicable laws and legislation, the nature of ongoing operations and technological innovations. Future changes, if any, due to their nature and unpredictability, could have a significant impact and would be reflected prospectively, as a change in an accounting estimate. The following table explains the change in the asset retirement obligations:

As at December 31 2004 2003 Asset retirement obligations, beginning of year $ 132 $98 Liabilities incurred 5 18 Liabilities settled (5) (9) Gain on settlement of liabilities (5) — Accretion expense 8 7 Revisions in estimated cash flows 7 — Foreign exchange 7 18 Asset retirement obligations, end of year $ 149 $ 132

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 77 10. SHARE CAPITAL (a) Employee Stock Option Plan The Corporation has a stock option plan, through which options may be granted to officers and employees for the purchase of common shares. Options are granted at prices equal to the closing market value on the last trading day or period prior to the grant. Stock options granted from 1997 through December 31, 1999 have a 10-year term and contain vesting provisions of 20% on the first anniversary date following the date of the grant, and a further 20% on each of the four subsequent anniversary dates. Stock options granted since January 1, 2000, have a 10-year term with the same vesting provisions; however, they also contain an accelerated vesting feature specifying that on the first day that the market price of the common shares is 20% greater than the exercise price of the option, the final tranche of unvested options outstanding on that date will immediately vest and be exercisable. In 2002, the Corporation amended the terms of its outstanding stock options to eliminate the cash settlement feature. Selling, general and administrative expenses for 2004 include compensation costs of $2 million (2003 – $2 million) relating to outstanding options granted since January 1, 2002. During 2004, two stock option series were granted totaling 385,500 options having a weighted- average fair value of Cdn$11.19 per share. The compensation expense associated with these stock options series was calculated using the Black-Scholes valuation model assuming the following weighted-average parameters; 10-year term, 27% volatility, expected dividend of 1.65% annually and an interest rate of 4.52%. The stock option value is charged against earnings over its vesting period. A summary of the status of the stock option plan and changes during the years is presented below:

As at December 31 2004 2003 Weighted-average Weighted-average Options exercise price Options exercise price (000s) (Cdn$) (000s) (Cdn$) Outstanding, beginning of year 3,332 $ 18.21 4,413 $ 18.24 Granted 386 30.62 760 16.73 Exercised (978) 19.37 (1,789) 17.64 Cancelled (241) 19.07 (52) 18.50 Outstanding, end of year 2,499 $ 19.59 3,332 $ 18.21

The following table summarizes information about the stock options outstanding at December 31, 2004:

Options outstanding Options exercisable Number (000s) Weighted-average Weighted-average Number (000s) Weighted-average outstanding remaining exercise price exercisable exercise price Range of exercise prices (Cdn$) at Dec. 31, 2004 contractual life (Cdn$) at Dec. 31, 2004 (Cdn$) $15.67 to $20.14 1,983 6.6 $ 16.85 750 $ 17.31 $26.25 to $32.00 516 7.5 30.10 206 29.30 $15.67 to $32.00 2,499 7.0 $ 19.59 956 $ 19.90

(b) Preferred Shares On March 7, 1997, the Corporation issued 8,000,000 Units, at a price of Cdn$10.00 per Unit, with each unit consisting of one Cumulative Preferred Share Series 1 (the “Preferred Share Series 1”) and one Cumulative Preferred Share Series 2 Purchase Warrant (the “Warrant”). Since September 1, 1998, the quarterly cash dividend on Preferred Share Series 1 has been Cdn$0.02 per share. The holders of the Units had the right to acquire on certain dates, for each Unit held, one Cumulative Preferred Share Series 2 (the “Preferred Share Series 2”) of the Corporation by the combined effect of tendering for conversion one Preferred Share Series 1 and the exercise of one Warrant together with the cash payment of Cdn$15.00 per Warrant. A total of 7,910,165 warrants have been converted into Preferred Share Series 2. The remaining unexercised warrants cannot be exercised. Until March 1, 2004, holders of the Preferred Share Series 2 were entitled to fixed cumulative preferential cash dividends, as and when declared by the Board of Directors, which accrued from the date of issue and were payable quarterly in the amount of Cdn$0.3672 per share or Cdn$1.4688 per share per annum. From March 1, 2004, the Preferred Share Series 2 are entitled to floating adjustable cumulative preferential cash dividends as and when declared by the Board of Directors.

78 FALCONBRIDGE • 2004 ANNUAL REPORT Holders of Preferred Share Series 2 had the right to convert their shares into Cumulative Preferred Share Series 3 (the “Preferred Share Series 3”) of the Corporation, subject to certain conditions, on March 1, 2004, and will continue to have the right every five years thereafter. On March 1, 2004, the Corporation had the right to redeem for cash the Preferred Share Series 2, in whole but not in part, at the Corporation’s option, at Cdn$25.00 per share plus accrued and unpaid dividends. Subse- quent to March 1, 2004, the Corporation has the right to redeem at any time for cash the Preferred Share Series 2, in whole but not in part, at the Corporation’s option, at Cdn$25.50 per share plus accrued and unpaid dividends. Effective March 1, 2004, the Preferred Share Series 2 shares pay a monthly adjustable floating dividend based on a percentage of the Canadian prime rate. A total of 3,122,882 units have been converted into Preferred Share Series 3. Holders of Preferred Share Series 3 are entitled to fixed cumulative preferential cash dividends, as and when declared by the Board of Directors, which accrue from March 1, 2004. The dividends are payable quarterly on the first day of March, June, September, and December in the amount of Cdn$0.2863 per share or Cdn$1.1452 per share per annum until March 1, 2009. The Preferred Share Series 3 are not redeemable prior to March 1, 2009. The Preferred Share Series 3 will be redeemable on March 1, 2009 and on March 1 every fifth year thereafter, in whole but not in part, at the Corporation’s option, at Cdn$25.00 per share, together with accrued and unpaid dividends up to but excluding the date of redemption. Holders of Preferred Share Series 3, upon giving notice, will have the right to convert on March 1, 2009, and on March 1 in every fifth year there- after, their shares into an equal number of Preferred Share Series 2, subject to the automatic conversion provisions.

(c) Earnings Per Common Share Basic earnings per common share have been calculated after deducting preferred share dividends of $7 million (2003 – $9 million) and have been based on the weighted average number of common shares outstanding during the year of 179,550,277 shares (2003 – 177,674,710 shares). Diluted earnings per share, calculated using the treasury stock method, have been based on the weighted average number of common shares outstanding during the year of 180,512,236 shares (2003 – 178,096,477 shares) after giving effect to the exercise of options.

(d) Repurchase of Common Shares During 2003, the Corporation redeemed and cancelled a total of 600,000 common shares, having a book value of $5 million, realizing a loss of $1 million on the repurchase. There were no common shares redeemed in 2004.

(e) Deferred Share Unit Plan for Non-employee Directors During 2002, the Corporation approved a deferred share unit plan for non-employee directors (DSUPD). Under the DSUPD, each eligible director may elect to be paid annual retainer fees and/or meeting attendance fees in deferred share units (DSU) rather than in cash. A DSU is a notional unit, equivalent to a common share. DSUs are credited with dividend equivalents when dividends are paid on the Corporation’s common shares. Payment of DSUs is made in cash or common shares after the director leaves the Board. As of December 31, 2004, a total of 17,806 DSUs (2003 – 10,264 DSUs) were held by participating directors.

11. INTEREST Interest includes the following:

Years ended December 31 2004 2003 Interest on long-term debt $84 $81 Interest capitalized (26) (16) Net interest income on interest rate swap contracts (14) (21) Amortization of deferred gain on interest rate swap contracts (7) — Other 11 5 Interest expensed on long-term debt 48 49 Interest income (11) (6) Interest $37 $43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 79 12. COLLAHUASI JOINT VENTURE Compañía Minera Doña Inés de Collahuasi S.C.M. (Collahuasi) is the corporation which owns the mining and water rights and other assets relating to the Collahuasi project, secures financing, conducts the operations, and markets the products of the property. The Consolidated Financial Statements of Falconbridge include the Corporation’s 44% share of the financial position, operating results and cash flow of Collahuasi as follows:

As at December 31 2004 2003 Financial Position ASSETS Current assets $ 383 $ 143 Property, plant and equipment 925 905 Other 30 18 Total assets $ 1,338 $ 1,066 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities $ 179 $87 Long-term debt Senior debt 242 226 Intercompany debt 184 266 Other long-term liabilities 200 106 Shareholders’ equity 533 381 Total liabilities and shareholders’ equity $ 1,338 $ 1,066

Years ended December 31 2004 2003 Earnings Revenues $ 566 $ 275 Earnings for the year 249 70 Cash Flow Cash Flow provided by (used in): Operating activities $ 272 $95 Investing activities (20) (114) Financing activities (66) 9 Increase (decrease) in cash and cash equivalents $ 186 $ (10)

Current assets include cash of $264 million (2003 – $78 million) which is only available for use within the project. During 2002, the Board of Directors of Compañía Minera Doña Inés de Collahuasi approved the construction of a new grinding circuit at the Ujina concentrator. This was part of the Ujina to Rosario transition project, which also involved transferring mine production from the Ujina to the Rosario orebody in the second quarter of 2004. The project increased Collahuasi’s concentrator design capacity to 110,000 tonnes per day. The total capital cost of the transition and concentrator expansion project was at $584 million, with Falconbridge’s 44% share of this cost totaling $257 million.

80 FALCONBRIDGE • 2004 ANNUAL REPORT 13. SEGMENTED DATA Falconbridge operates in one industry – mining, processing and marketing of mineral products. These activities are conducted through six segments – the Integrated Nickel Operations (INO), Kidd Creek, Falcondo, Collahuasi, Lomas Bayas and Corporate. The INO includes the accounts of the Corporation and all of its wholly-owned subsidiaries engaged in the integrated operations of mining, milling, smelting, refining and marketing of metals mainly derived from Sudbury and Raglan nickel-copper ores and its custom feed business. Kidd Creek includes the mining, milling, smelting and refining of its own copper-zinc ores and its custom feed business. Falcondo mines, mills, smelts and refines its own nickel laterite ores. Collahuasi is a copper mine, in which Falconbridge owns 44%. Lomas Bayas mines and refines its own copper ores. Corporate includes general and administrative expenditures, exploration, research and development expenditures, foreign exchange gains and losses, and other income and expenses. The accounting policies used by these segments are the same as those described in the Summary of Significant Accounting Policies in Note 1. Any sales and transfers between the segments are accounted for as if the sales or transfers were to third parties, that is, at current market prices. During the preparation of the financial statements the transfers between segments are eliminated. As the products and services in each of the reportable segments, except for Corporate, are essentially the same, the reportable segments have been selected at the level where decisions are made on the provision of resources, capital and where performance is measured. For operations forming part of a reportable segment, performance is measured based on production targets, operating costs incurred and unit operating costs.

(a) Segmented information: Nickel Copper Lomas Corporate INO Falcondo Kidd Creek Collahuasi Bayas and other Total Year ended December 31, 2004 Ownership (100%) (85.26%) (100%) (44%) (100%) (100%) Revenues(a) $ 1,429 $ 406 $ 486 $ 566 $ 183 $ — $ 3,070 Operating income (loss) 442 181 (45) 361 95 (65) 969 Working capital 415 56 29 386 84 (37) 933 Depreciation and amortization 120 10 68 58 16 2 274 Property, plant & equipment 1,071 114 834 1,031 137 8 3,195 Capital expenditures & deferred project costs 297 19 160 81 16 — 573 Year ended December 31, 2003 Ownership (100%) (85.26%) (100%) (44%) (100%) (100%) Revenues(a) $ 1,046 $ 252 $ 396 $ 275 $ 114 $ — $ 2,083 Operating income (loss) 224 59 (68) 115 32 (61) 301 Working capital 348 25 28 80 30 138 649 Depreciation and amortization 124 10 48 50 15 2 249 Property, plant & equipment 958 104 743 1,018 134 13 2,970 Capital expenditures & deferred project costs 97 13 97 151 12 — 370 Dominican Principal base of operations Canada Republic Canada Chile Chile Canada

(a) Inter-segment sales are eliminated during the preparation of the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 81 (b) Identifiable assets by geographic location are as follows:

Total Total Property, plant Property, plant assets assets and equipment and equipment As at December 31 2004 2003 2004 2003 Canada $ 2,418 $ 2,061 $ 1,778 $ 1,576 Chile 1,741 1,379 1,146 1,132 Barbados 203 124 2 2 Norway 158 159 145 148 Dominican Republic 301 216 114 104 Other 297 233 10 8 $ 5,118 $ 4,172 $ 3,195 $ 2,970

(c) Consolidated sales revenues: (i) By geographic location of customers:

Years ended December 31 2004 2003 Amount % Amount % Europe $ 1,189 39 $ 891 43 U.S. 838 27 554 27 Other 786 26 465 22 Total foreign* 2,813 92 1,910 92 Canada 257 8 173 8 $ 3,070 100 $ 2,083 100 *Includes sales by Canadian operations to foreign customers $ 1,246 $ 957

(ii) By product category:

Years ended December 31 2004 2003 Amount % Amount % Nickel $ 1,000 33 $ 768 37 Ferronickel 406 13 252 12 Copper 1,166 38 691 33 Zinc 144 5 100 5 Cobalt 180 6 71 3 Palladium 31 1 35 2 Other 143 4 166 8 $ 3,070 100 $ 2,083 100

14. FINANCIAL INSTRUMENTS Falconbridge has an approved financial risk management policy addressing the philosophy, implementation and control of financial risk management and investment activities. Falconbridge manages its exposures by entering into contractual arrangements (derivatives) which reduce (hedge) the exposures by creating an offsetting position. The following is a summary of these hedge positions.

Balance Sheet Economic Hedges Falconbridge has monetary assets and liabilities denominated in currencies other than the U.S. dollar. The Corporation uses foreign currency forward contracts to offset the exposure from fluctuations in foreign exchange rates. The following is a summary of foreign currency forward contracts:

82 FALCONBRIDGE • 2004 ANNUAL REPORT As at December 31 2004 2003 Canadian dollar net liability exposure US$ forward contracts (millions) 429 385 Average price (US$) 1.2120 1.3236 Contract amount (in Cdn$ millions) 520 510 Fair value (in US$ millions) 3 9 With maturity dates up to: March 2005

Expenditure Hedges Falconbridge incurs expenses, denominated in foreign currencies, which expose it to increased volatility in earnings due to fluctuations in foreign exchange rates. Falconbridge uses foreign currency forward exchange contracts and options to reduce these exposures by creating an offsetting position. Following is a summary of these hedge positions:

As at December 31 2004 2003 Forward exchange contracts Canadian dollar expenditures US$ forward contracts (millions) 198 426 Average price (US$) 1.3835 1.4941 Contract amount (in Cdn$ millions) 274 636 Fair value (in US$ millions) 30 62 With maturity dates up to: December 2005

Chilean peso expenditures US$ forward contracts (millions) 9 47 Average price (US$) 708 726 Contract amount (in CHP millions) 6,538 34,238 Fair value (in US$ millions) 3 10 With maturity dates up to: September 2005

Norwegian kroner expenditures US$ forward contracts (millions) — 33 Average price (US$) — 7.9841 Contract amount (in NOK millions) — 267 Fair value (in US$ millions) — 6

Option contracts Canadian dollar expenditures Option amount (in Cdn$ millions) 50 30 Fair value (in US$ millions) 1 1 With maturity dates up to: December 2005

Norwegian kroner expenditures Option amount (in NOK millions) 135 210 Fair value (in US$ millions) 1 1 With maturity dates up to: September 2005

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 83 Interest Rate Risk Management Falconbridge is exposed to interest rate risk as a result of its issuance of debt. Falconbridge reduces its borrowing costs and hedges its exposure to interest rate risk through the use of interest rate swaps and interest rate swap options. The differential to be paid or received, on interest rate swaps, for which Falconbridge received hedge accounting, is accrued and recognized as an adjust- ment to interest expense related to the debt. The net interest on other swaps is reflected in the financial statements as other expenses/(income). Following is a summary of the hedge positions:

Interest rate swap contracts at December 31, 2004 Total 1 Maturity (2005) 400 Maturity (2006) 325 Maturity (2008)2 136 Maturity (2012) 350 Maturity (2015) 150 Fair value3 66

1. Notional principal amount of maturities and fair value are in millions of U.S. dollars. 2. Includes cross currency interest rate swaps (with a notional amount of $111 million) designated as a hedge of the Canadian dollar debenture. The total fair value of these instruments at December 31, 2004 was $46 million, of which $34 million related to the currency component of the swap and $12 million related to the interest component. 3. Includes the total fair value of $34 million related to the cross currency interest rate swap discussed before.

Energy Price Management Falconbridge hedges a portion of the cost of electricity of its operations in Canada and Norway. The following tables summarize outstanding contracts for the year:

Canadian electricity contracts 2005 2006 2007 Rate Cdn$/MWh 50.82 52.78 52.65 Amount (MW) 125 92 21 Fair value (in Cdn$ millions) 5 3 1

Norwegian electricity contracts 2005 2006 2007 2008 2009 Thereafter Rate NOK/MWh 183.5 191.4 198.5 205.8 211.1 215.1 Amount (MW) 55.9 55.9 50.9 45.9 45.9 20.2 Fair value (in NOK millions) 8 15 11 8 9 38

Discretionary Trading Falconbridge’s risk management policy provides for the limited use of financial instruments for discretionary trading purposes. In the normal course of business, Falconbridge has traditionally maintained a limited amount of financial instruments for discretionary trading purposes. Falconbridge had no outstanding contracts used for discretionary trading at December 31, 2004 and December 31, 2003.

Fair Value of Primary Financial Instruments The fair value of Falconbridge’s primary financial instruments, including cash and cash equivalents, accounts and metals settlements receivable, and accounts payable and accrued charges approximates their carrying value due to the short-term nature of these instruments. The fair value of the long-term debt is disclosed in Note 6.

Credit Risk Falconbridge does not consider the credit risk associated with its financial instruments to be significant. Foreign currency and interest rate swap contracts are maintained with high quality counter-parties and Falconbridge does not anticipate that any counter-parties will fail to meet their obligation. Falconbridge does not have significant exposure to any individual customer and these risks are further managed through a highly effective credit management program. Falconbridge’s risk management policy only allows short-term investments in high-quality debt obligations.

84 FALCONBRIDGE • 2004 ANNUAL REPORT 15. RELATED-PARTY TRANSACTIONS At December 31, 2004, Noranda Inc. (Noranda) owned, directly and indirectly, approximately 58.8% of the common shares of the Corporation. Falconbridge has entered into an agreement with a subsidiary of Noranda, whereby it acts as a sales agent for all products, other than sulphuric acid and indium, produced at Kidd Creek operations. Falconbridge has entered into a supply agreement with another subsidiary of Noranda, which will purchase and resell the output of sulphuric acid. Accounts and metals settlements receivable, in the Consolidated Statements of Financial Position, includes $43 million (2003 – $30 million) in receivables from Noranda relating to amounts being collected under the sales agreements and $nil (2003 – $13 million) from net purchases of material by Noranda. Accounts payable and accrued charges, in the Consolidated Statements of Financial Position, include $28 million (2003 – $35 million) for the purchase of materials from Noranda. Falconbridge has agreements with various Noranda Group of Companies for the purchase of custom feeds; the toll treatment of copper concentrates, blister copper and refinery slimes; and the sale of metals. The following table details related-party production and marketing transactions with Noranda Group of Companies:

Years ended December 31 2004 2003 Sale of materials and technology to Noranda(a) $ 121 $ 98 Purchase of materials from and smelting and refining fees paid to Noranda(b) 140 159 Commissions and agency fees paid to Noranda(c) 1 1 Net fees received relating to sulphuric acid from Noranda(a) 7 2

Included in Falconbridge’s Consolidated Statements of Earnings in (a) Revenues; (b) Costs of metal and other product sales; (c) Selling, general and administrative.

In an effort to maximize synergies, certain operations of Noranda and Falconbridge are integrated including the combination of various corporate support services and merged management teams. Arrangements between Falconbridge and the Noranda Group of Companies are negotiated in the best interest of both parties, on an arms length basis at market terms.

16. OTHER EXPENSES/(INCOME) Other expenses/(income) include the following:

Years ended December 31 2004 2003 Foreign exchange loss $16 $ 17 Metals trading loss (gain) 2 (11) Net interest income on interest rate swaps not designated as hedges (6) — Other income (7) (8) Other expenses/(income) $5 $ (2)

17. COMMITMENTS AND CONTINGENCIES (a) The Corporation has received an exemption granted by the Ontario government, until December 31, 2009, from a requirement to refine in Canada ores mined from certain properties of the Corporation in Ontario. This exemption is limited to the quantity of nickel-copper matte capable of yielding not more than 100 million pounds of refined nickel per year.

(b) Effective January 1, 2003, Falconbridge adopted AcG 14, “Disclosure of Guarantees”, issued by the Canadian Institute of Chartered Accountants, which expands previously issued accounting guidance and requires additional disclosure by the guarantor in its interim and annual financial statements. In the normal course of business, Falconbridge enters into numerous agreements that

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 85 contain indemnification commitments and may contain other features that meet the expanded definition of guarantees. The terms of these indemnification agreements will vary based on the contract and typically do not provide for any limit on the maximum potential liability. Historically, Falconbridge has not made any significant payments under such indemnifications and no amounts have been accrued in the financial statements with respect to these indemnification commitments.

(c) In the normal course of business, Falconbridge may enter into contractual agreements with suppliers for project-related equipment where there may be a long lead delivery schedule.

(d) From time to time, Falconbridge is involved in litigation, investigations or proceedings relating to claims arising out of its operations in the ordinary course of business. In the opinion of management, the aggregate amount of any potential liability is not expected to have a material adverse effect on Falconbridge’s financial position or results.

18. COMPARATIVE AMOUNTS Certain of the comparative figures have been restated to conform to the current year’s presentation, including the restatement outlined in Note 2.

86 FALCONBRIDGE • 2004 ANNUAL REPORT Five-Year Review

(UNAUDITED – IN MILLIONS OF US$, EXCEPT PER SHARE DATA) 2004 2003 2002 2001 2000 Operating results Revenues 3,070 2,083 1,525 1,385 1,766 EBITDA1 1,243 550 313 231 561 Depreciation and amortization 274 249 234 210 194 Earnings for the year 672 191 52 16 254 Operating cash flow 968 444 233 231 446 Capital expenditures and deferred project costs 573 370 234 225 168 Per common share data Net income (US$) 3.71 1.03 0.25 0.05 1.39 Cash dividends (Cdn$) 0.40 0.40 0.40 0.40 0.40 Operating cash flow (US$) 5.38 2.48 1.32 1.31 2.52 Number of common shares issued at end of year (000s) 179,770 178,792 177,603 176,977 176,977 Financial position Cash and equivalents 645 298 165 125 167 Total assets 5,118 4,172 3,453 3,342 3,349 Working capital 933 649 443 356 470 Property, plant and equipment, net 3,195 2,970 2,616 2,610 2,542 Long-term debt 1,437 1,427 1,280 1,172 990 Shareholders’ equity 2,563 1,938 1,530 1,511 1,639 Total liabilities 2,555 2,234 1,923 1,831 1,710

Net debt/net debt plus equity 24% 37% 42% 41% 33% Return on common shareholders’ equity 31% 11% 3% 1% 16% Return on net assets employed 31% 13% 3% 1% 14% Production statistics (tonnes) Mine Nickel – Sudbury 22,602 24,143 27,833 25,226 23,234 – Raglan 26,552 25,110 24,636 24,570 23,089 – Montcalm 2,152 ———— – Falcondo 29,477 27,227 23,303 21,662 27,830 80,783 76,480 75,772 71,458 74,153 Refined Nickel – FNA 71,410 77,183 68,530 68,221 58,679 – Falcondo 29,477 27,227 23,303 21,662 27,830 100,887 104,410 91,833 89,883 86,509 Mine Copper – Sudbury 24,694 29,161 31,050 22,858 20,990 – Raglan 6,867 6,628 6,500 6,915 6,308 – Kidd Creek 41,029 46,409 45,434 42,340 54,926 – Collahuasi 205,116 168,578 185,014 193,135 186,073 – Lomas Bayas 62,041 60,427 59,304 24,702 — – Montcalm 1,188 ———— 340,935 311,203 327,302 289,950 268,297 Refined Copper – FNA 35,643 35,852 30,632 26,722 25,307 – Kidd Creek 115,578 132,364 146,526 127,824 122,987 – Collahuasi 25,610 27,895 26,678 26,180 25,579 – Lomas Bayas 62,041 60,427 59,304 24,702 — 238,872 256,538 263,140 205,428 173,873

1. EBITDA – represents earnings before interest, income and mining taxes, depreciation and amortization, and non-controlling interest.

FIVE-YEAR REVIEW 87 Consolidated Results – 2004 and 2003 by Quarters

(UNAUDITED – IN MILLIONS OF US$, EXCEPT PER SHARE DATA) 2004 1st Qtr. 2nd Qtr. 3rd Qtr. OPERATIONS Revenues $ 734 $ 704 $ 756 Operating expenses Costs of sales Costs of metal and other product sales 404 407 400 Depreciation of plant and equipment 41 46 35 Amortization of development and preproduction expenditures 16 21 24 461 474 459 Selling, general and administrative 24 30 28 Exploration 358 Research and process development 233 Other (income)/expenses (23) 3 22 467 515 520 Operating income 267 189 236 Interest 10 6 11 Earnings before taxes and non-controlling interest 257 183 225 Income and mining taxes 69 41 67 Non-controlling interest in earnings of subsidiary 433 Earnings for the period 184 139 155 Dividends on preferred shares 212 Earnings attributable to common shares $ 182 $ 138 $ 153 Basic earnings per common share (Note 1) $ 1.02 $ 0.77 $ 0.85 Diluted earnings per common share (Note 1) $ 1.01 $ 0.76 $ 0.85 Basic weighted average number of shares outstanding (thousands) 179,177 179,567 179,696 Diluted weighted average number of shares outstanding (thousands) 180,450 180,584 180,661 EARNINGS (LOSS) CONTRIBUTIONS Principal operations – Integrated Nickel Operations (INO) $ 131 $ 90 $ 106 Falconbridge Dominicana, C. por A. 55 44 40 Nickel Operations 186 134 146 Kidd Creek Operations 3 (19) (15) Collahuasi 45 73 124 Lomas Bayas 24 22 23 Copper Operations 72 76 132 Corporate and other (Note 2) 9 (21) (42) Operating income 267 189 236 Interest 10 6 11 Income and mining taxes 69 41 67 Non-controlling interest in earnings of subsidiary 433 Earnings for the period 184 139 155 Dividends on preferred shares 212 Earnings attributable to common shares $ 182 $ 138 $ 153 Basic earnings per common share (Note 1) $ 1.02 $ 0.77 $ 0.85 Diluted earnings per common share (Note 1) $ 1.01 $ 0.76 $ 0.85 METAL SALES (tonnes, except precious metal revenues and silver) INO – Nickel 18,118 18,025 15,432 – Copper 13,197 11,464 13,875 – Precious metal revenues (thousands) $ 21,727 $ 26,718 $ 24,436 Kidd Creek – Zinc (including metal in concentrate) 26,525 33,670 34,501 – Copper (including metal in concentrate) 28,969 15,834 23,040 – Silver (thousands of troy ounces) 1,004 1,143 949 Nickel in ferronickel 6,777 7,808 6,247 Collahuasi – Copper (including metal in concentrate) 28,879 47,077 62,013 Lomas Bayas – Copper 15,036 13,645 16,271 AVERAGE PRICES REALIZED (US$/lb., except silver) Nickel $ 6.88 $ 5.76 $ 6.54 Ferronickel 6.80 5.85 6.49 Copper 1.21 1.21 1.29 Zinc 0.52 0.51 0.48 Silver (US$/oz.) 6.42 6.22 6.06

Note: 1. See Note 10(c) to the Consolidated Financial Statements. 2. Corporate and other costs include general and administrative and exploration expenditures, foreign exchange gains or losses on U.S. dollar debt and other expenses/(income).

88 FALCONBRIDGE • 2004 ANNUAL REPORT 2003 4th Qtr. Year 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year

$ 876 $ 3,070 $ 472 $ 490 $ 485 $ 636 $ 2,083

471 1,682 332 340 352 389 1,413 71 193 41 51 43 44 179 20 81 16 17 18 19 70 562 1,956 389 408 413 452 1,662 26 108 21 23 19 23 86 420288523 412223613 35(3) (1) 9 (7) (2) 599 2,101 411 440 452 479 1,782 277 969 61 50 33 157 301 10 37 12 13 12 6 43 267 932 49 37 21 151 258 71 248 11 (3) 1 54 63 212— 1124 194 672 38 39 19 95 191 27 22239 $ 192 $ 665 $ 36 $ 37 $ 17 $ 92 $ 182 $ 1.07 $ 3.71 $ 0.20 $ 0.21 $ 0.10 $ 0.52 $ 1.03 $ 1.07 $ 3.69 $ 0.20 $ 0.21 $ 0.10 $ 0.51 $ 1.02 179,758 179,550 177,607 177,165 177,506 178,153 177,675 180,676 180,512 177,640 177,303 178,030 179,156 178,096

$ 115 $ 442 $ 44 $ 46 $ 31 $ 103 $ 224 42 181 4 7 17 31 59 157 623 48 53 48 134 283 (14) (45) (14) (16) (23) (15) (68) 119 361 28 25 23 39 115 26 95 6 5 8 13 32 131 411 20 14 8 37 79 (11) (65) (7) (17) (23) (14) (61) 277 969 61 50 33 157 301 10 37 12 13 12 6 43 71 248 11 (3) 1 54 63 212— 1124 194 672 38 39 19 95 191 2722239 $ 192 $ 665 $ 36 $ 37 $ 17 $ 92 $ 182 $ 1.07 $ 3.71 $ 0.20 $ 0.21 $ 0.10 $ 0.52 $ 1.03 $ 1.07 $ 3.69 $ 0.20 $ 0.21 $ 0.10 $ 0.51 $ 1.02

19,799 71,374 20,325 20,627 17,558 20,468 78,978 12,521 51,057 14,470 16,139 12,093 16,506 59,208 $ 26,165 $ 99,046 $ 19,963 $ 24,751 $ 22,686 $ 19,380 $ 86,780 40,563 135,259 35,517 28,361 25,407 21,307 110,592 22,443 90,286 28,773 26,375 26,098 23,916 105,162 780 3,876 1,204 1,553 1,550 1,016 5,323 8,104 28,936 6,536 6,455 7,361 6,781 27,133 66,667 204,636 44,429 46,798 37,281 39,639 168,147 15,238 60,190 14,578 14,817 15,601 16,293 61,289

$ 6.45 $ 6.40 $ 3.83 $ 3.87 $ 4.33 $ 5.57 $ 4.40 6.42 6.37 3.65 3.78 4.15 5.21 4.20 1.42 1.32 0.78 0.76 0.81 0.96 0.82 0.52 0.51 0.39 0.39 0.41 0.46 0.41 7.04 6.51 4.69 4.62 4.83 5.19 4.80

CONSOLIDATED RESULTS – 2004 AND 2003 BY QUARTERS 89 Board of Directors

DAVID W. KERR, C.A. ALEX G. BALOGH JACK L. COCKWELL ROBERT HARDING, Toronto, Ontario Oakville, Ontario Toronto, Ontario F.C.A. Chairman, Falconbridge Limited Corporate Director Group Chairman, Toronto, Ontario Appointed in April 1989 Appointed in September 1989 (2,3) Brascan Corporation Chairman, Brascan Corporation Chairman of Noranda Inc. and Formerly Deputy Chairman of Noranda Appointed in December 1995 (4) Appointed in July 2000 (2,4,6) previously President and CEO of Inc. (1994-2003) and Chairman of Formerly Brascan’s President and Directorships include: Brascan Noranda Inc. Past Chairman of the Falconbridge Limited (1994-2003). Chief Executive Officer for 12 years. Corporation (Chairman) and the International Council on Mining and Directorships include: Noranda Inc., Directorships include: Brascan following Brascan group companies: Metals. Directorships include: Strongco Inc., Brascan Power Inc. and Corporation, Brookfield Properties BPO Properties Corporation (Chair- Brascan Corporation, Shell Canada Cambior Inc. Mr. Balogh also serves on Limited, Brascan Power Inc., Astral man), Noranda Inc., Norbord Inc. Limited, Sun Life Financial Inc. and the Advisory Council of Sentient Global Media Inc., Noranda Inc., Norbord and Fraser Papers Inc. Mr. Harding Sustainable Development Technology Resources Fund. He is Chairman of the Inc., Fraser Papers Inc. and the is also a Director of Burlington Canada. Mr. Kerr is also Chairman of National Advisory Board, Minerals and C.D. Howe Institute. Mr. Cockwell Resources Inc. and is Chairman of the Toronto Rehabilitation Hospital Metals Science and Technology, and is is also Chairman of the Board of the Board of Governors of the Foundation. past Chairman of the International Trustees of the Royal Ontario University of Waterloo, Chair of Council of Metals and the Environ- Museum. Campaign Waterloo and Trustee and ment. In addition, Mr Balogh is a Vice-Chair of the United Way of metallurgical engineer. Greater Toronto.

COMMITTEES 1 Audit Committee 2 Corporate Governance Committee 3 Environment, Health and Safety Committee 4 Human Resources and Compensation Committee 5 Independent Directors’ Committee 6 Pension Investment Committee

The Chair of the committee is in bold

90 FALCONBRIDGE • 2004 ANNUAL REPORT G. EDMUND KING NEVILLE W. KIRCHMANN, MARY MOGFORD, ICD.D. DEREK PANNELL, ing, BSc, Toronto, Ontario C.A. (S.A.) Newcastle, Ontario ARSM Partner, DeCew Capital Corporation Toronto, Ontario Corporate Director Toronto, Ontario Appointed in June 1994 (2,4,5,6) President, Kirchmann Holdings Ltd. Appointed in December 1995 (1,2,3,5) President and Chief Executive Officer, Formerly Chairman and Chief Appointed in December 1997 (1,4,5) Former Deputy Minister of Finance Noranda Inc. Executive Officer of CIBC Wood Previously President and CEO of Coca- and Deputy Minister of Natural Appointed in April 2001 (3,4) Gundy Corporation and formerly Cola Canada and Southern Africa. Resources for the Province of Ontario. Appointed President and CEO of Chairman of WIC Western Inter- Formerly President and CEO of The Directorships include: MDS Inc., Noranda Inc. in June 2002. Previously national Communications Inc. Princess Margaret Hospital Founda- Potash Corporation of Saskatchewan President and COO of Noranda and CEO Directorships include: Rockwater tion. Directorships include: Clearly Inc., Sears Canada, Sears Canada of Falconbridge Limited, Vice-President Capital Corporation, Caldwell Canadian Beverage Corporation, Fibre Bank and the Altamira Advisory of Compañía Minera Antamina in Peru Partners Ltd., the Canadian Connections Inc. and Interlink Council. Ms. Mogford is also a Director and President of Brunswick Mining and Cardiology Society and the Centre of Community Cancer Nurses (Chairman). of The Hospital for Sick Children and Smelting. Directorships include: Addiction and Mental Health Mr. Kirchmann is also Chair of the a Trustee of The Toronto Symphony Noranda Inc. and the Mining Association Foundation. Development Committee and a Board Foundation. of Canada. Mr. Pannell is also an Member of The Princess Margaret Honorary Professor of the Universidad Hospital Foundation. Nacional de Ingenéria, Lima, Peru.

DAVID H. RACE AARON W. REGENT, C.A. JAMES D. WALLACE, F.C.A. Toronto, Ontario Toronto, Ontario Sudbury, Ontario Corporate Director President and Chief Executive President, Pioneer Construction, Inc. Appointed in April 1994 (1,3,5) Officer, Falconbridge Limited Appointed in January 2001 (1,4,5,6) Chairman Emeritus of CAE Inc. and Appointed in February 2002 Director of the following public companies: previously President and CEO of Previously Executive Vice-President Osprey Media Group Inc. and Northstar CAE Inc. (1985-1993). Mr. Race and CFO of Noranda Inc., President Aerospace Inc. Mr. Wallace is also a is also an Honorary Director of the and CEO of Trilon Securities Director of Northern Ski Company Limited, Bank of Nova Scotia and Laureate Corporation and Senior Vice- Krisjefdon Limited, Ethier Sand & Gravel of the Canadian Business Hall President and CFO of Brascan Limited and Alexander Centre Industries of Fame. Corporation. Directorships include: Limited. Other directorships: Councillors of Compañía Minera Doña Inés de Ontario’s Promise: The Partnership for Collahuasi S.C.M., The Nickel Children and Youth, Northeastern Smart Development Institute (Chairman), Growth Panel and Cancer Care, Ontario. the C.D. Howe Institute, Mr. Wallace is also past Chair of The National Ballet of Canada Laurentian University. and The Hospital for Sick Children Foundation.

BOARD OF DIRECTORS 91 Ongoing Corporate Governance Initiatives

THE BOARD OF DIRECTORS AND COMPANY MANAGEMENT STRIVE TO ANTICIPATE AND IMPLEMENT ANY GOVERNANCE INITIATIVES THAT THE CORPORATE GOVERNANCE COMMITTEE BELIEVES ARE APPROPRIATE IN THE CONTEXT OF THE EXTENSIVE INTERNATIONAL BUSINESS ACTIVITIES AND THE GENERAL GLOBAL BUSINESS ENVIRONMENT. OVER THE PAST TWO YEARS IN PARTICULAR, THE BOARD HAS TAKEN STEPS TO ALIGN ITSELF WITH DEVELOPING GOVERNANCE STANDARDS. CERTAIN KEY COMPONENTS OF THE COMPANY’S GOVERNANCE SYSTEMS AND PROCEDURES ARE OUTLINED BELOW.

Corporate Governance Guidelines The Corporate Governance Guidelines serve as the formal mandate of the Board of Directors with a view to providing a framework for strengthening governance, expanding insider accountability and enhancing the quality of Board oversight. These Guidelines, reviewed by the Board for effectiveness on an annual basis, state the primary responsibilities of the Board as well as the general criteria for Board membership and level of commitment expected of each director. Disclosure Committee Director Independence DENIS COUTURE In certain of the fundamental governance areas requiring Board oversight, a strong element of independent director stewardship continues to be maintained and developed by the Board. Vice-President, The Independent Directors’ Committee meets frequently during the course of the year to consider Investor Relations, Communications & Public Affairs related party matters and other transactions which may impact on the interests of the minority shareholders as a group. The Audit Committee is comprised solely of independent directors and KATHERINE RETHY there is a majority of independent directors, including the Chair, on the Corporate Governance Committee. Senior Vice-President, Information Systems, Procurement, Logistics, Enterprise Code of Ethics Risk Management & Facilities The Company’s written Code of Ethics sets a high standard of ethical behaviour throughout the Company and its global operations. The code applies to all directors, officers and employees of the JEFFERY SNOW Company and also provides a confidential procedure under which employees can report issues to Senior Vice-President designated individuals or through the Company’s Ethics Hotline. & General Counsel Disclosure Policy STEPHEN YOUNG The Corporate Disclosure Policy summarizes the Company’s policies and practices regarding Corporate Secretary disclosure of information to investors, analysts, the media and the public generally. The Company’s Disclosure Committee oversees and monitors compliance with this policy and advises senior management and the Board on public disclosure matters.

Recent Developments The Board has recently revised its Corporate Governance Guidelines and the terms of reference for the Board committees to expand their stated mandates and respective responsibilities, high- lighting the Company’s ongoing compliance with new regulatory governance guidelines. Audit Committee oversight was also enhanced over the past year by regular quarterly reports under the Company’s Enterprise Risk Management Process, which extends risk analysis processes globally to all business and functional units, and by the filling of the new post of Director, Corporate Audit Services who reports directly to the Audit Committee.

(see Management Information Circular for more information)

92 FALCONBRIDGE • 2004 ANNUAL REPORT Officers of the Corporation

DAVID KERR MICHAEL AGNEW ANDRÉ JORON Chairman of the Board Vice-President, Vice-President, Technology Human Resources AARON REGENT RICK BURDETT TED LAKS President & Chief Executive Officer Vice-President, Vice-President, Information Systems & Performance/Six Sigma CLAUDE FERRON Chief Information Officer IAN PEARCE President, Canadian Copper & ROBERT BURROW Recycling Senior Vice-President, Vice-President, Projects & Engineering JOSEPH LAEZZA Finance – Nickel Operations DAVID RAE President, Nickel DEAN CHAMBERS Vice-President, Commercial & FERNANDO PORCILE Treasurer Strategy, Nickel President, Copper SERGIO CHAVEZ KATHERINE RETHY

PETER KUKIELSKI President & General Manager, Senior Vice-President, Ferronickel Operations Information Systems, Executive Vice-President, Projects Procurement, Logistics, Enterprise DENIS COUTURE Risk Management & Facilities MICHAEL DOOLAN Vice-President, MARTIN SCHADY Senior Vice-President & Chief Investor Relations, Financial Officer Communications & Senior Vice-President, Public Affairs Business Development

JOHN DOYLE PAUL SEVERIN Vice-President, Senior Vice-President, Taxation Exploration

PETER EICHINGER JEFFERY SNOW Vice-President, Senior Vice-President Global Procurement & General Counsel

ALLEN HAYWARD ROBERT TELEWIAK Vice-President, Vice-President, Nickel Mining Environment, Health & Safety

DAVID HOLOWACK STEPHEN YOUNG Vice-President, Corporate Secretary Strategy & Administration

OLLE JOHANSSON LYNDA BEESLEY Vice-President, Trading Assistant Corporate Secretary

CRAIG DUFF Assistant Treasurer

OFFICERS OF THE CORPORATION 93 Corporate Directory

HEAD OFFICE Falconbridge Nikkelverk A/S Kidd Mining Division P.O. Box 457 Postal Bag 2002 Falconbridge Limited 4601 Kristiansand South, Norway Timmins, Ontario P4N 7K1 BCE Place Telephone: 47-38-10-10-10 Telephone: (705) 264-5200 181 Bay Street Fax: 47-38-10-10-11 Fax: (705) 267-8709 Suite 200 Edward Henriksen Michel Boucher Toronto, Ontario Managing Director General Manager M5J 2T3 Telephone: (416) 982-7111 Falconbridge Dominicana, Kidd Metallurgical Division Fax: (416) 982-7423 C. por A. Postal Bag 2002 Bonao, Dominican Republic Timmins, Ontario P4N 7K1 Telephone: (809) 682-6041 Telephone: (705) 235-8121 Fax: (809) 221-8423 Fax: (705) 235-7318 NICKEL Sergio Chavez Daniel Picard Sudbury Mines/Mill President & General Manager General Manager Onaping, Ontario P0M 2R0 Compañía Minera Falconbridge Telephone: (705) 966-3411 Lomas Bayas Fax: (705) 699-3100 CUSTOM FEED Galleguillos Lorca 1610 Antofagasta, Chile Michael Dufresne Falconbridge International Limited Telephone: (56) 55 200-600 General Manager Suite 201, Stevmar House Fax: (56) 55 200-664 Rockley, Christ Church, Barbados Sudbury Smelter Gordon Stodhart Telephone: (246) 435-9969 Falconbridge, Ontario General Manager Fax: (246) 435-9978 P0M 1S0 Telephone: (705) 693-2761 Ric Lorrimer Fax: (705) 699-3932 President CORPORATE Mark Trevisiol Falconbridge International S.A. General Manager Avenue Lloyd George 7, Box 2 Marketing and Sales Subsidiaries B – 1000 Brussels, Belgium and Offices Raglan Mine Telephone: (32-2) 401-8330 120, avenue de l’Aéroport Fax: (32-2) 401-8331 Falconbridge Europe S. A. Rouyn-Noranda, Québec Avenue Lloyd George 7, Box 2 Michael McSorley J9X 5B7 B – 1000 Brussels, Belgium Chairman Telephone: (819) 762-7800 Telephone: (32-2) 401-8300 Fax: (819) 762-9266 Fax: (32-2) 401-8301 Denis Lachance John Smillie General Manager, Raglan COPPER President Operations Compañía Minera Doña Inés de Falconbridge (Japan) Ltd. Collahuasi S.C.M. Nihonbashi First Building 8F Av. Andrés Bello 2687, Piso 11 2-19, Nihonbashi 1-Chome Las Condes Chuo-ku, Tokyo 103, Japan Santiago, Chile Telephone: (81-3) 3272-0900 Telephone: (56-2) 362-6500 Fax: (81-3) 3272-0901 Fax: (56-2) 362-6562 Toshiaki Oiwa Thomas Keller President Chief Executive Officer

94 FALCONBRIDGE • 2004 ANNUAL REPORT Falconbridge U.S. Inc. Falconbridge (Australia) Pty. Ltd. Falconbridge Nouvelle- Twin Towers – Suite 245 Exploration Division Calédonie SAS 4955 Steubenville Pike Suite 701, Level 7 9 rue Austerlitz, 6e étage Pittsburgh, Pennsylvania Toowong Tower – 9 Sherwood Road BP MGA 08 U.S.A. 15205-9604 Toowong, Queensland, 4066 Nouméa Cedex 98802 Telephone: (412) 787-0220 Australia Nouvelle-Calédonie Fax: (412) 787-0287 Telephone: (61-7) 3721-4222 Telephone: (687) 246-040 Fax: (61-7) 3871-1379 Fax: (687) 246-049 James Moore President Scott Bruce Brian Kenny Director of Exploration, Australasia President, Koniambo

Falconbridge Brasil Ltda. Falconbridge (Australia) Pty Ltd. Exploration Offices Avenida Afonso Pena 2770 Suite 701, Level 7 2nd Andar Toowong Tower – 9 Sherwood Road Queen’s Quay Terminal Bairro Funcionarios Toowong, Queensland, 4066 207 Queen’s Quay West Belo Horizonte – MG 30130-007 Australia Suite 800 Brazil Telephone: (61-7) 3721-4222 Toronto, Ontario Telephone: (55-31) 3280-4400 Fax: (61-7) 3871-1379 M5J 1A7 Fax: (55-31) 3280-4411 Brian Hill Telephone: (416) 982-7111 Helio Diniz Managing Director Fax: (416) 982-7420 Exploration Manager, Brazil Mike Donnelly Falconbridge France SAS General Manager, 17 Square Edouard VII Copper Exploration Latin America 75009 Paris Subsidiaries, Project Offices and David Gower France Associated Companies General Manager, Telephone: 33 (01) 53-43-51-60 Nickel Exploration Fax: 33 (01) 53-43-51-62 Noranda Chile Limitada – Derek Job Tony Green Falconbridge Chile S.A. Finance Director General Manager, Avenida Andres Bello 2777 Copper Exploration Piso 8 Las Condes Technology Centre Santiago, Chile P.O. Box 40 Telephone: (56-2) 337-0600 Falconbridge, Ontario P0M 1S0 Fax: (56-2) 337-7220 Telephone: (705) 693-2761 Fernando Porcile Fax: (705) 699-3600 President, Copper Gary Potts Manager of Geology, Sudbury Region

P.O. Bag 2002 Timmins, Ontario P4N 7K1 Telephone: (705) 264-5200 Fax: (705) 267-8709 Damien Duff Manager of Geology, Timmins Region

3296, avenue Francis-Hugues Laval, Quebec H7L 5A7 Telephone: (450) 668-2112 Fax: (450) 668-2929 James Robertson Director of Exploration, North America

CORPORATE DIRECTORY 95 Shareholder and Corporate Information

STOCK EXCHANGE LISTING AUDITORS Toronto, Trade Symbol: Deloitte & Touche LLP FL (Common Shares) Toronto, Ontario FL. PR. A (Preferred Share Series 2) FL. PR. B (Preferred Share Series 3) ANNUAL MEETING The annual meeting of shareholders will be held on INDEX LISTINGS April 21, 2005 at the Design Exchange, Trading Floor, S&P/TSX Composite 234 Bay Street, Toronto at 2:00 p.m. S&P/TSX Capped Composite S&P/TSX Capped Diversified Metals & Mining TRANSFER AGENT & REGISTRAR S&P/TSX Capped Materials For information regarding dividend cheques, S&P/TSX MidCap share certificates, stock transfers, etc., please contact: Computershare Trust Company of Canada OUTSTANDING SHARES Telephone: 1-800-564-6253 or December 31, 2004 (514) 982-7555 Common Shares 179,770,190 Fax: 1-866-249-7775 or Preferred Share Series 1 89,835 (416) 263-9524 Preferred Share Series 2 4,787,283 [email protected] Preferred Share Series 3 3,122,882 INQUIRIES ANNUAL DIVIDEND PER SHARE Denis Couture Common Shares Cdn$0.40 Vice-President, Investor Relations, Preferred Share Series 1 Cdn$0.08 Communications & Public Affairs Preferred Share Series 2 Cdn$0.74 Telephone: (416) 982-7020 Preferred Share Series 3 Cdn$0.86 Tracey Wise

FALCONBRIDGE DIVIDEND POLICY Manager, Investor Relations E OXBY TYPESETTING: IBEX GRAPHIC COMMUNICATIONS INC. PRINTED IN CANADA: QUEBECOR WORLD MIL INC. Falconbridge views common share dividends as an Telephone: (416) 982-7178 important part of a shareholder’s return on investment. As a result, it aims to pay a common share dividend at VISIT OUR WEBSITE all points of the economic cycle, as long as the payment Browse www.falconbridge.com to learn more about does not impair the Company’s financial position. It is Falconbridge and the mining industry. expected that the common share dividend will increase or decrease to reflect the Company’s operating results VERSION FRANÇAISE and financial position. La version française du rapport annuel sera fournie The preferred shares of each series issued by sur demande. Falconbridge rank in priority to the common shares with respect to the payment of dividends.

SHARE TRADING INFORMATION

Share Price Share Price Common Share Quarter Low High Volume (MILLIONS) 2004 First $ 29.21 $ 37.45 45 Second 28.05 35.53 33 Third 28.00 34.68 22 Fourth 28.14 34.35 23 2003 First $ 15.37 $ 18.13 26 Second 15.25 18.95 18 Third 17.35 23.18 24 Fourth 21.81 31.78 29 CREATIVE DIRECTION: S.D. CORPORATE COMMUNICATIONS DESIGN: RENATA CHUBB PORTRAIT PHOTOGRAPHY: TONY HAUSER LOCATION PHOTOGRAPHY: GRAEM 96 FALCONBRIDGE • 2004 ANNUAL REPORT Above, from left to right: 1) Collahuasi, Chile, shovel 2) Raglan, Quebec, logistics 3) Nickel crowns 4) Nikkelverk, Norway, cobalt packaging

Back cover, from left to right: 1) Collahuasi Chile, ball mill 2) Copper 3) Collahuasi, Chile, Rosario mine 4) Lomas Bayas, Chile, employee Falconbridge is a leading producer of nickel, copper, cobalt and platinum group metals. The Company is also a major recycler and processor of metal-bearing materials.

Falconbridge is committed to improving shareholder returns through the responsible and profitable growth of its core nickel and copper businesses. This will be accomplished by focusing on high-quality and long- life orebodies, by optimizing returns from current assets, and by selective acquisitions and development opportunities.

The company targets a 15% after-tax return on equity through a metals cycle, while maintaining investment grade credit ratings. Falconbridge entered the mining business in 1928 and today employs 5,800 people in 12 countries. The Company’s common shares are listed on the Toronto Stock Exchange under the symbol FL. As of December 31, 2004, Falconbridge was owned by Noranda Inc. of Toronto (58.8%) and by other investors (41.2%).

FALCONBRIDGE LIMITED

BCE PLACE, 181 BAY STREET, SUITE 200, TORONTO, ONTARIO, CANADA M5J 2T3

TELEPHONE: 416.982.7111 FACSIMILE: 416.982.7423 EMAIL: [email protected]

www.falconbridge.com