Falconbridge Limited 2003 Annual Report FUNDAMENTAL STRENGTH Our Operations

NICKEL COPPER CORPORATE

1 Sudbury 6 Compañía Minera Doña Inés de 9 Corporate Office (Sudbury, Ontario) Collahuasi S.C.M. (44%) (Toronto, Ontario) Mines and mills nickel-copper ores; smelts (Northern Chile) 10 Project Offices nickel-copper concentrate from Sudbury’s Mines and mills copper sulphide ores into (Kone and Nouméa, New Caledonia; mines and from Raglan, and processes concentrate; mines and leaches copper Brisbane, Australia) custom feed materials. oxide ores to produce cathodes. 11 Exploration Offices 2 Raglan 7 Kidd Division (Sudbury, Timmins and Toronto, Ontario; (Nunavik, Quebec) (Timmins, Ontario) Laval, Quebec; Pretoria, South Africa; Mines and mills nickel-copper ores from Mines copper-zinc ores from the Kidd Mine. Belo Horizonte, Brazil; Brisbane, open pits and an underground mine. Mills, smelts and refines copper-zinc ores Australia) from the Kidd Mine and processes Sudbury 3 Nikkelverk A/S copper concentrate and custom feed 12 Business Development (Kristiansand, Norway) materials. (Toronto, Ontario) Refines nickel, copper, cobalt, precious and platinum group metals from Sudbury, 8 Compañía Minera Falconbridge 13 Marketing and Sales Raglan and from custom feeds. Lomas Bayas (Brussels, Belgium; Pittsburgh, (Northern Chile) Pennsylvania; Tokyo, Japan) 4 Falconbridge Dominicana, C. por A. Mines copper oxide ores from an open pit; (85.26%) (Bonao, Dominican Republic) refines into copper cathode through the 14 Technology Centre Mines, mills, smelts and refines nickel solvent extraction-electrowinning process (Sudbury, Ontario) laterite ores. (SX-EW). 5 Custom Feed (Brussels, Belgium; Pittsburgh, Pennsylvania; Christ Church, Barbados)

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Contents 1 Strong Fundamentals 16 Management’s Discussion and Analysis 58 Corporate Governance Initiatives 2 To Our Shareholders 34 Auditors’ Report 59 Officers of the Corporation 6 Strength in Nickel 35 Financial Statements 60 Corporate Directory 10 Strength in Copper 39 Notes to the Financial Statements 62 Shareholder and Corporate 56 Board of Directors Information

Cover photo: A view of the conveyor from the new crusher at the Collahuasi copper mine in Chile, the fourth-largest mine in the world. Nickel Prices and Inventories Copper Prices and Inventories

60.0 6.00 1,500 1.0

52.5 5.25 0.9 1,200 0.8 45.0 4.50 0.7 37.5 3.75 900 0.6 30.0 3.00 0.5

22.5 2.25 600 0.4 (000s of tonnes) (000s of tonnes) 0.3 15.0 1.50 300 0.2 7.5 0.75 0.1 0.0 0.00 0 0.0 99Q4 00Q4 01Q4 02Q4 03Q4 99Q4 00Q4 01Q4 02Q4 03Q4

Nickel prices soared in the second half of Copper prices increased 14% in 2003 the year while inventories declined. year over year.

Price (US$/lb.) LME Inventories Price (US$/lb.) Exchange* Inventories

*LME, COMEX, Shanghai

Falconbridge Nickel Production Falconbridge Copper Production (000s of tonnes) (000s of tonnes) 120 350

280

90 210

140 60

30 0 01 02 03 00 03 00 01 99 02

The Company set a nickel production record Copper production in 2003 was slightly in 2003, exceeding 104,000 tonnes. lower than in 2002, partly due to anticipated lower ore grades at Collahuasi, Chile.

Falconbridge Falconbridge Earnings Cash Flow Falconbridge Revenues by Product (US$ M) (US$ M) 270 540 240 480 $445

210 $194 420 180 360 Nickel 49% 150 300

$228 Copper 33% 120 240 Zinc 5% 90 180 Other 13% 60 $50 120 30 60 0 0 02 03 02 03

Both earnings and cash flow benefited Nickel and copper together represent in from the surge in metal prices in 2003. excess of 80% of the Company’s revenues. 2003 Financial Highlights

The world economy picked up at a faster pace than originally anticipated. Nickel continued to outperform all other base metals, with prices rising 40% over the year. The market outlook also improved for copper, with prices rising 14%. The fundamentals remain very positive for 2004 and 2005.

US$ MILLIONS, EXCEPT PER SHARE DATA 2003 2002 Operating Highlights Revenues $ 2,083 $ 1,525 Operating income 305 78 Earnings 194 50 Cash provided by operating activities 445 228 Capital expenditures and deferred project costs 370 234 Financial Position (at December 31) Cash and cash equivalents 298 165 Working capital 649 443 Total assets 4,105 3,398 Long-term debt 1,427 1,280 Shareholders’ equity 1,925 1,516 Return on common shareholders’ equity 11.7% 3.1% Return on net assets 12.6% 3.2% Ratio of net debt to net debt plus equity 37% 42% Per Common Share Earnings (Basic) $ 1.05 $0.24 Earnings (Diluted) 1.04 0.24 Cash provided by operating activities 2.51 1.29 Book value 10.83 8.57 Shares outstanding 178.8 177.6

2003 Performance Versus Objectives

Achieve efficiency, production and Begin Koniambo bankable feasibility Advance development of Kidd cost objectives set by each operation study Mine D and Collahuasi expansion Met or exceeded production tar- Began bankable feasibility study and keep projects on budget and gets at almost all operations. in September. Financing arrange- on schedule 17Production records established for 4ments progressing in parallel. Both Collahuasi and Kidd Mine D nickel and at Lomas Bayas. remain on budget and on Controllable cost targets largely Grow nickel resource base through schedule. Collahuasi completion met but exchange rate movements exploration, acquisitions, business is expected in June 2004 and and higher energy costs adversely partnerships and technology Mine D in late 2004. affected results. Added 11 million tonnes of nickel 5resources. Expanded resources at Deliver cost savings and increased Increase asset utilization within Nickel Rim South and Fraser profits by working with Noranda and INO by increasing profitable feed Morgan deposits in Sudbury by other mining companies volumes 87% and 158%, respectively. Also 8Six Sigma delivered $13 million of 2Record nickel production within replaced Raglan production. savings in 2003, with $30 million INO, which increased by 13% to expected in 2004. Continued 77,183 tonnes, compared to Improve profitability of Kidd through cooperation with Noranda gene- 68,530 tonnes in 2002. cooperative activities with Horne rated cost savings of $8 million. smelter and CCR refinery Review Montcalm feasibility study 6Cooperative activities with Noranda and make development decision on successfully implemented. Lowered this nickel deposit operating costs through a 15% Made development decision and workforce reduction. Ability to 3started construction in November. process higher value complex concentrates has been verified. Falconbridge: Strong Fundamentals

During the past two years, Falconbridge has built a solid foundation in the nickel and copper markets, two metals with excellent fundamentals.

Shareholder value will be created with a strategy focused on maximizing the value of our assets, profitably growing our production base and maintaining a strong balance sheet.

Return on Net Assets 2003 Share Price Return on Equity (Cdn$) 35% 32 18% 30 30% 15% 28 Goal: 15% 25% 26 12% 20% 24 Goal: 18% 22 9% 15% 20 6% 10% 18 16 5% 3% 14 0% 12 0% 97 03 94 95 96 98 99 01 02 00 97 03 94 95 96 98 99 01 02 00 Jan Apr Oct Jun Feb Mar Nov Aug Dec July May Sept The implementation of our new In 2003, Falconbridge’s share price Falconbridge achieved an 11.7% return business plan will help narrow the increased 107%, whereas the on equity in 2003 and remains focused gap with our 18% RONA objective. S&P/TSX Composite Index on its 15% ROE objective. increased 24%.

Investment Grade Credit Ratings: Moody’s: Baa3 Standard & Poor’s: BBB– Dominion Bond Rating Service: BBB High

IN THIS REPORT, ALL NUMBERS ARE IN U.S. DOLLARS AND UNITS OF MEASUREMENT ARE METRIC UNLESS OTHERWISE NOTED.

1 To Our Shareholders

2003 was a year of significant industrialization of Asia, particu- Fundamental progress for Falconbridge. Our larly in China, where demand must decision to focus on our strengths – be met with imports due to the Strength in nickel and in copper – continued country’s insufficient nickel and to pay dividends as the fundamen- copper resources. tals for these metals kept improving. During 2003, world nickel con- Higher metal prices combined with sumption grew by 5%, with over solid production resulted in net one-third of that growth coming earnings of $194 million, or from China alone. Nickel prices $1.05 per share, a 288% increase moved faster than anticipated due • Uniquely concentrated in compared to last year. Operation- to labour disruptions at a major nickel and copper – two ally, we met or exceeded most of producer, which removed approxi- metals with excellent our targets, improved the position mately 30,000 tonnes of supply. of our assets and advanced our new short-term and long-term This further compounded an projects. We managed the balance fundamentals already tight market situation. As a sheet by funding our operations result, the nickel price rallied and capital expenditures from • Consumption rising due sharply and is now over $7.00/lb. operating cash flows and also added to improving global In 2003, the price averaged to our liquidity by extending the $4.37/lb., compared to $3.07/lb. economy and demand term of our debt and establishing in 2002. from China new credit relationships. Our progress, combined with the The copper market shifted into • Solid production base improving outlook for nickel and deficit in 2003 as a result of supply with upside potential copper contributed to a significant constraints and China’s increasing improvement in Falconbridge’s demand for the metal. Overall • Substantial options share price during the past year. growth in demand was 4.2%. How- for growth ever, China’s consumption grew by As we look forward, our strategy close to 20% and the country has remains the same: we will continue • Financial resources avail- now passed the United States as the to focus on copper and nickel, able to support strategy world’s largest copper consumer. maximize the value of our assets, The large copper inventories avail- profitably grow our production base able through the exchanges during and maintain a strong balance sheet. the past few years dropped by over 37% in 2003. As a result the Growing Strength in Nickel copper price rallied sharply and is and Copper now over $1.30/lb. In 2003, the Our focus on nickel and copper is price averaged $0.81/lb., compared based on the positive fundamentals to $0.71/lb. in 2002. apparentfor bothmetals.The high Although Asian growth under- long-term growth rates currently pinned demand in metal markets forecastcombined withconstrained during the past year, economic supply will provide a favourable indicators for the Western World pricing environmentfor atleast are also starting to show strong signs the next few years. Demand is also of improvement, particularly in the being intensified with the rapid

2 To Our Shareholders

United States. With the prospect of Rosario orebody and completion of synchronized growth in 2004, the the expansion of the mill and con- backdrop for metal demand should centrator. The project continues to continue to be positive. be on budget and is scheduled for completion in June 2004. Copper Maximizing Returns production is expected to increase by over 19% to 470,000 tonnes Increasing Production (206,800 tonnes attributable to Our Integrated Nickel Operations Falconbridge) in 2004. AARON REGENT (INO) achieved a new production President & Chief Executive Officer record in 2003. Refined nickel Lomas Bayas set a new production Falconbridge is uniquely production was 77,183 tonnes or record and exceeded its targets by positioned with its focus 13% higher than last year, a par- producing 60,427 tonnes of cop- on nickel and copper. ticularly rewarding accomplishment per. The crusher expansion project “ given the high nickel price environ- is on schedule for start-up in ment. Increased feed was provided April 2004. ” by our own operations and also by securing additional custom feed Kidd Creek’s profitability in 2003 volumes. was negatively affected by a combination of low zinc and copper With a total refined capacity of prices, the appreciation of the 85,000 tonnes, there is further Canadian dollar and low metallur- upside potential and we are success- gical treatment charges. Significant fully closing the gap. This will be steps have been taken to restructure MICHAEL DOOLAN accomplished with the development Kidd Creek into a more profitable Senior Vice-President & of the Montcalm deposit located operation. Chief Financial Officer near Timmins, Ontario. Montcalm In 2003, the workforce was We continue to have sub- will be producing in early 2005 and reduced by 15% with the elimina- stantial financial capacity to will add more than 8,000 tonnes of tion of 165 positions. At the same support our operations and production per year. time, in our metallurgical opera- “growth initiatives. Falcondo, our ferronickel operation tions, we continued to advance in the Dominican Republic, also initiatives aimed at better coordi- posted a stronger performance nating materials flows and utiliza- ” in 2003, exceeding its operating tion of infrastructure with our target and producing 27,227 tonnes majority shareholder, Noranda Inc. of nickel, a 17% increase from the Efforts are also being directed to year before. increase revenues by pursuing strategic relationships with other Our copper operations consist of mining companies to similarly Collahuasi and Lomas Bayas in enhance our operations. In our Chile and Kidd Creek in Canada. mining operations, we are develop- Collahuasi exceeded its targets FERNANDO PORCILE ing Mine D, which is a high-grade and produced 394,728 tonnes President, Copper ore body. Mine D is slated for pro- (168,147 tonnes attributable to duction later in 2004, and will Collahuasi and Lomas Bayas Falconbridge). However, as provide greater predictability and both exceeded production expected, production was lower flexibility in our mining opera- and operating targets than the previous year due to lower “in 2003. tions, which will result in lower copper ore grades. The operations mining unitcosts. are currently in the final stages of ” transitioning from the Ujina to the 3 To Our Shareholders

Improved Efficiencies and Cost Control We also had exploration success at While profitability of the Kidd Raglan where we mined approxi- Creek operation received particular mately 850,000 tonnes of ore but attention in 2003, company-wide discovered over 1.3 million tonnes. cost containment and reduction Our resource base now stands at continued to be a key priority. The over 24 million tonnes. decline in the U.S. dollar has also In February 2004, Falconbridge had an adverse impact on our acquired an option to earn 50% relative costs. JOSEPH LAEZZA ownership of the Kabanga deposit President, Nickel The momentum we developed in in Tanzania from Barrick Gold In 2003, we had record Six Sigma has continued in 2003. Corporation. Kabanga is a promis- nickel production and added Falconbridge realized savings of ing nickel property with 26 million 11 million tonnes of new high- $13 million in 2003 and expects tonnes of resources grading 2.6%, “quality nickel resources at $30 million of savings in 2004. with the potential to produce Sudbury and Raglan. To date, more than 1,000 people 30,000 to 35,000 tonnes of nickel throughout the Company have per year (see page 24). participated in Six Sigma training. ” Substantial Opportunities for Growth Adding to Our Resources With our focus on nickel and cop- During 2003, we achieved signifi- per, Falconbridge is uniquely posi- cant success with our exploration tioned and has a number of program. In the Sudbury basin, we promising growth opportunities. added over nine million tonnes of Through currently-owned projects, resources, mainly in two deposits. refined nickel production could PETER KUKIELSKI Nickel Rim South, a new resource exceed 165,000 tonnes by 2010, Executive Vice-President, Projects discovered in 2001, continues to compared to 104,000 tonnes in Our major projects remain on grow. The size of the resource now 2003. This would be achieved with target and scoping studies for stands at 11.7 million tonnes grad- the completion of Koniambo in expansion at Raglan, Falcondo, ing 1.6% nickel and 3.7% copper, New Caledonia, development of nearly double our estimate in Kabanga, expansion atFalcondo “Collahuasi and Lomas Bayas have been initiated. early 2003. and with the INO operating at capacity. Copper production could Nickel Rim South will be an impor- also increase to approximately tant asset because of its high grades 450,000 tonnes, compared to ” and very low operating costs. In 311,000 tonnes in 2003, with fur- 2004, we will commence the ther expansion at Collahuasi and underground definition program, expansion at Lomas Bayas. During which will lead to the development the course of 2004, scoping studies of a new mine in Sudbury. This will on these expansion options will enable us to deploy $400 million at be completed. high rates of return, with mine BRENT CHERTOW production expected in 2009. The Koniambo ferronickel project President, Canadian Copper & Recycling is advancing, with the completion In addition, Fraser Morgan, also of the bankable feasibility study Significant progress has been in Sudbury, has continued to grow expected in the third quarter of made to improve profitability and is now over six million tonnes, this year. The financing plan is at Kidd Creek. almost double this year’s original being completed in parallel and “ resource estimate.

4 ” To Our Shareholders

discussions with the French gov- Looking Ahead with Confidence ernmenttofinalize thefinancing We are very excited about the future structure are continuing. Because for Falconbridge. The world’s of the high grade and size of the economies are expected to continue resource, Koniambo is one of the to recover, which will provide a bestnickel assetsin theworld and solid backdrop for metal demand. 2004 Objectives has the potential to add substantial This, combined with insufficient value to Falconbridge for many additions to supply, should result in • Achieve production and years to come. deficits for both nickel and copper cost objectives As financial markets gradually and a period of high metal prices. recognize the strong fundamentals of • Complete Collahuasi, Kidd We are well positioned to benefit. the nickel and copper markets and Our production of both nickel and Mine D and Montcalm the likelihood of continued supply copper will be increasing over the projects on budget and deficits, the value of our projects next two years, allowing us to on schedule and expansion options will continue leverage our position in this positive to increase. pricing environment. We also have a • Complete Koniambo bank- number of exciting growth oppor- able feasibility study; A Solid Financial Platform tunities, which will permit us to further expand our production and finalize financing structure Financially, our primary objectives improve our ability to create value are to maintain a conservative • Complete scoping studies for shareholders. financial structure, preserve sub- on expansions at Raglan, stantial liquidity and protect our On a final note, I would like to Falcondo, Collahuasi and investment grade ratings. thank our customers for their Lomas Bayas valued business and our Board of During 2003, despite a period Directors and shareholders for of high capital expenditures, we • Add nickel and copper their continued support. I would improved our debt ratios and production through tech- also like to thank the many reduced our net debt to equity ratio employees within the Company nology, exploration, acqui- to 37% compared to 42% last year. and the senior management team sitions and partnerships This resulted from higher earnings for making 2003 another year of and our ability to fund operations substantial progress, and steady • Maintain good access and capital expenditures through growth and development. to capital and substantial operating cash flows. liquidity We continue to have good access to sources of liquidity from the corporate bond, corporate bank and Aaron Regent project finance markets. In May, we President & completed a very successful corpo- Chief Executive Officer rate bond issue of $250 million February 12, 2004 12-year notes at an interest rate of 5.375%. Combined with our cash balances and undrawn lines of credit, our current liquidity is more than $700 million, providing us with significant financial flexibility.

5 First Uses of Nickel

Stainless steel 67% High Ni alloys 12% Plating 10% Foundry 3% Other 6% Cu-Ni based alloys 2%

World Nickel Consumption and Production (000s of tonnes) 1,500

1,200

900

600 300 STRENGTH 0 99 00 01 02 03 Consumption Production in NICKEL Chinese Nickel Consumption (000s of tonnes) 120

0 99 00 01 02 03

World’s Producers of Stainless Steel (2003)

Europe 39% U.S. 10% Taiwan 7% South Korea 9% India 5% China 5% Other 6% Japan 19%

World Stainless Steel Production (Million tonnes) 25

0 99 00 01 02 03 Overhead view of the Craig Mine in Sudbury, Canada.

6 Strength in Nickel

The Best Fundamentals of At an annual growth rate of 5%, the All Base Metals world requires approximately Nickel currently enjoys the best 60,000 tonnes of nickel each year – fundamentals of all base metals. the equivalent of a mega-project Pursuing The nickel story is such as Voisey’s Bay. There are one of constrained many smaller projects that could be Opportunities. supply, strong developed given the metal’s current demand and limi- price strength, but they are not Maximizing ted new projects likely to deliver very large volumes. on the horizon. In addition, the lead-time to Potential. For those reasons, the nickel market develop larger projects has increased is expected to remain tight for the significantly during the past decade nextfew years. because of increased scale and com- plexity. As a result, there will be Constrained Supply insufficient additions to supply to The current supply of nickel has meet expected demand during the been constrained mainly because of next three to five years. the lack of development or investments in new projects during the Strong Demand lastdecade. This was a reactionto Demand for nickel remains very the expectation of a substantial strong, for two main reasons: first, amountof new supply from Voisey’s the rapid expansion of global stain- Bay and growth in acid leach less steel production is fuelling production from Australia. This demand for primary nickel and, growth has failed to materialize second, the extraordinary economic and combined with the lack of new performance of developmenthas led tothecurrent China is consum- supply shortage. ing a growing share of the world’s Small Number of New Projects nickel supply. There are currently few large-scale Stainless steel production is projects that will help meet the pro- the primary use of nickel, jected growth in demand for nickel. consuming about two-thirds of the world’s annual supply. Nickel is vital in the production of a broad variety of industrial and consumer products including power plants, electronics, medical instruments, satellites and jet engines. Global demand is growing fast and Falconbridge is well positioned to benefit from this trend.

7 Strength in Nickel

Growth Potential

Koniambo

New Caledonia

Noumea

Growth in Nickel

• Strong nickel fundamentals expected to last several years

• Efforts directed at maximizing mining, smelting and refining production

• Upside potential at existing operations

• Focused exploration program ongoing

• Attractive new growth opportunities available

Exploration is an ongoing activity in the nickel business. (Nickel Rim South, Sudbury, Canada)

8 Strength in Nickel

Expanding Resources its joint-venture partner, Société Falconbridge’s Refined Nickel Falconbridge has successfully added Production is Increasing Minière du Sud Pacifique (SMSP). resources to its reserve base. We have (000s tonnes/year) Discussions have continued in

identified two attractive, high- 120 early 2004. quality properties near our existing 100 A Prudent Development Approach facilities in Sudbury, Ontario, 80 In addition to the use of a well- which will ensure that we are mining 60 defined smelting process, in Sudbury for the next twenty 40 Falconbridge has assembled an years. We are also successfully adding 20 experienced project development resources to our Raglan property in 0 and execution team. The Company 01 00 02 the Nunavik Territory of Canada. 03 will use a well-known smelting Furthermore, we are working process with modern technology and with other mining partners in Increasing Production and Capacity equipment that will help reduce South Africa, Tanzania and Utilization project risk and support a rapid and Australia. Building on Falcondo’s Strengths successful start-up. Falcondo’s ferronickel production is Nickel Rim South much in demand by stainless steel Falconbridge has already invested Inferred resources at the recently producers, who are rapidly adding extensively in developing community discovered Nickel Rim South capacity to meet growing world relations in the North Province of deposit in Sudbury have increased requirements. The Company has New Caledonia and benefits signifi- by more than 87% since late 2002. begun a scoping study for a 20% to cantly from having a partner owned They now total 11.7 million tonnes 25% expansion of production that by the Province. with further increases expected. The would require relatively low capital resources are grading 1.6% nickel investments. Strict environmental standards in and 3.7% copper and contain sig- every aspect of development and nificant concentrations of platinum Advancing the Koniambo Project operations and a minimal site foot- and palladium. An underground One of the World’s Best print, have also helped create a definition program will begin early Nickel Resources positive impression for this project in 2004 at a cost of $400 million, With its high-grade ore and large in the region. with potential mine production resources, Koniambo represents a starting in 2008. major growth opportunity for Timetable Falconbridge, one that is reminis- Work on the bankable feasibility Fraser Morgan cent of the Company’s original study began in September 2003. Resources have nearly doubled at the Sudbury camp in 1928. Falconbridge and its joint-venture Fraser Morgan deposit, reaching partner expect a development deci- 6.3 million tonnes, up 158% from Substantial Expansion Potential sion by the end of 2004. Should it the previous year, with further The Koniambo depositis rich in proceed, the 60,000-tonne-per- increases also possible. two types of lateritic resources. year project would enter production Saprolitic ores lend themselves easily in late 2008 or early 2009. Raglan to treatment by conventional and The Company has already succeeded well-known pyrometallurgical tech- in replacing the reserves it has mined nology such as thatusedatthe since Raglan’s start-up in 1998. Company’s Falcondo operations. Exploration plans call for a signifi- The limonite resources offer vast cant increase in drilling activity expansion opportunities with the use during the next two years. The of pressure acid-leach technology. Company is also reviewing the possi- bility of a 40% expansion, which Interest From French Government would increase production to The French Governmenthas 1.3 million tonnes of ore per year. publicly indicated its interest in advancing the Koniambo project and in late 2003 made a prelimi- nary proposal to Falconbridge and

9 First Uses of Copper

Wire Rod 54% Sheet/Strip 8% Tube 11% Other 10% Cu Alloys 17%

World Copper Consumption (Million tonnes) 20

10 STRENGTH

0 99 00 01 02 03 in COPPER

Chinese Copper Consumption (Million tonnes) 3.2

2.4

1.6

0.8

0 99 00 01 02 03

World Copper Production (Million tonnes) 20

0 99 00 01 02 03

In 2003, the Lomas Bayas mine, in Chile, set a production record with more than 60,000 tonnes of copper.

10 Strength in Copper

Solid Fundamentals been constrained by the lack of The copper marketended 2003 on investmentoverthepastfive years. a strong note, with prices closing at With the likelihood of higher copper their high for the year. Meanwhile, prices, the next generation of cop- Pursuing copper supplies fell per projects will begin to emerge, into a substantial but due to the time required to Opportunities. deficitposition develop, will notbe available tothe during 2003 from marketfor thenextfew years. Atan Maximizing a sizable surplus average growth rate of 3%, an addi- the year before. tional 500,000 tonnes of new cop- Potential. This change was broughtaboutby per capacity is needed each year. supply-side discipline on the part Desirable Properties of producers and very strong Due to its many desirable proper- demand for copper from China. ties, which include Given these improved fundamen- excellentconduc- tals, the copper price increased by tivity, durability, 51% from $0.69/lb. attheend of malleability and 2002 to $1.05/lb. by year-end resistance to corro- 2003. sion, copper Deficits Likely for Next Few Years is used in an astonishing range of Demand for copper is expected to applications across all industry continue to outpace supply with the sectors. potential synchronized global recovery and continued demand growth from China. Growth in supply has

Copper is used in a wide variety of products in the automotive, construction, transportation, industrial machinery, consumer products, electronics and tele- communications industries. That’s why demand for this vital metal closely reflects overall rates of growth in the global economy.

11 Strength in Copper

Growth Potential

Collahuasi

Chile Lomas Bayas

Growth in Copper

• Solid copper market fundamentals

• Completion of major expansion projects at Collahuasi and Kidd in 2004

• Additional growth potential at existing operations (Collahuasi and Lomas Bayas)

Drilling activity at Collahuasi’s Rosario pit in Chile.

12 Strength in Copper

World-class Operations at Collahuasi Kidd Mine to Provide Significant Falconbridge Copper Transition Project Nearing Copper and Zinc Exposure Production Completion (000s of tonnes per year) The Mine D project at Kidd Creek,

The construction of a new grinding 350 which involves the deepening of the circuit at the Ujina concentrator Kidd Mine to 3,200 metres 280 and the transition to the Rosario pit (10,000 feet), will increase the ore are expected to be completed in 210 production to 2.4 million tonnes June 2004 – on budget and on 140 per year. The mine will provide

schedule. The project will increase 70 access to an additional 10 million

the concentrator’s capacity from 0 tonnes of reserves and 14 million 01 02 00 60,000 to 110,000 tonnes per day, 03 tonnes of resources. compensating for an anticipated Work at Mine D is advancing. Ore decline in ore grade. Total invest- Expanding Production at Lomas Bayas production is expected to begin by ment in these projects is estimated For the second year in a row, the the end of 2004 and ramp up dur- at $654 million, of which Lomas Bayas mine achieved record ing the first half of 2005. Mine D Falconbridge’s 44% share will be production. Since its acquisition in will improve operational reliability approximately $288 million 2001, the mine has consistently and predictability. in 2003. metor exceeded production and Also at Kidd Creek, starting in Reliable, Low-cost Operator cost targets. 2005, ore from the Montcalm Since its start-up in 1999, A feasibility study has been initiated nickel deposit, near Timmins, Collahuasi has posted an impressive to evaluate the acquisition of the Ontario, will be treated at the Kidd track record that includes operating Fortuna de Cobre deposit, adjacent concentrator. This, coupled with cash costs per pound of $0.38 to the Lomas Bayas copper opera- completion of Mine D, will improve in 2003. tion. The study is scheduled for the overall profitability of Expansion Potential completion in 2004 and the Kidd Creek. With more than 1.8 billion tonnes Company has a $15 million option of proven and probable reserves to purchase the property before and almost2.4 billion tonnesof 2006. Development of this deposit additional measured and indicated could potentially increase Lomas resources, the Collahuasi resource Bayas’ annual production by 50% base has significant potential for to 90,000 tonnes per year. expansion. In 2003, additional water rights were secured, which gives Collahuasi the option to assess the potential for further expansion. A scoping study will be initiated in 2004.

13 Summary of Mineral Reserves and Mineral Resources1

Percentage Thousand Operation Ownership Category Tonnes % Nickel % Copper % Zinc g/t Silver

Mineral Reserves

NICKEL DEPOSITS Sudbury 100% Proven 5,588 1.40 1.34 — — Probable 8,503 1.22 1.24 — — Total 14,091 1.29 1.28 — — Raglan 100% Proven 8,308 2.86 0.77 — — Probable 9,355 2.86 0.80 — — Total 17,663 2.86 0.78 — — Montcalm 100% Proven 0 — — — — Probable 5,113 1.46 0.71 — — Total 5,113 1.46 0.71 — — Falcondo2 85.26% Proven 49,271 1.19 — — — Probable 11,656 1.16 — — — Total 60,927 1.18 — — — COPPER DEPOSITS Kidd Creek 100% Proven 12,585 — 1.86 5.60 71 Probable 8,239 — 2.23 7.00 53 Total 20,824 — 2.01 6.15 64 Lomas Bayas 100% Proven 54,760 — 0.40 — — Probable 309,171 — 0.33 — — Total 363,931 — 0.34 — — Collahuasi2 44% Proven 254,146 — 1.01 — — Probable 1,554,075 — 0.90 — — Total 1,808,221 — 0.91 — —

Mineral Resources (in addition to Mineral Reserves)

NICKEL DEPOSITS Sudbury 100% Measured 683 1.31 0.80 — — Indicated 20,477 2.27 0.99 — — Total 21,160 2.24 0.98 — — Inferred 28,200 1.70 2.70 — — Raglan 100% Measured 228 1.47 0.37 — — Indicated 2,972 2.18 0.76 — — Total 3,200 2.13 0.74 — — Inferred 4,000 2.90 0.90 — — Montcalm 100% Measured 0 — — — — Indicated 0 — — — — Total 0 — — — — Inferred 700 1.70 0.70 — — Falcondo2 85.26% Measured — — — — — Indicated 13,840 1.53 — — — Total 13,840 1.53 — — — Inferred 6,400 1.40 — — —

COPPER DEPOSITS Kidd Creek 100% Measured 276 — 1.34 6.00 47 Indicated 77 — 2.82 8.54 52 Total 353 — 1.66 6.55 48 Inferred 14,200 — 3.40 4.90 91 Lomas Bayas 100% Measured 5,654 — 0.28 — — Indicated 246,898 — 0.27 — — Total 252,552 — 0.27 — — Inferred 41,700 — 0.32 — — Collahuasi2 44% Measured 48,102 — 0.57 — — Indicated 429,564 — 0.63 — — Total 477,666 — 0.63 — — Inferred 1,840,000 — 0.72 — —

Notes: 1. The mineral reserve and resource estimates are prepared in accordance with the CIM Standards On Mineral Resources and Mineral Reserves, Definitions And Guidelines, adopted by CIM Council on August 20, 2000, using classical and/or geostatistical methods, plus economic and mining parameters appropriate to each project. 2. The mineral reserves and resources at Collahuasi and Falcondo are shown on a 100% basis. There are no known environmental, permitting, legal, taxation, political or other relevant issues that would materially affect the estimates of the mineral reserves. The mineral resources have reasonable prospects for economic extraction but have not yet had complete formal evaluation, or do not have demonstrated economic viability under current conditions. The mineral reserve and mineral resource estimates are compiled and verified by 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 reserves and resources at Collahuasi are estimated and provided by the operator of the joint venture based on a copper price of $US0.95/lb. The mineral reserves and resources are estimated and classified to industry standards following the Australasian Institute of Mining and Metallurgy’s Joint Ore Reserve Committee code. These estimates have been restated to conform to CIM mineral reserve and resource definitions. The estimates are inspected annually by Chester Moore. Excludes Kabanga, Tanzania acquired in February 2004. Financial Section

Financial Section

In 2003, Falconbridge benefited from improving fundamentals for nickel, copper and cobalt. In 2004 and beyond, the Corporation will continue its drive to maximize production at existing operations, grow profitably with timely and judicious investments and enhance its financial position.

CONTENTS

MANAGEMENT’S DISCUSSION AND ANALYSIS...... 16 Energy...... 26 Overview ...... 16 Sustainable development ...... 26 Results of operations ...... 16 Sensitivities...... 26 Nickel operations...... 17 Critical accounting estimates ...... 27 INO ...... 17 Accounting changes...... 27 Falcondo ...... 19 Markets...... 27 Copper operations ...... 20 Outlook...... 28 Kidd Creek ...... 20 Trends, risks and uncertainties ...... 29 Collahuasi ...... 21 MANAGEMENT’S RESPONSIBILITY ...... 33 Lomas Bayas ...... 22 Corporate and other ...... 22 AUDITORS’ REPORT ...... 34 Liquidity and capital resources...... 22 CONSOLIDATED FINANCIAL STATEMENTS...... 35 Liquidity and cash flow ...... 22 FINANCIAL REVIEW ...... 53 Outstanding indebtedness ...... 23 Capital expenditures and BOARD OF DIRECTORS ...... 56

deferred project costs ...... 23 CORPORATE GOVERNANCE INITIATIVES ...... 58 Growth opportunities...... 23 OFFICERS OF THE CORPORATION ...... 59 Exploration...... 25 Business development...... 26 SHAREHOLDER AND CORPORATE INFORMATION...... 62

FORWARD-LOOKING STATEMENTS The following discussion provides a review of the financial performance and position of Falconbridge for the years ended December 31, 2003 and 2002. This discussion should be read in conjunction with the Corporation’s audited financial statements and notes to those statements. In addition, this discussion contains certain forward-looking statements regarding Falconbridge’s businesses and operations. Actual results may differ materially from those contemplated by these statements depending on, among others, such key factors as supply and demand for metals to be produced, production levels, exchange rates and metals prices.

CHANGE IN FUNCTIONAL AND REPORTING CURRENCY Effective July 1,2003,the functional and reporting currency of Falconbridge Limited was changed from the Canadian to U.S. dollar to more appro- priately reflect the gradual increase in the overall proportion of business activities conducted in U.S. dollars. In accordance with Canadian GAAP, the change was effected by translating assets and liabilities,at the end of prior reporting periods,at 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 rate s; 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 account. All amounts are expressed in U.S. dollars,except where indicated.

15 Management’s Discussion and Analysis

Management’s Discussion and Analysis

In 2003, Falconbridge achieved net earnings of $194 million, almost four times 2002 earnings of $50 million. This was mainly as a result of higher metal prices and higher sales volumes of nickel, partially offset by the higher Canada/U.S. exchange rate. Cash flow from operations before working capital was $441 million compared to $272 million in 2002.

Overview In 2003, the Corporation’s balance sheet improved as the Nature of business and strategy ratio of net debt to net debt plus equity improved to 37% Falconbridge is focused on the production of nickel and from 42%. Cash and cash equivalents were $298 million at copper, two metals which have positive long-term fundamentals December 31, 2003. and positive near-term outlooks (see page 27). Both metals Falconbridge has significant liquidity and financial flexibility, have competitive attributes which have led to diversified usage including unused bank lines of credit totalling $405 million. in the world’s economy and have had an average annual con- As a result, the Corporation has unused credit and cash avail- sumption growth rate of over 3% for copper and 4% for nickel able in excess of $700 million. In addition, the Corporation (see pages 27-28). Falconbridge has a unique position in these has no major debt maturities until 2005. markets as one of the world’s largest producers of both metals and substantial operational, technical, exploration and devel- Results of operations opment experience. In addition, the Company has the poten- Earnings for the year ended December 31, 2003, were tial to increase its production as a result of the development of $194 million ($1.05 per common share – $1.04 on a diluted a number of new projects (see pages 23-25). basis), which was almostfour timesgreaterthan2002 net Falconbridge’s focus is to increase returns to shareholders as earnings of $50 million. measured by returns on net assets and on shareholders’ equity. Operating income of $305 million in 2003 was also nearly To achieve this, the goal is to maximize the value of existing four times or $227 million higher than $78 million in 2002. operations, redeploy capital profitably, maintain a conservative The significant increase in operating income was attributable financial structure and significant liquidity to support opera- to the following factors: tions and growth initiatives. • Revenues for the year ended December 31, 2003, increased Development projects by $559 million or 37% to $2,084 million. This increase In 2003, Falconbridge continued to advance its important resulted from (i) higher realized prices for nickel, copper, development programs at Collahuasi and Kidd Creek, zinc, cobalt, platinum and acid, and (ii) higher sales vol- ensuring that copper production levels are maintained for at umes for nickel, cobalt, precious metals and acid, offset by least the next 17 years. Work on the Collahuasi expansion lower sales volumes for copper and zinc. Precious metals project progressed as planned and is scheduled for completion revenues at the Integrated Nickel Operations (INO) in June of 2004. Work also continued on the Mine D project increased $12 million during the year ended December 31, at Kidd Creek. First production is expected by year-end 2004 2003. with project completion by 2006. • Selling, general and administrative costs decreased by 1% to The Montcalm nickel project was started in November with $86 million. construction expected to take approximately 15 months. It will These items were offset by the following: add 8,000 tonnes of nickel production per year beginning in 2005. • Costs of metal and other product sales increased by $311 million, or 28%, to $1,415 million, mainly reflecting Going forward in nickel, our focus will be on the advancement higher sales volumes, higher mining costs and higher acqui- of the Koniambo, Nickel Rim South, Fraser Morgan and sition costs for custom feed, as well as the impact of a Kabanga projects, and the potential expansion of Falcondo. stronger Canadian dollar. In copper, further expansions at Lomas Bayas and Collahuasi • Depreciation and amortization costs of $175 million com- are being assessed. pared with $171 million in 2002. Financial flexibility • Exploration expenditures of $23 million compared with The Corporation believes that a conservative financial struc- $22 million in 2002, a 5% year-over-year increase due ture and financial flexibility are important in order to accom- mainly to additional drilling at the Nickel Rim South modate the capital intensive and cyclical nature of the business. deposit to further define the resource and the impact of the stronger Canadian dollar.

16 Management’s Discussion and Analysis

• Research and process development expenditures of $13 mil- Nickel operations lion were $5 million higher than in 2002, due to increased Falconbridge is the third-largest producer of refined nickel in development activity in new nickel metallurgical processes the world, accounting for roughly 9% of world supply in 2003. and the impact of a stronger Canadian dollar. Operating income of the total nickel business of $289 million • Other income of $3 million in 2003 compared with other in 2003 was more than three times larger than $87 million income of $4 million in 2002. Further details on the com- in 2002. Refined nickel production was 104,400 tonnes in ponents of other income can be found in Note 16 on 2003, 14% higher than 91,800 tonnes in 2002. The operating page 52. cash costper pound of mined nickel for all of Falconbridge was Income and expenses were provided from the following non- 27% higher in 2003 at$2.78, compared with$2.19 in 2002. operating sources: Falconbridge has two nickel divisions. The Integrated Nickel • Interest of $43 million in 2003 was $8 million or 15% Operations (INO) produces LME-quality nickel. The lower than 2002, due to lower interest rates and higher Falcondo division produces ferronickel. average expenditures on projects for which interest costs are Integrated Nickel Operations (INO) capitalized. These savings were offset by higher average debt The INO includes mines and plants in Sudbury and Raglan in balances during 2003 relative to 2002. Canada, a smelter in Sudbury, a refinery at Nikkelverk in • Income and mining taxes were $63 million in 2003, com- Norway and a significant custom feed business. pared with a recovery of $23 million in 2002. This resulted from higher income in 2003. Further details concerning 2003 2002 income taxes can be found in Note 7, on page 43 of this Sales (tonnes) annual report. Nickel 79,000 71,200 • Non-controlling interest in earnings of subsidiaries Copper 59,200 54,500 increased by $5 million, reflecting higher earnings at our Cobalt 3,400 2,900 ferronickel operations in the Dominican Republic. Revenues ($ millions) 1,046 692 Operating cash cost The following table summarizes the segmented results of oper- ($ per pound of nickel)* 2.64 1.96 ations for 2003 and 2002: Operating income ($ millions) 227 86

YEAR ENDED DECEMBER 31, *Operating cash cost includes all cash production and selling costs, net of by- $ MILLIONS 2003 2002 product credits, but excludes interest, corporate, exploration costs and custom feed profits. Costs incurred during shutdowns or strikes are excluded. Nickel operations Integrated Nickel Operations (INO) $ 227 $ 86 Revenues: Sales volumes of nickel, copper and cobalt increased Falconbridge Dominicana, in 2003 by 11%, 9% and 16%, respectively. Realized nickel C. por A. 62 1 prices in 2003 increased by 40%, copper prices improved by $ 289 $87 14%, and cobalt prices rose 34%. Precious metals revenues Copper operations increased by $12 million to $87 million. In 2003, consoli- Kidd Creek (70) (48) dated revenues for the INO increased 51% to $1,046 million Collahuasi 115 83 from $692 million in 2002. Lomas Bayas 31 17 Costs: The operating cash cost of producing a pound of nickel 76 52 from INO mines, was $2.64. The $0.68, or 35%, increase Corporate and other (60) (61) over 2002 costs was the result of the stronger Canadian dollar, Operating income 305 78 increased costs to access the ore in the Canadian operations Interest 43 51 and lower ore grades, which were partially offset by higher by- Income and mining taxes 63 (23) productcredits. Non-controlling interest 5 — Operating income: The INO’s 2003 operating income was Earnings for the year 194 50 $227 million compared with $86 million for 2002. The Dividends on preferred shares 8 8 $141 million increase was mainly due to higher metal prices Earnings attributable to common shares $ 186 $ 42 and sales volumes, which were offset by higher depreciation and amortization charges, higher administrative charges and higher unit costs, caused in part by the strengthening of the Canadian dollar.

17 Management’s Discussion and Analysis

Integrated Nickel Operations 2003 2002 Ore tonnes Ni Cu Ore tonnes Ni Cu (x 1,000) % % (x 1,000) % % Production Sudbury – Mine Craig 889 1.54 0.46 980 1.77 0.57 Fraser 686 1.05 2.99 639 1.08 3.48 Lindsley 429 1.16 1.36 418 1.19 1.16 Lockerby 225 1.88 1.15 258 2.10 1.18 Total mined 2,229 2,295 Total – ore processed 2,261 1.35 1.48 2,295 1.51 1.56 Raglan mine 834 3.47 0.99 868 3.35 0.97

Ni Cu Co Ni Cu Co Metal in concentrate (tonnes) Sudbury mine output 24,143 29,161 611 27,833 31,050 690 Raglan mine output 25,110 6,628 381 24,636 6,500 386 Metal in copper concentrate 110 21,874 — 94 21,666 — Smelter, refinery Smelter (tonnes) Mines – Sudbury 24,687 8,139 658 28,243 11,166 691 – Raglan 28,708 7,678 463 25,211 6,617 370 Custom 6,436 4,962 1,075 4,400 2,735 894 Total 59,831 20,779 2,196 57,854 20,518 1,955 Refinery (tonnes) Mines – Sudbury 25,351 8,862 688 27,170 11,108 621 – Raglan 27,020 6,895 437 24,305 6,741 344 Custom 24,812 20,095 3,431 17,055 12,783 3,029 Total 77,183 35,852 4,556 68,530 30,632 3,994

Ni Cu Co Ni Cu Co Sales (tonnes) Mines – Sudbury 26,278 32,767 667 28,035 34,352 637 – Raglan 26,627 6,820 412 25,250 6,905 358 Custom 25,775 19,621 2,322 17,472 13,238 1,937 Purchased product 298 — — 396 — — Total 78,978 59,208 3,401 71,153 54,495 2,932

Production: Sudbury’s nickel in concentrate production At the Sudbury smelter, nickel in matte production increased decreased to 24,100 tonnes in 2003 from 27,800 tonnes in 3% from 57,900 tonnes in 2002 to 59,800 tonnes in 2003. 2002 primarily due to lower average nickel grades. Average The increase in production is due to the successful efforts to nickel ore grades at1.35% was 11% lower thanthe1.51% average acquire spot lots of custom feed and from reducing in-process mined in 2002. Nickel in concentrate production in Sudbury inventories, which more than offset the shortfall in mine in 2004 is planned at21,000 tonnes. feed. Production of nickel in matte in 2004 is planned at At Raglan, nickel in concentrate production in 2003 53,000 tonnes. increased 2% to 25,100 tonnes from 24,600 tonnes in 2002 The collective agreement with the production and mainte- as the increase in nickel ore grades offset the shortfall in mine nance workers expired on January 31, 2004. The employees tonnage. Production of nickel in concentrate in 2004 is went on strike starting on February 1, 2004 for a period of planned at 25,400 tonnes. three weeks. A new collective agreement was completed on February 22, 2004.

18 Management’s Discussion and Analysis

Production of nickel at the Kristiansand refinery increased At the planned operating rates, mineral reserves at Montcalm 13% from 68,500 tonnes in 2002 to 77,200 tonnes in 2003 are equal to approximately eight years of production. The due to increases in custom feed deliveries and a small increase Montcalm deposit will be put into production based on prob- in mine feed. This was a new production record. Production able mineral reserves totalling 5.1 million tonnes grading of nickel in 2004 is planned at71,000 tonnesas some of 1.46% nickel and 0.71% copper. The probable reserves have thefeeds acquired on a spotbasis in 2003 will notbe avail- been established from the 7.0 million tonnes of measured and able this year. Productivity at the refinery, measured by the indicated mineral resources previously reported. Inferred equivalent units of metals produced per hour worked, resources totalling 0.7 million tonnes remain as before. improved by 8% as a result of increased throughput. Falconbridge Dominicana, C. por A. (Falcondo) The collective agreements with the workers at the refinery Located in the Dominican Republic, Falcondo mines, mills, in Kristiansand expire May 31, 2004, and are renegotiated smelts and refines its own nickel laterite ores. Falconbridge annually. owns 85.26% of Falcondo. Reserves & exploration: At planned operating rates, the proven and 2003 2002 probable mineral reserves at Sudbury are equal to approxi- Sales of ferronickel (tonnes) 27,100 21,400 mately seven years of production, not including Nickel Rim Production (tonnes) 27,200 23,300 South. Production is expected to be significantly extended as it Revenues ($ millions) 251 149 is anticipated that a significant portion of the mineral Operating cash cost resources will be converted to mineral reserves and will extend ($ per pound of nickel) 3.04 2.76 the life of the operation. Operating income ($ millions) 62 1 In 2003, the Sudbury Division’s proven and probable mineral reserves decreased by an additional 1.0 million tonnes after Revenues: Revenues of $251 million atFalcondo in 2003 were production of 2.0 million tonnes. The loss of reserves 68% higher compared to $150 million in 2002, due to the 27% resulted from a 1.2 million tonne write-down of reserves at increase in sales to 27,100 tonnes from 21,400 tonnes and the Craig Mine due to changes in mining plans and parameters. impactof a 33% increase in therealized ferronickel price. This loss was partially offset by mining gains in reserves at the Costs: Falcondo’s operating cash cost per pound of ferronickel Thayer Lindsley mine. At December 31, 2003, total proven increased by 10% in 2003 to $3.04, mainly due to the increase and probable reserves were 14.1 million tonnes. in oil prices. It is estimated that a change of $1 in the price of a In Sudbury, total mineral resources increased significantly in barrel of oil results in approximately $0.07 in operating cash 2003 from 39.0 to 49.4 million tonnes with large additions costper pound. at Nickel Rim South and Fraser Morgan and smaller additions Operating income: Falcondo’s 2003 operating income was at the mining operations. Approximately 5.5 million tonnes $62 million, compared with $1 million in 2002. The $61 mil- were added at Nickel Rim South in 2003. The Nickel Rim lion higher contribution reflects a higher ferronickel selling South deposit is now estimated to contain 11.7 million tonnes price and increased sales volumes, which were partially offset grading 1.6% nickel, 3.7% copper, 2.0 grams/tonne platinum, by higher oil prices. 2.3 grams/tonne palladium and 0.7 grams/tonne gold. Production: Falcondo’s production rate in 2003 returned to Drilling at Fraser Morgan Zones 8 and 9 added 3.8 million more normal levels after the planned shutdown in 2002. For tonnes grading 1.7% nickel and 0.5% copper. the year, Falcondo produced 27,200 tonnes, in line with its AtRaglan, themineral reserves are equal toapproximately annual target of 27,000 tonnes. Production in 2004 is 19 years of productionatcurrentoperatingrates.In combina- planned to be 27,000 tonnes. Productivity at Falcondo, tion with production of 834,000 tonnes and reserve adjust- measured by nickel units produced per hour worked, ments, the overall mineral reserves decreased by only increased by 12% in 2003. 0.4 million tonnes in 2003. Discovery of approximately Reserves & exploration: At planned operating rates, the proven and 260,000 tonnes of mineral reserves in Zone 3 plus other probable mineral reserves are equal to approximately 18 years mining gains, replaced a large partof theannual production. of production. The proven and probable mineral reserves at At December 31, 2003, total proven and probable reserves at Falcondo showed a net decrease of 3.2 million tonnes after Raglan were 17.7 million tonnes. Total mineral resources production of 3.8 million tonnes in 2003. The decrease due increased by over 900,000 tonnes in 2003 to 7.2 million to production was partly offset by the discovery of 0.6 million tonnes due to discoveries at Zones 2, 3, 5-8, Donaldson tonnes in previously un-drilled areas in Lomas Caribe and and Katinniq. Larga. At December 31, 2003, total proven and probable reserves were 60.9 million tonnes.

19 Management’s Discussion and Analysis

Kidd Creek operations 2003 2002 Ore tonnes Ore tonnes (x 1,000) Cu % Zn % Ag g/t (x 1,000) Ni % Cu % Ag g/t Production Kidd Mining Division No. 1 and 2 Mines 737 2.36 6.12 87 1,118 2.01 6.47 79 No. 3 Mine 1,371 2.25 3.20 41 1,112 2.11 5.89 78 Total mined 2,108 2,230 Total – ore processed 2,125 2,245 2.12 5.89 78

Cu Cu Cu Cu Cu Cathode Blister Zn Ag Cu Cathode Blister Zn Ag Kidd Mining Division Metal in concentrate (tonnes except 000 troy ounces for Ag) 46,409 — — 75,528 2,676 45,434 — — 104,083 3,671 Kidd Metallurgical Division (tonnes except 000 troy ounces for Ag) Mines 51,477 51,104 62,126 2,557 46,945 44,513 103,609 2,638 Custom – Sudbury 26,048 25,860 — 380 23,083 23,083 — 125 Custom – other 54,839 54,441 32,593 2,520 76,498 76,498 41,700 1,084 Total 132,364 131,405 94,719 5,457 146,526 144,094 145,309 3,847

Cu in Zn in Cu in Zn in Cu conc. Zn conc. Ag Cu conc. Zn conc. Ag Sales (tonnes except 000 troy ounces for Ag) Mines 47,184 — 63,963 15,792 4,131 47,190 — 103,711 3,007 2,638 Custom – other 57,978 — 34,665 6,461 1,326 57,553 — 41,700 — 1,085 Purchased metal —————5,832 — — — — Total 105,162 — 98,628 22,253 5,457 110,575 — 145,411 3,007 3,723

Copper operations The integrated Kidd operations have been adversely impacted Falconbridge is also an important copper producer, ranking by low copper and zinc prices, low treatment charges for twelfth in the world in mined production during 2003. The third-party concentrates, and by the appreciation of the Corporation’s copper operations include Kidd Creek in Canadian dollar relative to the U.S. dollar. Profitability is Canada and Collahuasi and Lomas Bayas in Chile. expected to improve in 2004 as a result of cost reduction ini- Operating income of the copper business was up 46% to tiatives implemented in 2003, the securing of higher-margin $76 million in 2003 compared with $52 million in 2002. complex concentrates from third parties and from higher Copper production from the mines was 311,200 tonnes in metal prices. 2003 compared with 327,300 tonnes in 2002. The operating 2003 2002 cash cost per pound of copper was $0.53 compared with Sales (tonnes) $0.42 in 2002. Copper (in metal and concentrate) 105,162 110,575 Kidd Creek operations Zinc (in metal and concentrate) 120,881 148,418 Kidd Creek is an integrated processing facility engaged in Revenues ($ millions) 396 340 the mining, milling, smelting and refining of its own copper Operating cash cost and zinc ores and in the processing of custom feed. ($ per pound of copper) 0.83 0.68 Operating loss ($ millions) 70 48

20 Management’s Discussion and Analysis

Revenues: Revenues of $396 million in 2003 were 16% higher to start in late 2004. In 2003, $85 million was spent on than the $340 million realized in 2002 despite the 13-week Mine D development (2002 – $78 million), with a total of summer shutdown of the zinc plant and lower copper sales $276 million spent to date. Mine D is expected to contribute volumes, which were offset by higher precious metal sales 1.8 million tonnes of ore annually once in full production. volumes and stronger metal prices. The cost of Mine D has been estimated at $450 million.

Costs: The 2003 operating cash costs at the Kidd Mine Collahuasi increased to $0.83 per pound from $0.68 per pound in 2002. Compañía Minera Doña Inés de Collahuasi S.C.M., in which The increase reflects lower by-product credits and higher Falconbridge holds a 44% interest, operates the Collahuasi labour, contractor and energy costs, and the impact of a mine in northern Chile. Collahuasi mines and mills copper stronger Canadian dollar. sulphide ores into concentrate and mines and leaches copper Operating income: Kidd Creek Operations reported a 2003 oper- oxide ores to produce cathodes. Collahuasi continues to be a ating loss of $70 million or a $22 million loss before deprecia- strong performer and exceeded targeted production for 2003. tion and amortization charges. This compares with an operating Falconbridge share 2003 2002 loss of $48 million or a profitof $1 million before depreciation and amortization charges for 2002. The $22 million increase Sales of copper (tonnes) 168,147 187,524 in the operating loss largely reflects lower Kidd concentrate Production (tonnes) 168,578 185,014 production, the stronger Canadian dollar, lower treatment Revenues ($ millions) 275 246 terms, lower sales volumes, one-time restructuring costs of Operating cash cost $4 million and higher costs for purchased raw materials, ($ per pound of copper) 0.38 0.39 partially offset by higher metal prices. Operating income ($ millions) 115 82 Production: At the Kidd Mining Division, ore hoisted and milled Revenues: Falconbridge’s share of revenues atCollahuasi in 2003 in 2003, both at 2.1 million tonnes, was 5% less than 2002 was $275 million compared with $246 million in 2002. The volumes. The lower tonnage was mainly due to poor ground increase of $29 million is due to an increase in the realized conditions in the lower mine and delays in the rehabilitation copper prices, which offsetthedecrease in sales volumes. of key stopes in the upper mine. Costs: The operating cash cost of $0.38 per pound of copper in Copper metal in concentrate increased marginally to 2003 decreased by one cent US per pound compared to 46,400 tonnes due to the higher ore grades. Zinc in concen- 2002. Lower treatment and refining charges more than offset trate was 28,600 tonnes lower at 75,500 tonnes due to lower the increase in mining costs from lower grades and the tonnage and ore grades. Copper ore grade in 2003 was strengthening Chilean peso. 2.30%, compared with 2.12% in 2002 and the zinc ore grade Operating income: The Corporation’s share of Collahuasi’s 2003 was 4.27% compared with 5.89% in 2002. operating income was $115 million compared with $82 million The copper smelter underwent a four-week maintenance in 2002. The positive variance is mostly attributable to higher shutdown in 2003 after a record 22-month campaign. copper prices and lower unit production costs. Copper blister output and copper cathode production were Production: Falconbridge’s share of annual copper production 131,400 tonnes and 127,600 tonnes, respectively, and 9% totalled 168,578 tonnes, 9% lower than the production of and 10% lower, respectively, than in 2002. Zinc metal 185,014 tonnes in 2002. Falconbridge’s share of cathode production was also lower due to the decision to take the from the oxide plant reached 27,895 tonnes, 27% above the 13-week summer shutdown for market reasons. Zinc metal design capacity of the refinery, while production of copper in production at 94,700 tonnes was 50,600 tonnes lower than concentrate was 140,683 tonnes. The decrease in 2003 pro- lastyear. Sulphuric acid productionat472,100 tonneswas duction was anticipated and attributable to lower ore grades 112,100 tonnes below the 2002 volume. compared to 2002. Falconbridge’s share of total copper Reserves: At December 31, 2003, reserves totalled 20.8 million production in 2004 is forecast at 206,000 tonnes. tonnes grading 2.0% copper and 6.1% zinc. After production The construction of a new grinding circuit at the Ujina con- of 2.1 million tonnes and a revision of previous estimates of centrator was approved in 2002. It is part of the Ujina to 0.7 million tonnes, reserves decreased 2.8 million tonnes. At Rosario transition project, which also involves transferring current operating rates, the mineral reserves are equal to mine production from the Ujina to the Rosario ore body in approximately nine years based on current proven and pro- June of 2004. The project will increase Collahuasi’s concen- bable mineral reserves. trator design capacity to 110,000 tonnes per day from Mine D: Kidd is currently developing Mine D, the depth 70,000 tonnes per day, compensating for an expected decline extension of No. 3 mine orebody, with production scheduled

21 Management’s Discussion and Analysis

in ore grade and thereby enabling Collahuasi to maintain cop- Corporate and other per production at current levels. The total capital cost of the Corporate and other includes corporate costs, exploration, transition and concentrator expansion project is estimated at research and development expenditures, foreign exchange $654 million, with Falconbridge’s 44% share of this cost gains and losses and other income and expenses. totalling $288 million. The project to move the operations Corporate costs of $59 million for 2003 improved by from the Ujina pit to the new Rosario open pit and the expan- $2.0 million over 2002. The decrease was attributable prima- sion of the Ujina concentrator is on schedule and on budget. rily to higher gains on metals trading and reduced corporate The project is expected to achieve mechanical completion general and administrative costs. These savings were offset by in June 2004. Construction work was 77% complete by the foreign exchange losses attributable to the strengthening of the end of 2003, with the civil work 100% complete and the Chilean Peso and Euro relative to the US dollar, higher mechanical and electrical work well advanced. spending on research and development projects, and the Reserves & exploration: The December 31, 2003, total proven impact of the stronger Canadian dollar. and probable mineral reserves at Collahuasi of 1,808 million tonnes decreased by 30.5 million tonnes due to mine Liquidity and capital resources production. The Corporation’s cash position and changes in cash in each of the last two years ended December 31 are summarized below: Lomas Bayas Compañía Minera Falconbridge Lomas Bayas mines and $ MILLIONS 2003 2002 leaches copper oxide ores to produce cathodes. During 2003 Cash provided by operating activities $ 445 $228 Lomas Bayas achieved a record level of production. Cash used in investing activities (388) (242) Cash provided by financing activities 77 54 2003 2002 Cash provided (used) during the year 134 40 Sales of copper (tonnes) 61,289 60,625 Cash and cash equivalents, Production (tonnes) 60,427 59,304 beginning of year 164 124 Revenues ($ millions) 114 97 Cash and cash equivalents, end of year $ 298 $ 164 Operating cash cost ($ per pound of copper) 0.48 0.45 Liquidity and cash flow Operating income ($ millions) 31 17 Consolidated cash and cash equivalents increased by $134 million to $298 million at December 31, 2003, compared with Revenues: Revenues in 2003 were $114 million compared to $164 million at the end of last year. These items were invested $97 million in 2002. The increase of $17 million was attribu- primarily in high-quality, short-term money market instru- table to the impact of higher metal prices and higher sales ments and liquidity funds. volumes. The Corporation has three-year committed revolving credit Costs: The operating cash cost of producing a pound of copper facilities with various banks totalling $405 million at in 2003 increased to $0.48 per pound from $0.45 per December 31, 2003. This total was increased to $420 million pound in 2002. The increase in the cash cost resulted from effective January 1, 2004. Borrowings may be in many forms higher sulphuric acid prices and the strengthening of the including letters of credit, which offset amounts available Chilean peso against the U.S. dollar. under thecreditfacilities.As atDecember 31, 2003, the Operating income: Lomas Bayas’ 2003 operating income of Corporation had no borrowings and had drawn letters of credit $31 million, increased by $14 million over 2002. Higher totalling $17 million. The Corporation also has letters of credit sales prices and volumes offset the impact of higher produc- outstanding of $15 million under an uncommitted facility. tion costs. The Corporation has a Commercial Paper Program. Unused Production: Lomas Bayas produced a record 60,427 tonnes of lines of credit and cash on hand are used to support the copper cathode in 2003 compared to 59,304 tonnes in 2002. Commercial Paper Program. As at December 31, 2003, the Copper production in 2004 is forecast at 60,000 tonnes. Corporation had no Commercial Paper outstanding. Reserves & exploration: The December 31, 2003, total proven and Working capital increased by $206 million to $649 million at probable mineral reserves of 363.9 million tonnes at Lomas the end of 2003, from $443 million, primarily due to the Bayas decreased by 33.4 million tonnes due primarily to mine impact of higher metal prices and foreign exchange. production, which utilized 30.4 million tonnes. A total of 81.2 million tonnes of mineral resources were added during 2003 as a result of new modeling of the area.

22 Management’s Discussion and Analysis

Cash generated from operations totalled $445 million com- be financed from internal sources and existing lines of credit. pared with $228 million for 2002. Based on sustaining capital required for existing operations The ratio of current assets to current liabilities improved to and planned developments, capital expenditures beyond 2004 2.9:1 from 2.7:1 in 2002. are expected to be in the range of $300 million to 400 million per year over the following three years. Based on planned production levels, estimated London Metal Exchange (LME) prices and forecasted Canadian/U.S. dollar Growth opportunities exchange rates, it is anticipated that funds provided from Over the last decade, Falconbridge has assembled a significant operations, available cash, and proceeds from existing lines of portfolio of growth projects. Some are closer to its operations credit will be sufficient to finance planned capital expendi- and easier to execute (e.g. brownfield projects); others are tures in 2004 and the dividends declared to date. new projects unrelated to existing operations (e.g. greenfield Outstanding indebtedness projects). Total debt increased to $1,427 million at December 31, 2003, Projects in development from $1,280 million at the end of 2002. The increase was Collahuasi, Chile – The Corporation is completing a major attributable to the issue of $250 million of new debt offset by investment project to expand concentrator capacity and move debt repayments of $130 million and an unrealized foreign mining operations to a higher-grade open pit (see page 22). exchange loss of $27 million on Canadian dollar denominated debt. The current portion of long-term debt is $71 million. Kidd Mine D, Timmins, Canada – (See page 21). The ratio of net debt (debt minus cash and temporary invest- Montcalm, Timmins, Canada – The Montcalm mineral reserves con- ments) to net debt plus equity improved to 37% at the end of sist of 5.1 million tonnes of 1.46% nickel and 0.71% copper. 2003 from 42% in 2002. This underground development project is accessed via a ramp system and is expected to be operational in the first quarter Capital expenditures and deferred project costs of 2005, producing 8,000 tonnes of nickel per year for The following table summarizes the expenditures incurred or seven years. planned for the periods indicated: Brownfield projects Total Total NICKEL $ MILLIONS 2004 2003 Nickel Rim South, Sudbury, Canada – This high-grade deposit is close Investment projects to existing operations and could be put in production in late Nickel 2008 or early 2009. Surface diamond drilling during 2003 Montcalm 75 5 resulted in the tonnage increasing by 87%. The updated Koniambo 52 34 inferred mineral resource estimate as of December 31, 2003, Nickel Rim South 77 5 is 11.7 million tonnes of 1.6% nickel, 3.7% copper and signif- Copper icant palladium and platinum. The mineral deposit remains Kidd 105 85 open in an up-dip direction and additional surface diamond Collahuasi 91 151 drilling is planned. An underground exploration/development Maintenance and other 100 90 program will start in 2004 leading to the completion of a Total 500 370 bankable feasibility study by 2008. This program is expected to cost $400 million over five years. Expenditures in 2003 were directed towards development Fraser Morgan – Diamond drilling at the Fraser Mine has resulted of Mine D at the Kidd Mining Division, the Collahuasi in a combined indicated and inferred mineral resource of transition from Ujina to Rosario, the crusher expansion at 6.3 million tonnes of 1.6% nickel and 0.5% copper. Diamond Lomas Bayas, evaluation work at Koniambo and to maintain drilling will continue in 2004. The mineral deposit is accessi- and improve productive capacity at all locations. ble from existing Fraser Mine infrastructure. Expenditures in 2004 will primarily be used to proceed with Raglan, Nunavik, Quebec – The Corporation is evaluating the pos- the continued development of Mine D at the Kidd Mining sibility of increasing annual production by 40% to 1.3 million Division, the Collahuasi transition from Ujina to Rosario, the tonnes of ore per year. A scoping study will be completed in development of the Montcalm deposit, the underground 2004. A focused exploration program continues on the exploration program at the Nickel Rim South ore body, con- Corporation’s large property holdings. tinued evaluation work at Koniambo and to maintain and improve productive capacity at all locations. Expenditures will

23 Management’s Discussion and Analysis

Advanced projects – mineral resources1

DECEMBER 31, 2003 Resource Percentage Million Project location ownership Category tonnes % Nickel % Copper % Cobalt % Zinc Nickel deposits Nickel Rim South2 Sudbury 100% Inferred 11.7 1.6 3.7 0.04 — Fraser Morgan2 Sudbury 100% Indicated 3.8 1.71 0.52 0.06 — Inferred 2.5 1.4 0.4 0.05 — Onaping Depth2 Sudbury 100% Indicated 14.6 2.52 1.15 0.06 — Inferred 1.2 3.6 1.2 0.07 — Côte d’Ivoire Ivory Coast 85% Indicated 123.9 1.57 — 0.10 — Inferred 134.0 1.4 — 0.12 — Koniambo3 New Caledonia 49% Measured 32.4 2.21 — 0.07 — Indicated 109.7 2.10 — 0.07 — Total 142.1 2.13 — 0.07 — Inferred 156.0 2.2 — 0.08 — Copper deposits Mine D4 Timmins 100% Inferred 14.2 — 3.4 — 4.9 Fortuna de Cobre5 Chile 100% Measured 125.2 — 0.31 — — Indicated 345.1 — 0.28 — — Total 470.3 — 0.29 — — Inferred 150.0 — 0.21 — — Notes: 1. The mineral resource estimates were prepared in accordance with the “CIM Standards on Mineral Resources and Mineral Reserves, Definitions and Guidelines”, adopted by CIM Council on August 20, 2000, using classical and/or geostatistical 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 30 years experience as a geologist. The mineral resources have reasonable prospects for economic extraction but have not yet had complete formal 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 754.6 million tonnes grading 2.47% nickel and 0.06% cobalt. 4. Also included as part of the Kidd Creek mineral resources on the Mineral Reserves and Mineral Resources table. 5. Option to purchase.

COPPER 50% of its interest in the Kabanga and Kagera nickel proper- Collahuasi, Chile – Currently, the fourth-largest copper mine in ties in Tanzania. This option requires Falconbridge to meet the world, Collahuasi has sufficient reserves and resources for certain spending and work plan milestones. Kabanga, located further expansion after the current Phase II project is com- in western Tanzania about 1,500 kilometres from Dar Es pleted in June 2004. Water rights to enable further expansion Salaam, has a high-grade mineral resource of more than have been secured. Furthermore, the Rosario orebody con- 26 million tonnes at 2.6% nickel, with significant upside tains significant molybdenum giving rise to an investment potential. Kabanga, together with the Kagera property, pro- opportunity to construct a molybdenum recovery circuit. vides a significant land position on the highly prospective Lomas Bayas, Chile – The acquisition of an adjacent deposit, Kagera nickel belt. Falconbridge and Barrick have agreed on called Fortuna de Cobre, is being considered. It could a work plan to advance the Kabanga nickel project towards a increase annual production by 50% to 90,000 tonnes and development decision within 36 months. Depending on the extend mine life by five years. A decision on the option to buy additional resources found during the exploration program, a the deposit must be made by 2006. mine could produce between 30,000 and 35,000 tonnes of nickel in concentrate annually. Greenfield projects Koniambo, New Caledonia – Work continued throughout the year Kabanga, Tanzania – In early February 2004, Falconbridge and on the Koniambo ferronickel project in the Northern Barrick Gold Corporation reached an understanding under Province of New Caledonia, near the provincial capital of which Barrick would grant Falconbridge an option to acquire

24 Management’s Discussion and Analysis

Key assumptions for mineral resource and reserve estimation

Refer to Summary of Mineral Reserves and Mineral Resources on Page 14 and Advanced Projects on page 24. 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 minimum 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.

Kone. With measured and indicated saprolite mineral Further geological drilling, completed in March 2003, was resources estimated to be 142.1 million tonnes of 2.13% nickel undertaken to delineate 25 years of measured resources and and inferred mineral resources of 156 million tonnes of 2.2% indicated resources. nickel, the Koniambo deposit is one of the largest and highest In 2003, $28 million was spent on the project, bringing total grade laterite resources in the world. In addition, the project expenditure to date to $123 million. A formal application was has an inferred limonite mineral resource estimated to consist made in 2003 under the French ‘Loi Girardin’ incentive pro- of 125 million tonnes of 1.6% nickel and 0.2% cobalt that gram for investments in overseas territories. Discussions are could be developed at a later date. continuing with the Government of France and with our In 1998, Falconbridge entered into a joint-venture agreement partner, SMSP. with Société Minière du Sud Pacifique S. A. (SMSP) and its controlling shareholder, Société de Financement et Exploration d’Investissement de la Province Nord, for the evaluation and The Falconbridge exploration team conducts worldwide explo- development of the 60,000-tonne per year nickel in ferro- ration focused primarily on nickel and platinum group metals. nickel mining and smelting complex. Falconbridge has a right Its mandate is to discover and delineate mineral resources that to earn a 49% interest in the project with SMSP owning 51%. merit the Board of Directors’ approval to proceed to develop- Governance of the project will be on a 50/50 basis. ment and production. The team targets mineral resources The Corporation has assembled an experienced project devel- of strategic size, in locations with acceptable country risk, with opment and execution team. A pre-feasibility study was com- after-taxratesof returnon investmentofatleast15% and pleted in 2003 and indicates a capital cost of $1.57 billion and operating costs below the industry mid-point. Its goal is to operating costs of $1.27 per pound. A bankable feasibility conductsafe and environmentallyresponsible exploration study is in progress which will refine the capital and operating utilizing the latest technological advances in exploration cost estimates through greater detailed engineering and will methodology to improve efficiency and the likelihood of adjust for foreign exchange rate movements. The bankable success. Joint-venture arrangements are pursued with both feasibility study will be completed in the third quarter of junior and senior mining companies to increase the level of 2004. The Koniambo ferronickel project would use a well- focused activity and to share cost and risk. known smelting process with modern, updated technologies.

25 Management’s Discussion and Analysis

Exploration is being carried out primarily in Canada, Brazil, management practices are applied in order to stabilize prices South Africa, Norway and Australia. Advanced nickel explo- and enhance energy cost management. Of particular concern ration is focused in Sudbury, Ontario and Raglan, Quebec in the mid term are world oil prices, the availability of sweet near existing operations. Diamond drilling at the Nickel Rim crude oil in the Gulf of Mexico and the tight supply situation South discovery at Sudbury has increased the estimated for natural gas in North America. inferred mineral resource from 6.3 million tonnes to A formal strategy has been established for strengthening the 11.7 million tonnes of 1.6% nickel, 3.7% copper, effective use of energy within the Company. The operations 2.0grams/tonne platinum, 2.3grams/tonne palladium and are provided an infrastructure that effectively measures con- 0.7grams/tonne gold. Exploration at Raglan during 2003 has sumption and performance. Additionally, awareness work- resulted in 1.7 million tonnes being added to the mineral shops are being held at each facility to help employees reserves/resources. understand how energy use can be controlled. The Falconbridge exploration budget for 2004 is forecast to Furthermore, energy is being defined as a managed variable be $22 million. The financial investment of worldwide joint- within operations management systems. Energy performance venture participants plus tax credits provided by the Quebec indicators are being developed for each level in the organiza- provincial government to stimulate exploration activity is tion so that production processes can be operated to con- expected to provide external funding that will leverage the sumption benchmarks. Senior management has endorsed an internal budget to an estimated $28 million. energy intensity improvement target of 1% per year. Finally, Six Sigma methodology and techniques were also applied Business development to reduce consumption. In 2003, energy cost reduction The business development function plays a critical role in initiatives resulted in savings of approximately $5 million. several aspects of the company’s management. First, it works in tandem with the various business units, exploration group and Sustainable development project development teams to plan, coordinate and implement Falconbridge is a strong proponent of Sustainable Develop- long-term strategies to replace the resources that are depleted ment where economic prosperity, environmental quality and in the normal course of mining operations and to grow the social equity drive business activities. This commitment is business throughout the cycle. Business development regularly reflected in the Company’s Sustainable Development Policy. evaluates opportunities for growth. These objectives are achieved by, amongst other things, evaluating potential acqui- Providing a safe and healthy workplace is a priority at sitions of mining properties or assets, investing in junior Falconbridge. Operations continue to implement effective mining companies, partnering with other companies to safety training programs and management systems. Safety per- develop growth opportunities, developing long-term strategic, formance is strongly supported by senior management and the commercial relationships or examining potential brownfield Board of Directors. Under the 2003 Safety, Health and expansions within the Corporation’s existing asset base. Leadership program five Falconbridge operations were visited Furthermore, the Corporation focuses on the development of by senior management to assess, promote and reinforce the long-term relationships that bring the Corporation technical, importance of a safe workplace. These initiatives, among operational, project development, financial, managerial and others, have resulted in enhanced safety performance in 2003 commercial strengths to bear, so that significant value, in as the lost-time injury frequency (a measure of the number of addition to cash resources, can be deployed to successfully compensable injuries per 200,000 hours worked) declined to realize potential growth opportunities. The Corporation 1.26 versus 1.45 in 2002. also focuses on growth opportunities that create additional For more details on our progress towards sustainability please synergies with its existing asset base. refer to the 2003 Falconbridge Limited Sustainable Development Report, which is scheduled for release in April 2004, and will be avail- Energy able on the Corporation’s website. In 2003, energy costs represented approximately 21% of the cash cost breakdown for all of Falconbridge’s operations. Sensitivities Significant quantities of electricity, natural gas, and petroleum Falconbridge’s earnings and cash flows are sensitive to changes products are procured from commodities markets and regu- in metal prices and the Canadian/U.S. dollar exchange rate. lated energy providers in the U.S., Canada, Norway, Mexico The following table shows the approximate impact on operating and Chile. income, earnings and cash flow due to variations in these fac- Company profitability is sensitive to energy price volatility. tors, based on Falconbridge’s normal annual sales volumes, if Where energy is purchased in a commodities market, risk the change was to remain in effect for the full year:

26 Management’s Discussion and Analysis

Impact on Change in US$ Operating Cash $ MILLIONS In Realized Price Income Earnings(a) Flow Nickel $0.10 per pound 12 9 11 Ferronickel 0.10 per pound 6 3 3 Copper 0.10 per pound 79 56 75 Zinc 0.05 per pound 10 7 9 Cobalt1.00 per pound 4 3 4 Platinum and Palladium 100.00 per ounce 12 8 11 Silver 1.00 per ounce 4 3 4 Exchange rate US$1.00 = Cdn$ +/- 1¢ 2 2 2 (a) Difference between earnings and cash flow relates to deferred tax amount.

Falconbridge periodically uses foreign exchange and options Markets contracts to hedge the effect of exchange rate changes on iden- Nickel tifiable foreign currency exposures. The Canadian dollar sen- The world economies remained sluggish during the first half sitivity table above reflects the impact of such currency hedges. of 2003, primarily due to geopolitical factors such as the In addition, Falconbridge may use futures and option con- Iraq war. But the situation began to change in the second tracts to hedge the effect of price changes on a portion of the half of the year as forward-looking indicators began to turn metals it sells. The above sensitivities could accordingly be positive. In the U.S., business investment picked up and affected if such hedging programs were to be put in place. positive economic data suggested an accelerating and sustainable trend. The euro-zone economy also started to recover, Critical accounting estimates albeitata weaker rate.In Japan, supportivemacroeconomic Management is required to make estimates in preparing its policies generated an appreciable improvement in the manu- financial statements in conformity with generally accepted facturing sector. In China, booming exports and soaring accounting principles. These estimates affect the reported domestic demand counteracted the negative effect of SARS amounts of assets and liabilities and the disclosure of contin- on the Chinese economy and highlighted the country’s great gent assets and liabilities at the date of the financial statements influence on practically all base metal markets during the and the reported amounts of revenues and expenses during the year. Prices across base and mostprecious metalsrallied in reporting period. The critical accounting estimates made by the second half of the year in anticipation of stronger fun- Falconbridge are used in the determination of asset lives to damentals ahead. compute depreciation, impairment of assets, the cost of In 2003, the price of nickel rose from a low of $3.27/lb. at employee future benefits, reclamation and environmental the start of 2003 to $7.55/lb. by year end. Supply-side funda- obligations, the determination of mineral reserves, the mentals were the main driver behind this run-up, comple- determination of taxes, and allowances for unrecoverable mented by the very strong demand for metals in China. In receivables. 2003, world production of nickel grew by only 1.7%, less than half the growth seen in 2002. Disruptions at producers Accounting changes reduced nickel supply in the first half of the year. This was fol- Effective July 1, 2003, the functional currency of Falconbridge lowed by a three-month strike at Inco’s Sudbury operations, Limited was changed from the Canadian to the U.S. dollar. which removed approximately 30,000 tonnes of nickel from Concurrent with this change, Falconbridge adopted the U.S. the market in the second half of the year. dollar as its reporting currency. Effective January 1, 2003, the Consumption of nickel grew 5.9% in 2003, with one-third of Corporation also adopted new policies for interest capitaliza- the growth coming from China. Stainless steel production, tion and inventory costing. These changes were made to har- which uses more than two-thirds of the world’s supply of monize Falconbridge’s policies with predominant industry nickel, grew at6.3%. This rateis well above thetrend growth practices and international accounting standards. [See notes 1 rate. The first half of 2003 was particularly strong as mills in and 2]. all geographic market sectors, with the exception of the U.S., produced at record levels. Growth in the availability of external scrap kept pace with growth in stainless steel production, with

27 Management’s Discussion and Analysis

Average U.S. prices and Canadian/U.S. exchange rates Realized by Falconbridge London Metal Exchange

Pricing unit 2003 20022003 2002 Nickel pound $ 4.40 $ 3.14 $ 4.37 $ 3.07 Ferronickel pound 4.20 3.16 — — Copper pound 0.82 0.72 0.81 0.71 Zinc pound 0.41 0.39 0.38 0.35 Cobaltpound 9.42 7.02 8.94* 6.76* *As per Metal Bulletin 99.3%

theneteffectthatstainlesssteelscrap availabilityremained strongest demand growth occurred in Asia. While Japan’s cop- tight. In the non-stainless steel sectors, electronic alloys and per consumption was weak, the rest of Asia experienced 5% batteries showed some signs of recovery, but both the aerospace growth. Chinese consumption grew at close to 20% year over and land-based gas turbine markets remained weak. year, making China the leading copper consuming country in When factoring in the Inco strike, the nickel market deficit was the world and, for the first time, a net importer of refined estimated to be 56,000 tonnes in 2003. However, the release copper. Demand is estimated to have exceeded three million of the 60,000-tonne collateral stocks by Norilsk more than tonnes in 2003 and imports were over one million tonnes. offset the deficit, creating an implied surplus of 4,000 tonnes Cobalt for the period. At the beginning of 2003, the cobalt market hit historically Copper low price levels due to continued oversupply and weakness in The copper market underwent a significant change during the key superalloy sector. However, unsustainable prices in the 2003, moving from a sizable surplus position early in the year $6.00/lb. range prompted restructurings at producers, bank- to a substantial deficit by year end. This change was brought ruptcies and changes in business practices. This has led the way about by a combination of two factors: supply-side discipline to improved supply fundamentals, while demand for cobalt on the part of producers and strong demand for copper from was strengthening throughout the year. The year ended with a China. Given these improved fundamentals, the copper price supply deficit. increased by 51% from $0.69/lb. at the end of 2002 to $1.05/lb. by year end. The underlying supporting factor of the Outlook copper market in 2003 was restrained supply rather than Nickel physical demand. The prospect of synchronized growth in the three major Western World economies (U.S., Europe, Japan), together Production cutbacks implemented by producers in 2002 con- with the robust growth continuing in the non-OECD coun- tinued in 2003. Codelco, the world’s largest copper producer, tries (China, Russia, India, Latin America), should underpin stockpiled 200,000 tonnes of copper cathodes in 2003. Idled a strong pick-up in metal consumption in 2004. mine capacityatthestartoftheyear reached 685,000 tonnes and continued at this level until the third quarter, when the The nickel market is expected to remain in significant deficit. restartoftwooperationsbrought125,000 tonnesof capacity Given the industry consensus for higher than average nickel back on stream. Despite the significant production cutbacks, prices for the next couple of years, nickel producers are trying mine output increased slightly in 2003, mainly due to the to maximize output levels. There are a number of small sul- completion of expansion projects. In 2003, refined metal pro- phide projects in development, which should increase output duction fell for a second year in a row, as a result of the lower levels. Refined nickel production is projected to rise by 6% in availability of concentrates and a shortage of scrap. 2004, due in large part to the recovery of production after shortfalls at Inco and other producers in 2003. Copper demand remained weak in the Western World in 2003, growing by less than 1%. The U.S. market was particu- With a recovery in industrial production (IP) expected to take larly slow in the first half of 2003, and while the economy place in 2004, stainless steel production, which is strongly recovered in the second half, the benefits only filtered down to correlated to IP, should continue to experience above-trend the copper sector in the fourth quarter. European demand was growth. The forecast suggests that it could exceed 8%, but the slightly stronger in the first half of the year, but remained austenitic ratio (nickel-bearing stainless steel) is expected to subdued for the second half of 2003, as manufacturing weaken, as higher nickel prices push some mills to put more activity weakened and the strong euro hampered exports. The

28 Management’s Discussion and Analysis

focus on ferritic grade stainless steel and/or grades with lower Trends, risks and uncertainties nickel content. Fluctuating metal prices As substantially all of Falconbridge’s revenues are derived from Furthermore, scrap availability is expected to fall short of the sale of nickel, copper, cobalt and zinc, its earnings are demand from stainless steel producers. Scrap dealers have directly related to fluctuations in the prices of these metals. already liquidated all excess inventories, with no surplus avail- The prices of these metals are subject to volatile price move- able. The volumes of scrap that normally arise from the indus- ments over short periods of time. Falconbridge generally does trialized Western World economies will continue and higher not hedge prices of the metals it produces. Market prices can nickel prices will draw out further marginal quantities. be affected by numerous factors beyond Falconbridge’s con- However, in the newly industrialized Asian countries, where trol, including expectations for inflation, speculative activities, much of the expansion in stainless steel production is taking relative exchange rates to the U.S. dollar, production activities place, the economies have little stainless steel to be scrapped. of Falconbridge’s competitors, global and regional demand As a result, the overall scrap ratio is forecast to decline further. and supply, political and economic conditions and production Demand from the non-stainless steel sector is expected to costs in major producing regions. The prices for nickel, cop- grow by 3% in 2004 due to improved economic performance. per or other metals produced by Falconbridge may decline sig- Overall, nickel demand is forecast to grow by 4.8%. This is nificantly from current levels. A reduction in the prices of one expected to generate a nickel supply deficit in 2004 of or more of these metals could materially adversely affect the approximately 42,000 tonnes. value and amount of Falconbridge’s reserves and its business, financial condition, liquidity and operating results. Copper The copper deficit is expected to increase in 2004, as Western Mining and processing risks World consumption is forecast to grow by over 4%. Refined The business of mining and processing of metals is generally copper demand is expected to be strong in all market areas, subjecttoa number of risks and hazards, including unusual while demand in China is expected grow by more than 10%. or unexpected geological conditions, ground conditions, Production of both concentrate and cathodes is expected to phenomena such as inclement weather conditions, floods and increase, but should be outpaced by the growth in consump- earthquakes and the handling of hazardous substances and tion. Most of the increased production will come from mine emissions of contaminants. Such occurrences could result re-starts and continued ramp-up of brownfield expansions in personal injury or death, damage to, or destruction of, and newly expanded capacity. There is only one greenfield mineral properties, processing or production facilities or the mine project of significance expected to commence produc- environment, monetary losses and possible legal liability. tion in 2004. The cathode inventories stockpiled by Codelco Falconbridge’s business, financial condition, liquidity and will also be entering this market, as the company gradually operating results could be materially adversely affected if any releases them now that exchange inventories have fallen below of these developments were to occur. its 800,000-tonne threshold. Although Falconbridge maintains insurance to cover some of Cobalt these risks and hazards to the extent available that Falconbridge Cobalt’s supply and demand prospects for 2004 continue to believes is consistent with the industry practice, no assurance be very favourable for prices. Another supply deficit is pro- can be given that such insurance will continue to be available, jected even if demand is conservatively forecast to grow at only or that it will be available at economically feasible premiums. 2.5%. Although there is potential to reactivate idled produc- Falconbridge’s property, business interruption and liability tion capacity and increase the supply of intermediate feeds to insurance may not provide sufficient coverage for losses chemical producers in China, demand should be much related to these or other risks or hazards. In such event, stronger than previously anticipated. This demand growth is Falconbridge’s business, financial condition, liquidity and primarily powered by the lithium-ion battery sector. Imports results of operations could be materially adversely affected. into Japan of cobalt oxide are a good barometer of this Environmental risks growth, as Japan is the world’s leading producer of such bat- Environmental legislation affects nearly all aspects of teries. On an annualized basis, imports were up about 44% in Falconbridge’s operations worldwide. This type of legislation 2003. Continued strong demand into 2004 is expected requires Falconbridge to obtain operating licences and because of favourable contract negotiations with battery grade imposes standards and controls on activities relating to min- cobalt oxide producers, which have resulted in unprecedented ing, exploration, development, production, closure and pricing and early renewals of contracts, two reliable signals that the refining, distribution and marketing of nickel and other security of supply has become a cause for concern for cobalt metals products. Environmental assessments are required customers.

29 Management’s Discussion and Analysis

before initiating most new products or undertaking significant amendments to applicable laws and legislation, the nature of changes to existing operations. Compliance with environmen- ongoing operations and technological innovations. Future tal legislation can require significant expenditures, including changes, if any, due to their nature and unpredictability, expenditures for clean-up costs and damages arising out of could have a significant impact and would be reflected contaminated properties. In addition to current require- prospectively as a change in an accounting estimate. ments, Falconbridge expects that additional environmental In addition, regulatory authorities in various jurisdictions regulations will likely be implemented to protect the environ- around the world may require Falconbridge to post financial ment and quality of life, given issues of sustainable develop- security to secure in whole or in part future reclamation and ment and other similar requirements which governmental and restoration obligations in such jurisdictions. In some supragovernmental organizations and other bodies have been instances, Falconbridge has already provided this security. In pursuing. Some of the issues currently under review by envi- other instances, such security may be required to be posted ronmental regulatory agencies include reducing or stabilizing upon the occurrence of certain events including if various emissions, including sulphur dioxide and greenhouse Falconbridge ceases to maintain a minimum investment grade gas emissions, mine reclamation and restoration, and water, credit rating, if the regulatory authority ceases to accept alter- air and soil quality. native forms of comfort to secure the obligation or as a prop- Canada ratified the Kyoto Protocol to the United Nations erty nears the end of its operation. Although the posting of Framework Convention on Climate Change in late 2002. The this security does not increase the future reclamation and protocol has not entered into force but may do so in the restoration costs (other than costs associated with posting such future. Various levels of governments in Canada are develop- security), a portion of Falconbridge’s credit may be required ing a number of policy measures in order to meet Canada’s to back up these commitments, which could affect emission reduction obligations under the protocol. While the Falconbridge’s liquidity. impact of the protocol and measures cannot be quantified at this time, the likely effect will be to increase costs for fossil Labour relations fuels, electricity and transportation, restrict industrial emis- Collective agreements covering Falconbridge’s hourly rated sion levels, impose added costs for emissions in excess of employees at Falconbridge’s Sudbury operations, Nikkelverk permitted levels and increase costs for monitoring and report- operations, Collahuasi operations, Kidd metallurgical divi- ing. Compliance with these initiatives could have a material sion, Raglan mine, Falcondo operations and Lomas Bayas adverse effect on Falconbridge’s business, financial condition, operations are currently in place. Falconbridge’s collective liquidity and operating results. agreements with unionized workers at Falconbridge’s Nikkelverk and Collahuasi operations remain in effect until Further changes in environmental laws, new information on 2004. The supervisory, technical, professional and adminis- existing environmental conditions or other events, including trative employees at Lomas Bayas are not represented by a legal proceedings based upon such conditions or an inability union but have historically acted collectively when renegotiat- to obtain necessary permits, could have a material adverse ing their individual contracts of employment each of which effect on product demand, product quality and methods of expires in June 30, 2003. Collective agreements covering production and distribution or could require increased finan- Falconbridge’s unionized workers at the Kidd metallurgical cial reserves or compliance expenditures or otherwise have a division, Raglan mine, Falcondo operations and Lomas Bayas material adverse effect on Falconbridge’s business, financial operations will expire between 2005 and 2006. Falconbridge condition, liquidity and operating results. cannot predict at this time whether it will be able to reach new Failure to comply with environmental legislation may result in agreements with these employees upon expiry of their current the imposition of fines and penalties, liability for clean-up agreements without a work stoppage. Any lengthy work inter- costs, damages and the loss of important permits. There can ruptions could materially adversely affect Falconbridge’s busi- be no assurance that Falconbridge will at all times be in com- ness, financial condition, liquidity and results of operations. pliance with all environmental regulations or that steps to bring Falconbridge into compliance would not materially Uncertainty of reserve estimates and production estimates adversely affect Falconbridge’s business, financial condition, Falconbridge’s reported ore reserves as of year-end 2003 are liquidity or operating results. estimated quantities of proven and probable ore that under present and anticipated conditions can be legally and economi- In view of the uncertainties concerning future removal and site cally mined and processed by the extraction of their mineral restoration costs on Falconbridge’s properties, the ultimate content. Falconbridge determines the amount of its ore costs for future removal and site restoration to Falconbridge reserves in accordance with the requirements of the applicable could differ from the amounts estimated by Falconbridge. The Canadian securities regulatory authorities and established estimate for this future liability is subject to change based on

30 Management’s Discussion and Analysis

mining standards. Falconbridge does not use outside sources to there are costs denominated in the domestic currency, while verify its reserves. The volume and grade of reserves actually Nikkelverk’s costs are incurred in Norwegian Kroner. recovered and rates of production from Falconbridge’s present Falconbridge’s consolidated financial statements are expressed ore reserves may be less than geological measurements of the in U.S. dollars. Fluctuations in exchange rates between the reserves. Market price fluctuations in nickel, copper, other U.S. dollar and the Canadian dollar and other currencies may metals and exchange rates, and changes in operating and capital give rise to foreign currency exposure, either favourable or costs may in the future render certain ore reserves uneconomic unfavourable, which has materially impacted and may in the to mine. In addition, short-term operating factors relating to future materially impact Falconbridge’s financial results. the mineral reserves, such as the need for orderly development Falconbridge from time to time hedges a portion of its of ore bodies or the processing of new or different ore grades, Canadian dollar and other currency requirements to limit any may cause mineral reserves to be modified or Falconbridge’s adverse effect of exchange rate fluctuations with respect to operations to be unprofitable in any particular fiscal period. Falconbridge’s Canadian dollar and other costs, but such No assurance can be given thattheindicatedamountof ore will hedges have not eliminated the potential material adverse be recovered or thatitwillbe recovered attheprices assumed effect of such fluctuations. by Falconbridge in determining ore reserves. Ore reserve esti- Interest rate and counterparty risk mates are based on limited sampling and, consequently, are Falconbridge’s exposure to changes in interest rates results uncertain because the samples may not be representative of from investing and borrowing activities undertaken to manage the entire ore body. As more knowledge and understanding of its liquidity and capital requirements. Falconbridge has the ore body is obtained, the reserve estimates may change entered into interest rate swap agreements to manage the significantly, either positively or negatively. interest rate risk associated with a portion of its fixed-rate Falconbridge prepares estimates of future production for par- debt. The interest rate swap changes Falconbridge’s exposure ticular operations. These production estimates are based on, to interest risk by effectively converting a portion of among other things, reserve estimates; assumptions regarding Falconbridge’s fixed-rate debt to a floating rate. At ground conditions and physical characteristics of ores, such as December 31, 2003, approximately $817 million, or 57% of hardness and presence or absence of particular metallurgical Falconbridge’s total debt of $1,427 million, was subject to characteristics; and estimated rates and costs of mining and variable interest rates. Falconbridge may elect in the future to processing. Falconbridge’s actual production may vary from enter into interest rate swaps to effectively convert floating- estimates for a variety of reasons, including actual ore mined rate debt to fixed-rate debt and enter into additional fixed- varying from estimates of grade, tonnage, dilution and metal- rate to floating-rate swaps. There can be no assurance that lurgical and other characteristics; short-term operating factors Falconbridge will not be materially adversely affected by relating to the ore reserves, such as the need for sequential interest rate changes in the future, notwithstanding its use of development of ore bodies and the processing of new or dif- interest rate swaps. ferent ore grades; risks and hazards associated with mining, In addition, Falconbridge’s interest rate swaps, metals hedging natural phenomena, such as inclement weather conditions, and foreign currency and energy risk management activities floods, and earthquakes; and unexpected labour shortages or expose Falconbridge to the risk of default by the counterparties strikes. No assurance can be given that production estimates to such arrangements. Any such default could have a material will be achieved. Failure to achieve production estimates could adverse effect on Falconbridge’s business, financial condition have a material adverse impact on Falconbridge’s future cash and results of operation. flows, earnings, results of operations and financial condition. Energy supply and prices Exchange rate fluctuations Falconbridge’s operations and facilities are intensive users of Fluctuations in currency exchange rates, principally the natural gas, electricity and oil. Procurement of these types Canadian/U.S. dollar exchange rate and, to a lesser extent, of energy sources can be affected by numerous factors beyond Norwegian Kroner, Euro, Yen and other exchange rates, can Falconbridge’s control, including global and regional supply significantly impact Falconbridge’s earnings and cash flows. and demand, political and economic conditions and problems These exchange rates have varied substantially over time, related to local production and delivery conditions. including over the last five years. Most of Falconbridge’s Falconbridge’s supply contracts typically provide that suppliers revenues and debt are denominated in U.S. dollars, whereas may be released from their delivery obligations to Falconbridge most of the operating costs at its Canadian sites are incurred if certain “force majeure” events occur. Falconbridge’s busi- in Canadian dollars. The costs at Falcondo, Lomas Bayas, and ness operations could be adversely affected, including loss of Collahuasi are incurred principally in U.S. dollars, although

31 Management’s Discussion and Analysis

production and damage to Falconbridge’s plants and equip- Falconbridge performs a thorough risk assessment on a ment, if, even temporarily, the supply of energy to one or country-by-country basis when considering foreign activities more of its facilities was interrupted. and attempts to conduct its business and financial affairs so as A prolonged shortage of supply of energy used in to protect against political, legal, regulatory and economic Falconbridge’s operations could materially adversely affect its risks applicable to operations in the various countries where it business, financial condition, liquidity and results of opera- operates, but there can be no assurance that Falconbridge will tions. As a significant portion of Falconbridge’s costs relate to be successful in so protecting itself. These projects and invest- energy consumption, its earnings are directly related to fluctu- ments could also be adversely affected by changes in Canadian ations in the cost of natural gas, electricity and oil. Energy laws and regulations relating to foreign trade, investment prices can be affected by numerous factors beyond and taxation. Falconbridge’s control, including global and regional demand Treatment and refining charges and supply, and applicable regulatory regimes. The prices for Falconbridge receives fees (treatment and refining charges) various sources of energy Falconbridge uses may increase sig- calculated in U.S. dollars for processing concentrate into nificantly from current levels. An increase in energy prices refined metal. Fluctuations in these treatment and refining could materially adversely affect Falconbridge’s business, charges result primarily from changes in the supply of, and financial condition, liquidity and operating results. demand for, concentrate, finished metal and by-products, all Foreign operations of which are beyond Falconbridge’s control. A shortage in the Some of Falconbridge’s activities and related assets are located supply of concentrate will generally have a negative impact on in countries outside North America, some of which may be the treatment and refining charges Falconbridge realizes. considered to be, or may become, politically or economically Legal proceedings unstable. Exploration or development activities in such coun- The nature of Falconbridge’s business subjects it to numerous tries may require protracted negotiations with host govern- regulatory investigations, claims, lawsuits and other proceed- ments, international organizations and other third parties, ings in the ordinary course of Falconbridge’s business. The including non-governmental organizations, and are frequently results of these legal proceedings cannot be predicted with cer- subject to economic and political considerations, such as tainty. There can be no assurance that these matters will not taxation, nationalization, inflation, currency fluctuations and have a material adverse effect on Falconbridge’s results of governmental regulation and approval requirements, which operations in any future period, and a substantial judgement could adversely affect the economics of projects. These proj- could have a material adverse impact on Falconbridge’s busi- ects and investments could be adversely affected by war, civil ness, financial condition, liquidity and results of operations. 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.

32 Accounting Responsibilities, Procedures and Policies

Accounting Responsibilities, Procedures and Policies

The Board of Directors which, among other things, is financial information. There are limits inherent in all sys- responsible for the consolidated financial statements of the tems based on the recognition that the cost of such systems Corporation, delegates to management the responsibility should not exceed the benefits to be derived. Falconbridge for the preparation of the statements. Responsibility for believes its systems provide the appropriate balance in their review is that of the Audit Committee. Each year the this respect. shareholders appoint independent auditors to audit and The Corporation’s Audit Committee is appointed by the report directly to them on the financial statements. Board of Directors annually and is currently comprised of In preparing the consolidated financial statements, great five non-management directors. The Committee meets care is taken to use the appropriate generally accepted with management and with the independent auditors (who accounting principles and estimates considered necessary have free access to the Audit Committee) to satisfy itself by management to present fairly and consistently the con- that each group is properly discharging its responsibilities solidated financial position and the results of operations. and to review the financial statements and the independent The principal accounting policies followed by Falconbridge auditors’ report. The Audit Committee reports its findings are summarized on pages 39 and 40. to the Board of Directors for consideration in approving the financial statements for issuance to the shareholders. 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

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

33 Auditors’ Report

Auditors’ Report

To the Shareholders of Falconbridge Limited:

We have audited the consolidated statements of financial test basis, evidence supporting the amounts and disclosures position of Falconbridge Limited as at December 31, 2003 in the financial statements. An audit also includes assessing and 2002, and the consolidated statements of earnings, the accounting principles used and significant estimates shareholders’ equity and cash flows for the years then made by management, as well as evaluating the overall ended. These financial statements are the responsibility of financial statement presentation. the Corporation’s management. Our responsibility is to In our opinion, these consolidated financial statements express an opinion on these financial statements based on presentfairly, in all materialrespects,thefinancial position our audits. of the Corporation as at December 31, 2003 and 2002, We conducted our audits in accordance with Canadian gen- and the results of its operations and its cash flows for the erally accepted auditing standards. Those standards require years then ended in accordance with Canadian generally thatweplan and perform an audittoobtainreasonable accepted accounting principles. assurance whether the financial statements are free of material misstatement. An audit includes examining, on a

Deloitte and Touche LLP Chartered Accountants

Toronto, Ontario February 4, 2004

34 Consolidated Financial Statements

Consolidated Statements of Earnings

IN THOUSANDS OF UNITED STATES DOLLARS YEARS ENDED DECEMBER 31, 2003 2002 Note 2

Revenues $ 2,083,480 $ 1,524,672 Operating expenses Costs of sales Costs of metal and other product sales 1,414,829 1,103,925 Depreciation of plant and equipment (note 2) 174,758 171,022 Amortization of development and preproduction expenditures (note 2) 69,950 59,316 1,659,537 1,334,263 Selling, general and administrative 85,968 86,779 Exploration 22,875 21,513 Research and process development 13,042 8,241 Other income (note 16) (2,916) (4,209) 1,778,506 1,446,587 Operating income 304,974 78,085 Interest (notes 2, 11) 42,873 50,586 Earnings before taxes and non-controlling interest 262,101 27,499 Income and mining taxes (note 7) 63,137 (22,464) Non-controlling interest in earnings (loss) of subsidiaries 4,540 (21) Earnings for the year $ 194,424 $ 49,984 Dividends on preferred shares 8,606 7,964 Earnings attributable to common shares $ 185,818 $ 42,020 Basic earnings per common share (note 10(c)) $ 1.05 $0.24 Diluted earnings per common share (note 10(c)) $ 1.04 $0.24 See accompanying Notes to Consolidated Financial Statements.

35 Consolidated Financial Statements

Consolidated Statements of Financial Position

IN THOUSANDS OF UNITED STATES DOLLARS ASATDECEMBER 31, 2003 2002 Note 2 ASSETS Current Cash and cash equivalents $ 298,091 $ 164,563 Accounts and metals settlements receivable (note 15) 257,835 216,754 Inventories (note 3) 441,733 330,228 Total current assets 997,659 711,545 Property, plant and equipment (note 4) 2,903,118 2,561,014 Deferred expenses and other assets (note 5) 203,983 125,847 Total assets $ 4,104,760 $ 3,398,406

LIABILITIES AND SHAREHOLDERS’ EQUITY Current Accounts payable and accrued charges (note 15) $ 255,084 $ 192,949 Income and other taxes payable 23,158 12,134 Long-term debt due within one year (note 6) 70,637 63,137 Total current liabilities 348,879 268,220 Long-term debt (note 6) 1,356,589 1,217,273 Future income and mining taxes (note 7) 198,551 153,166 Employee future benefits (note 8) 150,399 151,667 Other long-term liabilities (note 9) 98,573 72,966 Non-controlling interest 26,566 18,984 Total liabilities 2,179,557 1,882,276 Commitments and contingencies (notes 6, 9, 14, 17) Shareholders’ equity 1,925,203 1,516,130 Total liabilities and shareholders’ equity $ 4,104,760 $ 3,398,406 See accompanying Notes to Consolidated Financial Statements.

On behalf of the Board:

David Kerr, Aaron Regent, Director Director

36 Consolidated Financial Statements

Consolidated Statements of Shareholders’ Equity

IN THOUSANDS OF UNITED STATES DOLLARS YEARS ENDED DECEMBER 31, 2003 2002 Number Amount Number Amount Note 2 Share capital Authorized Unlimited preferred shares Unlimited common shares

Issued Common shares Balance, beginning of year 177,603,432 $ 1,430,382 176,977,146 $ 1,422,170 Issued (note 10(d)) ——583,386 7,663 Shares repurchased and cancelled (note 10(e)) (600,000) (5,097) —— Issued pursuant to employee stock option plan (note 10 (a)) 1,789,060 24,694 42,900 549 Balance, end of year 178,792,492 1,449,979 177,603,432 1,430,382 Preferred shares Series 1 (note 10(b)) Balance, beginning and end of year 89,835 587 89,835 587 Preferred shares Series 2 (note 10(b)) Balance, beginning and end of year 7,910,165 129,209 7,910,165 129,209

Contributed surplus Balance, beginning of year 1,997 — Amortization of fair value of stock options, net 408 1,997 Balance, end of year 2,405 1,997

Surplus (deficit) Balance, beginning of year (5,742) (69,911) Adjustment for change in accounting policies Capitalization of interest and inventory costing (note 2) — 67,602 Stock based compensation (note 2) — (152) Earnings for the year 194,424 49,984 Dividends – Common shares (50,250) (45,038) – Preferred shares (8,606) (7,964) Share issue costs, net of taxes — (263) Loss on repurchase of common shares (note 10(e)) (1,510) — Balance, end of year 128,316 (5,742) Cumulative translation adjustment 214,707 (40,303) Total shareholders’ equity $ 1,925,203 $ 1,516,130 See accompanying Notes to Consolidated Financial Statements.

37 Consolidated Financial Statements

Consolidated Statements of Cash Flows

IN THOUSANDS OF UNITED STATES DOLLARS YEARS ENDED DECEMBER 31, 2003 2002 Note 2 Operating activities Earnings for the year $ 194,424 $ 49,984 Add (deduct) items not affecting cash Depreciation of plant and equipment 169,369 164,241 Amortization of development and preproduction expenditures 69,949 59,316 Future income and mining taxes (note 7) 25,406 (32,202) Non-controlling interest in earnings of subsidiaries 4,540 (21) Other 7,381 42,097 Contributions to pension fund in excess of amounts expensed (29,847) (11,607) Cash provided by operating activities before working capital changes 441,222 271,808 Net change in receivables, inventories and payables 4,115 (43,601) Cash provided by operating activities 445,337 228,207 Investing activities Capital investments and deferred project costs (370,318) (234,430) Other (17,995) (8,047) Cash used in investing activities (388,313) (242,477) Financing activities Long-term debt, including current portion (note 6): Issued 246,229 248,102 Repaid (129,705) (149,001) Dividends paid (58,106) (53,003) Repurchase of common shares (6,608) — Issue of common shares (note 10(a), (d)) 24,694 8,212 Cash provided by financing activities 76,504 54,310 Cash provided during the year 133,528 40,040 Cash and cash equivalents, beginning of year 164,563 124,523 Cash and cash equivalents, end of year $ 298,091 $ 164,563 Supplementary information: Cash paid for interest $ 58,955 $ 58,680 Cash paid for income and mining taxes $ 17,337 $ 531

See accompanying Notes to Consolidated Financial Statements.

38 Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

(Tabular figures in thousands of United States dollars, except where otherwise noted)

1. Summary of significant accounting policies certain foreign currency monetary items are managed through The consolidated financial statements of Falconbridge the use of foreign currency forward and option contracts. Limited have been prepared in accordance with Canadian REVENUE RECOGNITION generally accepted accounting principles (GAAP), consistently Revenues are generated from the sale of refined metals, con- applied. In these consolidated financial statements, references centrates and ferronickel and are recorded in the accounts to the Corporation mean only Falconbridge Limited, the when the ownership and control of goods passes to the buyer, parentcompany, and references toFalconbridge include the which generally occurs upon shipment. Prices used for provi- Corporation and its consolidated subsidiaries. The principal sionally priced sales are based on market prices prevailing at accounting policies followed by Falconbridge are summarized the time of shipment and are adjusted upon final settlement hereunder. with customers pursuant to the terms of sales contracts. BASIS OF CONSOLIDATION CASH AND CASH EQUIVALENTS Falconbridge consolidates the financial statements of sub- Cash and cash equivalents include cash on account, demand sidiary companies and proportionately consolidates the finan- deposits and short-term investments with original maturities cial statements of joint ventures. of three months or less and are stated at cost, which approxi- TRANSLATION OF FOREIGN CURRENCIES mates market value. Effective July 1, 2003, the functional currency of Falconbridge VALUATION OF INVENTORIES Limited was changed from the Canadian to U.S. dollar. Metals inventories are valued at the lower of cost, determined Concurrent with this change in functional currency, on a “first-in, first-out” basis, and net realizable value. Falconbridge adopted the U.S. dollar as its reporting currency. Supplies inventories are valued at the lower of average cost of Prior to the change, foreign currency balances and the finan- acquisition, less appropriate allowances for obsolescence, and cial statements of integrated foreign operations were translated replacement cost. Effective January 1, 2003, the Corporation into Canadian dollars using the temporal method. Under this retroactively changed its accounting policy for inventory cost- method, monetary items are translated at the rate of exchange ing. Under the previous policy, depreciation and amortization in effectattheyear-end. Non-monetaryitemsare translatedat of property, plant and equipment was treated as a period cost. historical exchange rates. Revenue and expense items are trans- Under the new policy depreciation and amortization is treated lated at the average exchange rates prevailing during the year, as a product cost and expensed when the inventory is sold. except for depreciation and amortization, which are translated FINANCIAL INSTRUMENTS at the same exchange rates as the assets to which they relate. Falconbridge periodically uses forward foreign exchange and Exchange gains and losses are included in income in the cur- option contracts to hedge the effect of exchange rate changes rentyear, exceptwhen hedged. Certainmonetaryitemswere on identifiable foreign currency exposures. Generally, hedged by foreign currency forward and option contracts. Falconbridge does nothedge theprice itrealizes on thesale of Financial statements of self-sustaining foreign operations were its own production and accepts realizations based on market translated into Canadian dollars using the current rate prices prevailing around the time of delivery of metals to cus- method. Under this method, assets and liabilities are translated tomers. Under certain circumstances, Falconbridge enters into attherateof exchange in effectattheyear-end while revenue futures and option contracts to hedge the effect of price and expense items (including depreciation and amortization) changes on a portion of the commodities it sells. Gains and are translated at the average exchange rates prevailing during losses on these contracts are reported as a component of the the year. Exchange gains and losses from the translation of related transactions. Falconbridge may enter into futures and such financial statements are deferred and disclosed as a sepa- forward contracts for the purchase or sale of commodities and rate component of shareholders’ equity. Falconbridge used a currencies notdesignatedas hedges. These contractsare car- combination of its U.S. dollar long-term debt and forward ried at estimated fair values and gains or losses arising from the exchange contracts and options for the sale of U.S. dollars to changes in the market values of these contracts are recognized fully hedge its net investments in self-sustaining foreign oper- in the earnings of the period in which the changes occur. ations. Gains or losses on these hedge instruments are Falconbridge also enters into interest-rate swap agreements, reported in the same manner as exchange gains and losses from including foreign exchange cross currency swaps, to modify the the translation of the financial statements of its self-sustaining interest characteristics of its outstanding debt. The differential to foreign operations. be paid or received is accrued as interest rates change and recog- Subsequenttothechange, Falconbridge does nothave any nized as an adjustment to interest expense related to the debt. self-sustaining subsidiaries whose functional currency is not INTEREST the U.S. dollar. Balances denominated in currencies other Effective January 1, 2003, the Corporation retroactively than the U.S. dollar, and the financial statements of integrated changed its accounting policy for interest capitalization. foreign operations, are translated into U.S. dollars using the Under the previous policy, interest costs incurred, prior to temporal method described above. The economic exposure of

39 Notes to Consolidated Financial Statements

commencementof commercial production,were capitalized Pension fund assetsare valued atcurrentmarketvalues. toprojectsthatwere financed by projectspecific debt.Under Pension plan surpluses or deficits, experience gains or losses the new policy, a portion of interest costs incurred on the and the cost of pension plan improvements are amortized, on a corporate debt are allocated and capitalized to all major straight-line basis, over the expected average remaining service projects, prior to commencement of commercial production. life of the employee group or the term of the employment con- Interest costs incurred after the commencement of commer- tract to which the items relate, depending on the nature of the cial production are expensed. item.Funding is subjecttoapplicable governmentregulations. PROPERTY, PLANT AND EQUIPMENT Under its defined contribution retirement savings program, Property, plant and equipment and related capitalized devel- Falconbridge makes payments based on employee earnings and opment and preproduction expenditures are recorded at cost. partially matches employee contributions, to a defined maxi- Repairs and maintenance expenditures are charged to opera- mum. Employees may receive profit sharing credits based tions; major betterments and replacements are capitalized. on earnings. The Corporation generally depreciates plant and equipment Falconbridge also provides certain health care and life insur- on a straight-line basis over the lesser of their useful service ance benefits for retired employees and their dependents. The lives or the lives of the producing mines to which they relate. cost of these benefits is expensed over the period in which the At the Kidd Creek Operations, mine facilities are depreciated employees render services in return for the benefits. over the estimated lives of the mines based on the unit of pro- INCOME AND MINING TAXES duction basis. Up to and including the period ended Current income taxes are recognized for the estimated income September 30, 2002, reduction and refining facilities were and mining taxes payable for the current year. Future income depreciated on the straight-line basis over 25 years ending in tax assets and liabilities are recognized for temporary differ- 2010. Effective October 1, 2002, the straight-line deprecia- ences between the tax and accounting bases of assets and liabil- tion period of the reduction and refining facilities was ities as well as for the benefit of losses, available to be carried extended to 2022 to coincide with the revised estimated useful forward to future years for tax purposes, that are likely to be life of these facilities. Generally, subsidiary companies calcu- realized. Where appropriate, income and withholding taxes are late depreciation on a straight-line basis at rates varying from provided on the portion of any interest in consolidated foreign 5% to 25%. subsidiaries’ undistributed net income, which it is reasonable Depletion of resource properties is provided over the esti- to assume, will be transferred in a taxable distribution. mated lives of the reserves recoverable from the properties on ENVIRONMENTAL AND RECLAMATION COSTS the unit of production basis. Costs related to ongoing site restoration programs are Development and preproduction expenditures are capitalized expensed when incurred. A provision for mine closure and until the commencement of commercial production. These, site closure costs is charged to earnings during the life of the together with certain subsequent development expenditures, operations. which are also capitalized, are amortized over periods not USE OF ESTIMATES exceeding the lives of the producing mines and properties. The preparation of financial statements in conformity with EXPLORATION generally accepted accounting principles requires management Exploration costs incurred to the date of establishing that a to make estimates and assumptions. These estimates affect the property has reserves, which have the potential of being eco- reported amounts of assets and liabilities and the disclosure nomically recoverable, are expensed. Costs incurred subse- of contingentassetsand liabilitiesatthedateof thefinancial quent to the determination of economically recoverable statements and the reported amounts of revenues and reserves, including allocated interest costs, are deferred. Upon expenses during the reporting period. Falconbridge primarily reaching commercial production, such deferred costs are uses estimates in the determination of asset lives to compute amortized as appropriate under the policy for property, plant depreciation, impairment of assets, the cost of employee and equipment as described above. future benefits, reclamation and environmental obligations, EMPLOYEE FUTURE BENEFITS the determination of mineral reserves, the determination of The costs of retirement benefits and certain post-employment taxes, and allowances for unrecoverable receivables. Actual benefits are recognized over the period in which employees results could differ from those estimates. render services in return for the benefits. STOCK OPTION PLAN Pension expense recorded for Falconbridge’s defined benefit The Corporation has a stock option plan, which is described in plans is thenetof management’sbestestimateof thecostof note 10. Effective January 1, 2002, the Corporation adopted benefitsprovided, theinterestcostof projectedbenefits, retroactively, without restatement of the prior-period compar- return on pension plan assets and amortization of experience ative financial statements, the new CICA accounting standards gains or losses and other pension plan surpluses or deficits.

40 Notes to Consolidated Financial Statements

for Stock-Based Compensation and Other Stock-Based CAPITALIZATION OF INTEREST Payments. Under this standard, the Corporation now accounts As at January 1, 2003, the effect of adopting the new policy for stock options using the fair value method. Under this for interest capitalization (note 1, Interest) was to increase method, compensation expense for stock options, that are property, plant and equipment by $59.2 million, increase directawards of stockgrantedsince January 1, 2002, is meas- future income tax by $21.4 million, and increase retained ured atthefair value atthegrantdateusing theBlack-Scholes earnings by $37.8 million. The change resulted in an increase valuation model and is recognized over the vesting period of of $5.8 million to previously reported earnings for 2002. the options granted. INVENTORY COSTING As at January 1, 2003, the effect of adopting the new policy 2. Accounting changes (note 1, Valuation of inventories) was to increase inventory by (a) Change in functional and reporting currency $48.2 million, increase future income tax by $14.5 million, Effective July 1, 2003, the functional currency of Falconbridge and increase retained earnings by $33.7 million. The change Limited was changed from the Canadian to the U.S. dollar. In resulted in a decrease of $1.9 million to previously reported general, this change resulted from a gradual increase in the earnings for 2002. overall proportion of business activities conducted in U.S. (c) Stock-based compensation and other stock-based payments dollars. Concurrent with this change in functional currency, The effectof adoptingthestandard for Stock-BasedCompen- Falconbridge adopted the U.S. dollar as its reporting cur- sation and Other Stock-Based Payments (note 1, Stock option rency. In accordance with Canadian GAAP, the change was plan) was to decrease retained earnings by $0.2 million for effected by translating assets and liabilities, at the end of prior those awards granted and outstanding before January 1, 2002. reporting periods, at the existing U.S./Canadian dollar for- The prior year’s comparative figures have been restated to eign exchange spot rate, while earnings for those periods were reflecttheretroactiveimpactwithrespecttoitems(a) and translated at the average rate for each period. Equity trans- (b) above. actions have been translated at historic rates; with opening equity on January 1, 1999, restated at the rate of exchange on 3. Inventories that date. The resulting net translation adjustment has been credited to the cumulative translation adjustment account. Inventories of $441.7 million (2002 – $330.2 million) includes, in-process – $217.8 million (2002 – $148.5 mil- (b) Capitalization of interest and inventory costing lion); finished metals – $122.6 million (2002 – $99.8 mil- Effective January 1, 2003, the Corporation changed its lion); supplies – $85.0 million (2002 – $81.9 million); and accounting polices for interest capitalization and inventory raw materials – $16.3 million (2002 – nil). costing. These changes were made to harmonize Falconbridge’s policies with predominant industry practices and international accounting standards.

4. Property, plant and equipment Property, plant and equipment consist of the following:

ASATDECEMBER 31, 2003 2002 Accumulated Accumulated depreciation Net depreciation Net Cost and amortization book value Cost and amortization book value Plant and equipment: Mines, mining plants and ancillary mining assets $ 2,683,600 $ 1,256,970 $ 1,426,630 $ 2,151,717 $ 931,066 $ 1,220,651 Smelters 535,181 327,944 207,237 452,683 269,545 183,138 Refineries 673,089 404,989 268,100 570,176 330,878 239,298 Other 165,689 118,042 47,647 142,148 108,560 33,588 4,057,559 2,107,945 1,949,614 3,316,724 1,640,049 1,676,675 Land and properties 291,671 159,203 132,468 276,077 129,478 146,599 $ 4,349,230 $ 2,267,148 $ 2,082,082 $ 3,592,801 $ 1,769,527 $ 1,823,274 Development and preproduction expenditures, net 821,036 737,740 $ 2,903,118 $ 2,561,014

41 Notes to Consolidated Financial Statements

5. Deferred expenses and other assets In January 2004, the Corporation filed a shelf prospectus that Deferred expenses and other assets consist of the following: provided for the issuance, during a twenty-five month period ending February 2006, of debtsecuritiesof up to ASATDECEMBER 31, 2003 2002 $600.0 million. Deferred pre-development costs (b) The Corporation has entered into a number of interest Koniambo $ 122,672 $ 76,061 rate swap and option transactions with terms up to 11.5 years. Other projects 7,574 7,376 As a result of these transactions, at December 31, 2003, Unrealized gain on Canadian interest costs on $550.0 million (2002 – $425.0 million) of debt hedge contract 24,107 — the debentures were swapped to an average fixed interest rate Inventories and supplies 13,847 17,782 of 6.01% (2002 – 6.28%) and interest costs on $400.0 mil- Debt discount and issue lion (2002 – $275.0 million) were swapped to a floating rate expenses, net 9,727 5,474 basis at an average interest rate of 3.28% (2002 – 3.91%). Water rights 6,510 5,629 The weighted average interest rate on these debentures at Employee housing advances 3,697 3,840 December 31, 2003, was 4.86% (2002 – 5.35%). If these Other 15,849 9,685 positions had been settled at December 31, 2003, the $ 203,983 $ 125,847 Corporation would have received $23.9 million (2002 – received $39.3 million). 6. Long-term debt (c) The Corporation has entered into several cross currency Long-term debt consists of the following: interest rate swap transactions with terms of five years. As a ASATDECEMBER 31, 2003 2002 result of these transactions, at December 31, 2003, interest Falconbridge Limited: costs on $86.3 million (2002 – $86.3 million) of the deben- 7.35% Debentures, due tures were swapped to an average floating interest rate of November 1, 2006 (b) $ 250,000 $ 250,000 5.32% (2002 – 5.55%) and interest costs on $25.0 million 7.35% Debentures, due (2002 – $25.0 million) were swapped to a fixed interest rate June 5, 2012 (a), (b) 250,000 250,000 of 5.00% (2002 – 5.00%). If these positions had been settled 5.375% Debentures, due at December 31, 2003, the Corporation would have received June 1, 2015 (a), (b) 250,000 — $30.6 million (2002 – received $0.9 million). 3 7 ⁄8% Debentures, due (d) The Corporation has unsecured committed credit facilities September 1, 2005 (b) 200,000 200,000 with various banks outstanding at December 31, 2003, (indi- 8.5% Debentures, due vidually a “Credit Facility” and collectively the “Credit December 8, 2008 Facilities”). These three-year revolving Credit Facilities mature (Cdn$175.0 million) (a), (c) 135,336 110,788 on December 13, 2006. The aggregate principal amount of Credit facilities (d) — 97,422 the Credit Facilities is $405.0 million (2002 – $415.0 mil- Compañía Minera Doña Inés lion). The revolving period of the credit facilities may be de Collahuasi S.C.M.: renewed and extended annually to maintain the three-year Senior Debt (e) 281,890 281,900 term of the revolver. Compañía Minera Lomas Bayas: The Corporation has also established a Commercial Paper Senior Debt (f) 60,000 90,300 Program. Unused lines of credit and cash on hand are used to Total $ 1,427,226 $ 1,280,410 support the Commercial Paper Program. Less long-term debt due Borrowings may be made under the Credit Facilities in within one year 70,637 63,137 Canadian dollars in the form of prime rate loans or bankers’ $ 1,356,589 $ 1,217,273 acceptances or in U.S. dollars in the form of U.S. base rate (a) In May 2003, the Corporation issued $250.0 million, loans or LIBOR loans. In some cases, borrowings may be in 5.375% debentures repayable on June 1, 2015. These deben- the form of Letters of Credit which offset amounts available tures, along with the $250.0 million, 7.35% debentures under the Credit Facility. As at December 31, 2003, the repayable on June 5, 2012, and the Cdn$175.0 million, 8.5% Corporation had no borrowings (2002 – $ 63.5 million) and debentures repayable on December 8, 2008, were issued had drawn Letters of Credit totalling $17.3 million (2002 – under a shelf prospectus, as amended, that provided for the $36.5 million) under a Credit Facility. As at December 31, issuance, during a two-year period which ended in September 2003, the Corporation had no Commercial Paper outstanding 2003, of debt securities of up to $750.0 million. The deben- (2002 – $27.6 million and Cdn$10.0 million). Interest on tures are subordinate to all indebtedness and other liabilities $91.1 million outstanding at December 31, 2002, was payable of subsidiaries. at 2.34% and on Cdn$10.0 million was payable at 2.85%.

42 Notes to Consolidated Financial Statements

Amounts outstanding under the Commercial Paper program At December 31, 2003, the market value of Falconbridge’s are classified as debt not maturing within one year since the total debt, excluding the effect of interest rate swap agree- Corporation has both the intent and ability to refinance the ments, was $1,520.8 million (2002 – $1,328.8 million). borrowings on a long-term basis. The Corporation pays a standby fee, included with interest expense, on the unused 7. Income and mining taxes portion of each Credit Facility. (a) Consolidated income and mining taxes consist of the fol- The Corporation also has an uncommitted letter of credit lowing:

facility of $19.3 million. At December 31, 2003, $14.6 mil- YEARS ENDED DECEMBER 31, 2003 2002 lion (2002 – $13.0 million) of letters of credit had been Current issued under this facility. Federal and provincial (e) In November 2002, Collahuasi negotiated $270.0 million income taxes $ 4,128 $ 3,709 of additional replacement Senior Debt to partially finance the Foreign taxes 33,603 6,029 Ujina/Rosario transition/expansion project. The principal of 37,731 9,738 the initial Senior Debt is repayable in successive, semi-annual Future installments which commenced in December 1999, continuing Federal and provincial until December 2009. Proceeds from drawdowns from the income taxes (6,345) (37,565) replacement Senior Debt are used to make the scheduled Provincial mining taxes 4,335 (2,980) initial Senior Debt interest and principal payments during Foreign taxes 27,416 8,343 project construction. The principal of the replacement debt 25,406 (32,202) is payable in 10 successive, semi-annual installments following $ 63,137 $(22,464) completion of the project. The weighted average interest rate on the Senior Debt outstanding at December 31, 2003, was (b) The difference between the amount of the reported con- 2.52% (2002 – 2.69%). solidated income and mining taxes and the amount computed (f) In December 2002, Lomas Bayas renegotiated the term by multiplying the earnings before taxes by the Corporation’s loan due January 2003. The term was extended to January 31, applicable tax rates is reconciled as follows: 2008, with semi-annual principal repayments of US$7.5 mil- YEARS ENDED DECEMBER 31, 2003 2002 lion, commencing July 31, 2003. Under the terms of the agreement the Corporation has guaranteed the repayment of Taxes computed using the the debt. Lomas Bayas has entered into two interest rate swap Corporation’s tax rates* $ 102,534 $ 10,996 transactions. As a result of these transactions, at December 31, Adjust for – 2003, interest costs on $11.0 million (2002 – $29.0 million) Foreign tax rates, net (i) (40,803) (26,866) have been swapped to a fixed rate of 8.2% (2002 – 8.2%). Mining taxes 5,712 (2,998) The weighted average interest rate on the loan at December 31, Resource and depletion 2003, was 3.66% (2002 – 6.54%). If these positions had allowances (11,648) 1,205 been settled at December 31, 2003, Falconbridge would have Currency translation paid $0.3 million (2002 – paid $1.6 million). During 2003 adjustments 12,358 (5,311) Lomas Bayas made a special unscheduled pay down of Non-taxable income (2,933) (3,375) $22.8 million on this loan. Non-claimable expenses 7,946 3,361 Canadian income tax rate The weighted average interest rate on the long-term debt changes (9,369) — portfolio, including the effect of interest rate swap agree- Other (660) 524 ments, at December 31, 2003, was 4.37% (2002 – 4.63%). Income and mining taxes $ 63,137 $(22,464) Long-term debt will mature as follows: *Federal and provincial income Years ending December 31, 2004 $ 70,637 tax rates 39.12% 40.12% 2005 282,559 2006 298,713 (i) The Corporation has non-resident subsidiaries that have 2007 48,713 undistributed earnings on which no taxes have been pro- 2008 169,121 vided. These earnings, which amounttoapproximately thereafter 557,483 $410.8 million (2002 – $360.6 million), have been perma- $ 1,427,226 nently reinvested outside Canada and are used to finance non-Canadian investments, and exploration and develop- mentprojects.

43 Notes to Consolidated Financial Statements

(c) The components of the future income tax liability at 8. Employee future benefits December 31, 2003, are as follows: Falconbridge has a number of defined benefitplans providing

YEARS ENDED DECEMBER 31, 2003 2002 pension, health, dental and life insurance benefits for certain salaried and hourly-rated employees. Pension benefits are Future income and mining calculated based upon length of service and either final average tax liabilities pensionable earnings or a specified amountper year of serv- Property, plant and equipment $ 218,744 $ 202,552 ice. Funding and pension plan assets (which consist princi- Development and pally of cash, equity securities and fixed income securities) for preproduction 174,871 125,317 the defined benefit plans are primarily governed by the Accrued withholding taxes 31,831 22,819 Ontario Pension Benefits Act. Foreign exchange 9,065 13,890 Pensions 4,829 — Falconbridge also has a number of capital accumulation plans. Exploration 2,121 — The Kidd Creek Operations and Société Minière Raglan du Other 5,114 1,102 Québec Ltéé make monthly contributions on behalf of 446,575 365,680 employees under a deferred profitsharing plan and a group Future income and mining RRSP respectively. In 2003, Falconbridge offered certain tax assets groups of office employees atthecorporateoffice and Sudbury Non-capital losses 128,665 96,279 divisions the opportunity to switch from the current defined Post-retirement benefits 57,740 43,817 benefit plan to a defined contribution plan. Approximately Reclamation provisions 25,522 17,738 30% of eligible employees chose to make the switch with Research and development 15,624 10,385 $7.0 million in assets to be allocated to the defined contribu- Inventory obsolescence 9,605 7,484 tion plan. Under the terms of this plan, Falconbridge con- Exploration — 9,173 tributes 5% of the employee’s pensionable earnings and Pensions — 6,205 matches 50% of employee’s contributions up to 2% of the Other 10,868 21,433 employee’s pensionable earnings. Falconbridge is expecting 248,024 212,514 regulatory approval for the defined contribution plan in 2004. Net future income and mining tax liability $ 198,551 $ 153,166

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 ASATDECEMBER 31, 2003 2002 Plans where Plans where Plans where Plans where assets exceed accumulated assets exceed accumulated accumulated benefits accumulated benefits benefits exceed assets Net benefits exceed assets Net Plan assets at fair value $ 64,996 $ 587,039 $ 652,035 $ 25,948 $ 454,656 $ 480,604 Projected benefit obligations 51,494 786,938 838,432 17,109 639,771 656,880 Plan assets in excess of (less than) projected benefit $ 13,502 $ (199,899) $ (186,397) $ 8,839 $ (185,115) $ (176,276)

POST-EMPLOYMENT BENEFIT PLANS OTHER THAN PENSIONS ASATDECEMBER 31, 2003 2002 Plans where Plans where Plans where Plans where assets exceed accumulated assets exceed accumulated accumulated benefits accumulated benefits benefits exceed assets Net benefits exceed assets Net Plan assets at fair value $ 17,910 $ — $ 17,910 $ — $ 10,206 $ 10,206 Projected benefit obligations 16,440 229,333 245,773 — 164,934 164,934 Plan assets in excess of (less than) projected benefit $ 1,470 $(229,333) $(227,863) $ — $(154,728) $ (154,728)

44 Notes to Consolidated Financial Statements

The accrued asset (liability) for employee future benefits on the Statements of Financial Position, net of valuation allowance, are as follows: DEFERRED EXPENSES AND OTHER ASSETS ASATDECEMBER 31, 2003 2002 Defined benefit pension plans $ 21,299 $ (10,081) Post-employment benefit plans other than pensions (171,698) (141,586) Accrued benefit asset (liability), net of valuation allowance $(150,399) $(151,667)

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

ASATDECEMBER 31, 2003 2002 Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans Service cost $ 10,968 $ 3,201 $ 9,013 $ 4,283 Interest cost 52,386 13,097 43,705 10,844 Expected return on plan assets (40,122) (990) (37,494) (693) Amortization of: Past service costs 3,405 — 3,248 — Net actuarial losses 13,752 2,187 3,777 262 Valuation allowance provided against accrued benefit asset (3,025) — 348 — Settlement losses 2,004 — 81 — Other ——— 1,292 Defined benefit plan expense 39,368 17,495 22,678 15,988 Defined contribution plan expense 7,608 — 5,971 — Post-employment benefit expense $ 46,976 $ 17,495 $ 28,649 $ 15,988

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

ASATDECEMBER 31, 2003 2002 Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans Projected benefit obligation Balance at beginning of year $ 656,880 $ 164,934 $ 643,981 $ 160,539 Current service cost 10,968 3,201 9,013 4,283 Benefits paid (58,146) (13,428) (47,305) (11,368) Interest cost 52,386 13,097 43,705 10,844 Actuarial losses 52,031 42,880 6,010 101 Settlements (7,875) — (6,547) — Net transfers in 1,017 — —— Effect of exchange rate changes 131,171 35,089 8,023 535 Balance at end of year $ 838,432 $ 245,773 $ 656,880 $ 164,934 Plan assets Balance at beginning of year $ 480,604 $ 10,206 $ 519,553 $ 10,394 Expected return on plan assets 40,122 990 36,158 693 Experience gain/(loss) on fund assets 31,973 — (64,939) — Employer contributions 65,351 17,806 33,307 10,400 Benefits paid (54,593) (13,428) (44,876) (11,368) Settlements (6,507) — (6,808) — Net transfers in 1,017 — —— Effect of exchange rate changes 94,068 2,336 8,209 87 Balance at end of year $ 652,035 $ 17,910 $ 480,604 $ 10,206 Plan deficit $ 186,397 $ 227,863 $ 176,276 $ 154,728

45 Notes to Consolidated Financial Statements

ASATDECEMBER 31, 2003 2002 Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans Reconciliation of projected benefit obligation to deficit Accrued benefit (asset) liability, net of valuation allowance $ (21,299) $ 171,698 $ 10,081 $ 141,586 Unamortized past service costs 575 751 3,291 549 Unamortized net actuarial losses 212,654 55,414 169,683 12,593 Accrued benefit liability, net of valuation allowance 191,930 227,863 183,055 154,728 Valuation allowance (5,533) — (6,779) — Plan deficit $ 186,397 $ 227,863 $ 176,276 $ 154,728

The significant actuarial assumptions used in measuring Falconbridge’s post-retirement benefit obligations were as follows: Pension Pension Other Other benefit plans benefit plans benefit plans benefit plans

ASATDECEMBER 31, 2003 20022003 2002 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% Effect of 1% increase in assumed health care cost trend rates Total of service and interest cost components $ 1,916 $ 1,704 Post-employment benefit obligation 31,210 20,193 Effect of 1% decrease in assumed health care cost trend rates Total of service and interest cost components $ (1,578) $ (1,363) Post-employment benefit obligation (25,674) (14,416)

The health care cost trend rate is assumed to start at 9.0% for 2003 (2002 – 8.5%), decreasing to an ultimate medical trend rate of 4.5% (2002 – 4.0%).

9. Other long-term liabilities The total liability for future site restoration costs in relation to Other long-term liabilities consist of the following: Falconbridge’s worldwide operations, which will be incurred primarily after the cessation of operations, is estimated to be ASATDECEMBER 31, 2003 2002 approximately $174.1 million (2002 – $142.4 million). The Future removal and site increase in the estimated liability is due to the impact of the restoration costs $ 81,813 $ 59,093 stronger Canadian dollar on the liability for the Canadian Other 16,760 13,873 based operations. This estimate is based on information cur- $ 98,573 $ 72,966 rently available, including closure plans and alternatives, applicable regulations and planned spending on site restoration. At The business conducted by Falconbridge has been, and may in December 31, 2003, Falconbridge had provided $81.8 million the future be, affected by changes in environmental legislation (2002 – $59.0 million), in addition to ongoing capital and and other requirements including those related to future operating expenditures. The remaining balance will be accrued removal and site restoration costs. As Falconbridge operates in and expensed during the remaining lives of the operations. many countries, both the likelihood of changes in legislation In view of the uncertainties concerning future removal and site and its impact upon Falconbridge are not predictable. restoration costs, the ultimate costs to Falconbridge could dif- Falconbridge’s policy is to meet and, if possible, surpass stan- fer materially from the amounts estimated. The estimate for dards set by relevant legislation, through the application of the future liability is subject to change based on amendments innovative and technically proven economical measures in to applicable laws and legislation, the nature of ongoing opera- advance of prescribed deadlines. In addition, Falconbridge tions and technological innovations. Future changes, if any, incurs substantial removal and site restoration costs on an due to their nature and unpredictability, could have a signifi- ongoing basis, which it believes will mitigate future removal cantimpactand would be reflectedprospectively,as a change and site restoration costs. in an accounting estimate.

46 Notes to Consolidated Financial Statements

10. Share capital amended the terms of its outstanding stock options to elimi- (a) Employee stock option plan nate the cash settlement feature. Selling, general and adminis- The Corporation has a stock option plan, through which trative expenses to December 31, 2003, include compensation options may be granted to officers and employees for the pur- costs of $1.7 million (2002 – $2.5 million) relating to out- chase of common shares. Options were granted at prices equal standing options granted since January 1, 2002. to the closing market value on the last trading day or period Deferred Share Unit Plan for Non-Employee Directors: prior to the grant. Stock options granted from 1997 through During 2002, the Corporation approved a deferred share unit December 31, 1999, have a 10-year term and contain vesting plan for non-employee directors (DSUPD). Under the provisions of 20% on the first anniversary date following the DSUPD, each eligible director may elect to be paid annual date of the grant, and a further 20% on each of the four subse- retainer fees and/or meeting attendance fees in deferred share quent anniversary dates. Stock options granted since January 1, units (DSU) rather than in cash. A DSU is a notional unit, 2000, have a 10-year term with the same vesting provisions; equivalent to a common share. DSUs are credited with divi- however, they also contain an accelerated vesting feature speci- dend equivalents when dividends are paid on the Corpora- fying thatonthefirstday thatthemarketprice of thecommon tion’s common shares. Payment of DSUs is made in cash or shares is 20% greater than the exercise price of the option, the common shares after the director leaves the Board. As of final tranche of unvested options outstanding on that date will December 31, 2003, a total of 10,264 DSUs (2002 – immediately vest and be exercisable. In 2002, the Corporation 2,176 DSUs) were held by participating directors.

A summary of the status of the stock option plan and changes during the years is presented below:

2003 2002 Weighted-average Weighted-average Options exercise price Options exercise price (000s) ($Cdn) (000s) ($Cdn) Outstanding, beginning of year 4,413 $ 18.24 3,658 $ 18.60 Granted 760 16.73 1,168 16.65 Exercised Purchase option (1,789) 17.64 (43) 17.22 Market growth option —— (275) 16.56 Cancelled (52) 18.50 (95) 18.06 Outstanding, end of year 3,332 $ 18.21 4,413 $ 18.24

The following table summarizes information about the stock options outstanding at December 31, 2003:

Options outstanding Options exercisable Number (000s) Weighted-average Weighted-average Number (000s) Weighted-average outstanding remaining exercise price exercisable exercise price at Dec. 31, 2003 contractual life ($Cdn) at Dec. 31, 2003 ($Cdn) $15.67 to $15.93 827 6.5 $ 15.86 246 $ 15.84 $16.58 to $16.65 1,475 8.6 16.61 136 16.58 $17.45 to $31.10 1,030 4.4 23.24 805 23.33 $15.67 to $31.10 3.332 6.5 $ 18.21 1,187 $21.00

(b) Preferred shares Warrant together with the cash payment of Cdn$15.00 per On March 7, 1997, the Corporation issued 8,000,000 Units, Warrant. A total of 7,910,165 units have been converted into at a price of Cdn$10.00 per Unit, with each unit consisting of Preferred Share Series 2. one Cumulative Preferred Share Series 1 (a “Preferred Share Until March 1, 2004, the Preferred Share Series 2 will be enti- Series 1”) and one Cumulative Preferred Share Series 2 tled to fixed cumulative preferential dividends, as and when Purchase Warrant(a “Warrant”).Since September1, 1998, the declared by the Board of Directors, which will accrue from the quarterly dividend on Preferred Share Series 1 has been date of issue and be payable quarterly in the amount of Cdn$0.02 per share. The holders of the Units had the right to Cdn$0.3672 per share or Cdn$1.4688 per share per annum. acquire on certain dates, for each Unit held, one Cumulative From March 1, 2004, the Preferred Share Series 2 will be enti- Preferred Share Series 2 (a “Preferred Share Series 2”) of the tled to floating adjustable cumulative preferential cash divi- Corporation by the combined effect of tendering for conver- dends as and when declared by the Board of Directors. sion one Preferred Share Series 1 and the exercise of one

47 Notes to Consolidated Financial Statements

Holders of Preferred Share Series 2 will have the right to con- 12. Collahuasi joint venture vert their shares into Cumulative Preferred Share Series 3 of Compañía Minera Doña Inés de Collahuasi S.C.M. the Corporation, subject to certain conditions on March 1, (Collahuasi) is the corporation which owns the mining and 2004, and every five years thereafter. On March 1, 2004, the water rights and other assets relating to the Collahuasi project, Corporation may redeem for cash the Preferred Share Series 2, secured financing, conducts the operations, and markets the in whole butnotin part,attheCorporation’s option,at products of the property. Cdn$25.00 per share plus accrued and unpaid dividends. The consolidated financial statements include Falconbridge’s SubsequenttoMarch 1, 2004, theCorporationmay redeem at 44% share of the financial position, operating results and cash any time for cash the Preferred Share Series 2, in whole but flow of Collahuasi as follows: notin part,attheCorporation’s option,atCdn$25.50 per share plus accrued and unpaid dividends. Effective March 1, ASATDECEMBER 31, 2003 2002 2004, the Preferred Shares Series 2 shares will pay a monthly Financial Position adjustable floating dividend based on a percentage of the ASSETS Canadian prime rate. Current assets $ 143,461 $ 141,929 Holders of the Preferred Shares Series 2 shares had the right Property, plant and equipment 899,062 785,025 to convert their shares into Preferred Shares Series 3 effective Other 18,354 21,663 March 1, 2004. The Preferred Shares Series 3 will pay fixed Total assets $ 1,060,877 $ 948,617 quarterly dividends for 5 years at the annual yield of 4.58%. LIABILITIES AND (c) Earnings per common share SHAREHOLDERS’ EQUITY Earnings per common share have been calculated after Current liabilities $ 87,248 $ 80,977 deducting preferred share dividends of $8.6 million (2002 – Long-term debt $7.9 million) and have been based on the weighted average Senior debt 226,253 226,253 number of common shares outstanding during the year of Intercompany debt 266,374 257,776 177,674,710 shares (2002 – 177,021,546 shares). Diluted Other long-term liabilities 99,779 72,146 earnings per share have been based on the weighted average Shareholders’ equity 381,223 311,465 number of common shares outstanding during the year of Total liabilities and 178,096,477 shares (2002 – 181,434,246 shares). shareholders’ equity $ 1,060,877 $ 948,617 (d) Flow-through shares Earnings In December 2002, the Corporation completed a private Revenues $ 275,483 $ 246,123 placement of 583,386 flow-through common shares at a price Earnings for the year $ 69,758 $ 46,522 of Cdn$20.75 per share for gross proceeds of Cdn$12.1 mil- Cash Flow lion. The proceeds of the issue were used to fund the Cash flow provided by (used in): Corporation’s Canadian exploration expenditures. Operating activities $ 94,594 $ 126,755 (e) Repurchase of common shares Investing activities (114,037) (65,077) During 2003, the Corporation redeemed a total of 600,000 Financing activities 8,598 (19,195) common shares, having a book value of $5.1 million, realizing (Decrease) Increase in cash a loss of $1.5 million on the repurchase. and cash equivalents $ (10,845) $ 42,483

11. Interest Currentassetsinclude cash of $77.6 million (2002 – $88.4 million) which is only available for use within the Interest includes the following: project. YEARS ENDED DECEMBER 31, 2003 2002 During 2002, the Board of Directors of Compañía Minera Interest on long-term debt $ 64,844 $ 61,789 Doña Inés de Collahuasi approved the construction of a new Interest capitalized 16,379 5,609 grinding circuitattheUjina concentrator.This is partof Interest expensed on the Ujina to Rosario transition project, which also involves long-term debt 48,465 56,180 transferring mine production from the Ujina to the Rosario Interest income 5,592 5,594 orebody in June of 2004. The projectwill increase Interest $ 42,873 $ 50,586 Collahuasi’s concentrator design capacity to 110,000 tonnes per day. The total capital cost of the transition and concentrator expansion project is estimated at US$654 million, with Falconbridge’s 44% share of this cost totalling US$288 million.

48 Notes to Consolidated Financial Statements

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

(a) Segmented information: Nickel Copper Lomas Corporate INO Falcondo Kidd Creek Collahuasi Bayas and other Total 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) 227 62 (70) 115 31 (60) 305 Working capital 348 25 28 80 30 138 649 Depreciation, depletion and amortization 121 9 48 50 15 2 245 Property, plant and equipment 921 87 739 1,012 133 11 2,903 Capital expenditures & deferred project costs 97 13 97 151 12 — 370 Year ended December 31, 2002 Ownership (100%) (85.26%) (100%) (44%) (100%) (100%) Revenues(a) $ 692 $ 150 $ 340 $ 246 $ 97 $ — $ 1,525 Operating income (loss) 86 1 (48) 82 18 (61) 78 Working capital 243 37 44 64 27 28 443 Depreciation, depletion and amortization 105 6 49 53 15 2 230 Property, plant and equipment 835 83 596 899 136 12 2,561 Capital expenditures & deferred project costs 69 14 85 54 11 1 234 Dominican Principal base of operations Canada Republic Canada Chile Chile Canada (a) Inter-segment sales are eliminated during the preparation of the internal financial statements.

49 Notes to Consolidated Financial Statements

(b) Identifiable assets by geographic location are as follows: Total Total Property, plant Property, plant assets assets and equipment and equipment

YEARS ENDED DECEMBER 31, 2003 20022003 2002 Canada $ 2,020 $ 1,646 $ 1,535 $ 1,321 Chile 1,370 1,239 1,123 1,017 Barbados 124 58 2 1 Norway 159 142 148 132 Dominican Republic 199 173 87 83 Other 233 140 8 7 $ 4,105 $ 3,398 $ 2,903 $ 2,561

(c) Consolidated sales revenues: monetary assets and liabilities denominated in currencies (i) By geographic location of customers: other than the Canadian dollar. Consistent with the financial risk management policy, these items were hedged by issuing YEARS ENDED DECEMBER 31, 2003 2002 debt in the same currency as the investment, and by entering Amount % Amount% into forward exchange and option contracts. At December 31, Europe $ 891 43 $ 661 43 2002, the Corporation had outstanding foreign currency for- U.S. 554 27 429 28 ward contracts relating to these exposures to sell a notional Other 465 22 282 19 amount of US$61.3 million, with maturity dates through Total foreign* 1,910 92 1,372 90 April 2003 at an average exchange rate of Cdn$1.5637. Canada 173 8 153 10 Subsequent to the change in functional currency, $ 2,083 100 $ 1,525 100 Falconbridge has foreign currency denominated monetary *Includes sales by assets and liabilities denominated in currencies other than the Canadian operations U.S. dollar. At December 31, 2003, the Corporation had to foreign customers $ 957 $ 736 outstanding foreign currency forward contracts, relating to these exposures, to purchase a notional amount of Cdn$510.0 million, with maturity dates through March 2004 (ii) By product category: at an average exchange rate of Cdn$1.3236. If these contracts YEARS ENDED DECEMBER 31, 2003 2002 had been settled at December 31, 2003, the Corporation Amount % Amount% would have received US$8.8 million. Nickel $ 768 37 $ 494 32 Falconbridge’s sales are denominated primarily in U.S. dollars Ferronickel 252 12 149 10 and to a lesser extent in Euros, Yen and other foreign curren- Copper 691 33 618 41 cies, and it incurs expenses that are denominated in foreign Zinc 100 5 125 8 currencies, which expose it to increased volatility in earnings Cobalt 71 3 45 3 due to fluctuations in foreign exchange rates. Falconbridge Palladium 35 2 33 2 uses foreign currency forward exchange contracts and options Other 166 8 61 4 to reduce these exposures by creating an offsetting position. $ 2,083 100 $ 1,525 100 Prior to the change in functional currency, the Corporation used foreign currency exchange contracts, designated as a 14. Financial instruments hedge of its U.S. dollar sales revenue. At December 31, 2002, The Corporation’s Board of Directors has an approved finan- the Corporation had contracts to sell US$415.0 million cial risk managementpolicy addressing thephilosophy, imple- maturing over the ensuing 24 months at an average exchange mentation and control of financial risk management and rate of Cdn$1.5734. In addition, the Corporation also had investment activities. Falconbridge manages its exposures by option contracts that if exercised, would result in additional entering into contractual arrangements (derivatives) which sales of US$125.0 million over the ensuing 5 months. If these reduce (hedge) the exposures by creating an offsetting position. contracts had been settled at December 31, 2002, the Corpo- Effective July 1, 2003, the functional currency of Falconbridge ration would have paid US$6.9 million. Subsequent to the was changed from the Canadian to U.S. dollar. Prior to the change, Falconbridge started using foreign currency exchange change, Falconbridge had significant investments in foreign contracts, designated as a hedge of its Canadian dollar costs, domiciled operations where the functional currency was not the Canadian dollar. In addition, the Corporation had

50 Notes to Consolidated Financial Statements

while maintaining its program of hedging Norwegian Kroner hedges its exposure to interest rate risk through the use of and Chilean peso expenditures. At December 31, 2003, interest rate swaps and interest rate swap options, the details of Falconbridge has foreign currency exchange contracts, desig- which are disclosed in note 6. nated as a hedge of its Canadian dollar expenditures, to purchase Cdn$636.0 million maturing over the next 24 months 15. Related-party transactions at an average exchange rate of Cdn$1.4941. In addition, the At December 31, 2003, Noranda Inc. (Noranda) owned, Corporation also has option contracts that if exercised, would directly and indirectly, approximately 59.2% of the common resultin additionalpurchases of Cdn$29.5 million over the shares of the Corporation. Falconbridge has entered into an next 4 months. If these contracts had been settled at agreement with a subsidiary of Noranda, whereby it acts as sales December 31, 2003, Falconbridge would have received agent for all products, other than sulphuric acid and indium, US$63.0 million. AtDecember 31, 2003, Falconbridge also produced at Falconbridge’s Kidd Creek Operations. has foreign currency exchange contracts, designated as a hedge Falconbridge has entered into a supply agreement with another of its Norwegian Kroner (NOK) expenditures, to purchase subsidiary of Noranda which will purchase and resell NOK 267.0 million, up to September 2007, at an average Falconbridge’s output of sulphuric acid. Accounts receivable, exchange rate of NOK 7.9841 (2002 – 333.0 million in the consolidated statements of financial position, includes Norwegian Kroner atNOK 7.9617). In addition,the $30.2 million (2002 – $23.6 million) in receivables from Corporation also has option contracts that if exercised, would Noranda relating to amounts being collected under the sales resultin additionalpurchases of 210.0 million Norwegian agreements and $13.3 million (2002 – $6.1 million) from net Kroner over the next 14 months (2002 – 165.0 million purchases of material by Noranda. Accounts payable, in the Norwegian Kroner). If these contracts had been settled at consolidated statements of financial position includes December 31, 2003, Falconbridge would have received $35.1 million (2002 – Nil) for the purchase of materials US$6.5 million (2002 – received US$3.6 million). At from Noranda. December 31, 2003, Falconbridge also had foreign currency Falconbridge has agreements with various Noranda group forward contracts to purchase 34,238 million Chilean pesos companies for the purchase of custom feeds; the toll treatment (2002 – 66,021 million Chilean pesos) to hedge certain of copper concentrates, blister copper and refinery slimes; expenditures associated with its Chilean operations for periods and the sale of metals. The following table details related-party extending through September 2005. If these contracts had production and marketing transactions with Noranda Group been settled at December 31, 2003, Falconbridge would have Companies: received US$10.3 million (2002 – paid US$3.7 million). Falconbridge’s risk management policy provides for the lim- YEARS ENDED DECEMBER 31, 2003 2002 ited use of financial instruments for discretionary trading Sale of materials and technology purposes. In the normal course of business, Falconbridge has to Noranda (a) $ 97,665 $ 71,938 traditionally maintained a limited amount of financial instru- Purchase of materials from and ments for discretionary trading purposes. smelting and refining fees The fair value of Falconbridge’s primary financial instruments, paid to Noranda (b) 159,013 37,257 including cash and cash equivalents, accounts and metals set- Commissions and agency fees tlements receivable, and accounts payable and accrued charges paid to Noranda (c) 2,124 758 approximates their carrying value due to the short-term nature Fees paid relating to sulphuric of these instruments. The fair value of the long-term debt and acid (a) 1,336 2,043 interest rate swaps is disclosed in note 6. Other (a), (b), (d) 35 442 Included in the Corporation’s Consolidated Financial Statements in Falconbridge does not consider the credit risk associated with (a) Revenues; (b) Costs of metal and other product sales; (c) Selling, general its financial instruments to be significant. Foreign currency and administrative expenses; (d) Other (income) expenses. and interest rate swap contracts are maintained with high quality counterparties and Falconbridge does not anticipate During 2002, a process was initiated to integrate certain that any counterparties will fail to meet their obligation. operations of Noranda and Falconbridge with the objective Falconbridge does not have significant exposure to any of maximizing synergies. The initiatives undertaken have individual customer and these risks are further managed included the combination of various corporate support through a highly effective credit management program. services and the merging of management teams. Agreements Falconbridge’s policy is to enter into short-term investments between Falconbridge and the Noranda group companies are in high quality debt obligations. negotiated in the best interest of Falconbridge, on an arms Falconbridge is exposed to interest rate risk as a result of its length basis at market terms. issuance of debt. Falconbridge reduces its borrowing costs and

51 Notes to Consolidated Financial Statements

16. Other income annual financial statements. In the normal course of business, Other income includes the following: the Corporation enters into numerous agreements that contain indemnification commitments and may contain other YEARS ENDED DECEMBER 31, 2003 2002 features that meet the expanded definition of guarantees. The Foreign exchange (loss) gain $(17,062) $ 6,309 terms of these indemnification agreements will vary based on Metals trading gain (loss) 11,167 (3,595) the contract and typically do not provide for any limit on the Other 8,811 1,495 maximum potential liability. Historically, Falconbridge has Other income $ 2,916 $ 4,209 not made any significant payments under such indemnifica- tions and no amounts have been accrued in the financial state- 17. Commitments and contingencies ments with respect to these indemnification commitments. (a) The Corporation has received an exemption granted by the (c) From time to time, Falconbridge is involved in litigation, Ontario government, until December 31, 2009, from a investigations or proceedings relating to claims arising out requirement to refine in Canada ores mined from certain of its operations in the ordinary course of business. In the properties of the Corporation in Ontario. This exemption is opinion of management, the aggregate amount of any poten- limited to the quantity of nickel-copper matte capable of tial liability is not expected to have a material adverse effect yielding not more than 100,000,000 pounds of refined on Falconbridge’s financial position or results. nickel per year. (b) Effective January 1, 2003, the Corporation adopted 18. Comparative amounts Accounting Guideline 14, “disclosure of guarantees”, issued by Certain of the comparative figures have been restated to con- the Canadian Institute of Chartered Accountants, which form to the current year’s presentation. expands previously issued accounting guidance and requires additional disclosure by the guarantor in its interim and

52 Five-Year Review

Five-Year Review

(UNAUDITED) 2003 02002 2001 2000 1999 Operating results ($ thousands) Revenues 2,083,480 1,524,672 1,384,570 1,756,706 1,462,251 EBITDA(1) 549,682 308,423 231,144 560,054 397,335 Depreciation, depletion and amortization 244,708 230,338 207,352 192,361 190,842 Earnings (loss) for the year 194,424 49,984 17,268 254,389 107,722 Operating cash flow 445,337 228,207 230,457 445,629 234,368 Capital expenditures and deferred project costs 370,318 234,430 225,070 168,220 114,456 Per common share data Net income (loss) 1.04 0.24 0.05 1.39 0.56 Cash dividends (Cdn) 0.40 0.40 0.40 0.40 0.40 Operating cash flow 2.49 1.93 1.30 2.52 1.32 Number of common shares issued at end of year (000s) 178,792 177,603 176,977 176,977 176,971 Financial position ($ thousands) Cash and equivalents 298,091 164,563 124,523 166,937 70,314 Total assets 4,104,760 3,398,406 3,293,293 3,306,552 3,378,707 Working capital 648,780 443,325 356,343 470,331 402,180 Property, plant and equipment, net 2,903,118 2,561,014 2,560,592 2,498,629 2,599,439 Long-term debt 1,427,226 1,280,410 1,172,598 989,546 1,091,283 Shareholders’ equity 1,925,203 1,516,130 1,499,228 1,625,308 1,715,891 Total liabilities 2,179,557 1,882,276 1,794,065 1,681,244 1,662,816

Net debt/net debt plus equity 37% 42% 41% 34% 37% Return on common shareholders’ equity 12% 3% 1% 16% 6% Return on net assets employed 13% 3% 1% 14% 10% Production statistics (tonnes) Mine Nickel – Sudbury 24,143 27,833 25,226 23,234 35,678 – Raglan 25,110 24,636 24,570 23,089 19,524 – Falcondo 27,227 23,303 21,662 27,830 24,454 76,480 75,772 71,458 74,153 79,656 Refined Nickel – FNA 77,183 68,530 68,221 58,679 74,137 – Falcondo 27,227 23,303 21,662 27,830 24,454 104,410 91,833 89,883 86,509 98,591 Mine Copper – Sudbury 29,161 31,050 22,858 20,990 40,999 – Raglan 6,628 6,500 6,915 6,308 4,930 – Kidd Creek 46,409 45,434 42,340 54,926 67,429 – Collahuasi 168,578 185,014 193,135 186,073 185,739 – Lomas Bayas 60,427 59,304 24,702 — — 311,203 327,302 289,950 268,297 299,097 Refined Copper – FNA 35,852 30,632 26,722 25,307 33,262 – Kidd Creek 132,364 146,526 127,824 122,987 121,278 – Collahuasi 27,895 26,678 26,180 25,579 22.573 – Lomas Bayas 60,427 59,304 24,702 — — 256,538 263,140 205,428 173,873 177,113

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

53 Consolidated Results – 2003 and 2002 by Quarters

Consolidated Results – 2003 and 2002 by Quarters

(UNAUDITED) 2003 1st Qtr. 2nd Qtr. 3rd Qtr. OPERATIONS (thousands, except per share data) Revenues $ 472,113 $ 490,144 $ 484,484 Operating expenses Costs of sales Costs of metal and other product sales 331,917 340,134 352,449 Depreciation of plant and equipment 40,300 49,863 41,441 Amortization of development and preproduction expenditures 16,156 16,380 18,719 388,373 406,377 412,609 Selling, general and administrative 21,248 22,519 19,582 Exploration 2,226 7,698 7,757 Research and process development 1,870 2,191 2,761 Other (income)/expenses (3,629) 717 5,822 410,088 439,502 448,531 Operating income (loss) 62,025 50,642 35,953 Interest 12,065 12,833 12,253 Earnings (Loss) before taxes and non-controlling interest 49,960 37,809 23,700 Income and mining taxes 10,452 (2,426) 1,179 Non-controlling interest in earnings of subsidiaries 328 575 1,194 Earnings (Loss) for the period 39,180 39,660 21,327 Dividends on preferred shares 2,043 2,038 2,212 Earnings (Loss) attributable to common shares $ 37,137 $ 37,622 $ 19,115 Earnings (Loss) per common share (note 1) $ 0.21 $ 0.21 $ 0.11 Weighted average number of shares outstanding (thousands) 177,607 177,165 177,506 EARNINGS (LOSS) CONTRIBUTIONS (thousands) Principal operations – Integrated Nickel Operations (INO) $ 44,419 $ 47,051 $ 31,551 Falconbridge Dominicana, C. por A. 4,526 7,951 17,260 Nickel Operations 48,945 55,002 48,811 Kidd Creek Operations (13,943) (16,795) (23,418) Collahuasi 27,660 25,466 23,785 Lomas Bayas 5,935 4,786 8,190 Copper Operations 19,652 13,457 8,557 Corporate and other (note 2) (6,572) (17,817) (21,415) Operating income (loss) 62,025 50,642 35,953 Interest 12,065 12,833 12,253 Income and mining taxes expense (credit) 10,452 (2,426) 1,179 Non-controlling interest in earnings of subsidiaries 328 575 1,194 Earnings (Loss) for the period 39,180 39,660 21,327 Dividends on preferred shares 2,043 2,038 2,212 Earnings (Loss) attributable to common shares $ 37,137 $ 37,622 $ 19,115 Earnings (Loss) per common share (note 1) $ 0.21 $ 0.21 $ 0.11 METAL SALES (tonnes, except precious metal revenues and silver) INO – Nickel 20,325 20,627 17,558 – Copper 14,470 16,139 12,093 – Precious metal revenues (thousands) $ 19,963 $ 24,751 $ 22,686 Kidd Creek – Zinc (including metal in concentrate) 35,517 28,361 25,407 – Copper (including metal in concentrate) 28,773 26,375 26,098 – Silver (thousands of ounces) 1,204 1,553 1,550 Nickel in ferronickel 6,536 6,455 7,361 Collahuasi – Copper (including metal in concentrate) 44,429 46,798 37,281 Lomas Bayas – Copper 14,578 14,817 15,601 AVERAGE PRICES REALIZED (US$ per pound, except silver) Nickel $ 3.83 $ 3.87 $ 4.33 Ferronickel 3.65 3.78 4.15 Copper 0.78 0.76 0.81 Zinc 0.39 0.39 0.41 Silver (per ounce) 4.69 4.62 4.83

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.

54 Consolidated Results – 2003 and 2002 by Quarters

2002 4th Qtr. Year 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year

$ 636,739 $ 2,083,480 $ 329,256 $ 406,484 $ 346,208 $ 442,724 $ 1,524,672

390,329 1,414,829 232,358 274,775 261,184 335,608 1,103,925 43,154 174,758 41,115 43,531 43,182 43,194 171,022 18,695 69,950 16,097 19,276 15,054 8,889 59,316 452,178 1,659,537 289,570 337,582 319,420 387,691 1,334,263 22,619 85,968 22,751 20,398 21,156 22,474 86,779 5,194 22,875 3,991 5,500 8,121 3,901 21,513 6,220 13,042 1,993 2,172 1,731 2,345 8,241 (5,826) (2,916) (6,213) (2,336) 9,891 (5,551) (4,209) 480,385 1,778,506 312,092 363,316 360,319 410,860 1,446,587 156,354 304,974 17,164 43,168 (14,111) 31,864 78,085 5,722 42,873 11,620 13,277 12,947 12,742 50,586 150,632 262,101 5,544 29,891 (27,058) 19,122 27,499 53,932 63,137 (7,853) 1,635 (12,312) (3,934) (22,464) 2,443 4,540 (733) 560 269 (117) (21) 94,257 194,424 14,130 27,696 (15,015) 23,173 49,984 2,313 8,606 1,959 2,002 2,013 1,990 7,964 $ 91,944 $ 185,818 $ 12,171 $ 25,694 $ (17,028) $ 21,183 $ 42,020 $ 0.52 $ 1.05 $ 0.07 $ 0.15 $ (0.10) $ 0.12 $ 0.24 178,153 177,675 176,977 177,018 177,020 177,092 177,022

$ 103,606 $ 226,627 $ 25,071 $ 25,304 $ 4,944 $ 30,647 $ 85,966 31,893 61,630 (9,736) 8,552 4,235 (1,654) 1,397 135,499 288,257 15,335 33,856 9,179 28,993 87,363 (15,383) (69,539) (13,062) (10,023) (10,109) (14,413) (47,607) 37,908 114,819 20,378 27,823 12,341 21,903 82,445 11,943 30,854 5,511 4,231 2,420 5,155 17,317 34,468 76,134 12,827 22,031 4,652 12,645 52,155 (13,613) (59,417) (10,998) (12,719) (27,942) (9,774) (61,433) 156,354 304,974 17,164 43,168 (14,111) 31,864 78,085 5,722 42,873 11,620 13,277 12,947 12,742 50,586 53,932 63,137 (7,853) 1,635 (12,312) (3,934) (22,464) 2,443 4,540 (733) 560 269 (117) (21) 94,257 194,424 14,130 27,696 (15,015) 23,173 49,984 2,313 8,606 1,959 2,002 2,013 1,990 7,964 $ 91,944 $ 185,818 $ 12,171 $ 25,694 $ (17,028) $ 21,183 $ 42,020 $ 0.52 $ 1.05 $ 0.07 $ 0.15 $ (0.10) $ 0.12 $ 0.24

20,468 78,978 18,768 17,137 14,780 20,468 71,153 16,506 59,208 15,627 13,634 11,470 13,764 54,495 $ 19,380 $ 86,780 $ 17,830 $ 19,783 $ 20,073 $ 16,914 $ 74,600 21,307 110,592 35,073 39,118 34,508 39,719 148,418 23,916 105,162 25,410 24,096 29,699 31,370 110,575 1,016 5,323 378 1,124 986 1,235 3,723 6,781 27,133 543 7,460 6,279 7,164 21,446 39,639 168,147 42,029 53,348 42,390 49,757 187,524 16,293 61,289 15,939 14,324 14,402 15,600 60,265

$ 5.57 $ 4.40 $ 2.84 $ 3.23 $ 3.23 $ 3.28 $ 3.14 5.21 4.20 2.68 3.12 3.22 3.19 3.16 0.96 0.82 0.74 0.75 0.67 0.72 0.72 0.46 0.41 0.39 0.39 0.38 0.38 0.39 5.19 4.80 4.44 4.70 4.70 4.54 4.61

55 Board of Directors

Board of Directors

DAVID W. KERR ALEX G. BALOGH JACK L. COCKWELL Chairman of Corporate Director Group Chairman, Falconbridge Limited Oakville, Ontario Brascan Corporation Toronto, Ontario Appointed in September 1989 (2,3) Toronto, Ontario Appointed in April 1989 Appointed in December 1995 (4) Formerly Deputy Chairman of Chairman of Noranda Inc. and Noranda Inc. (1994-2003) and Formerly Brascan’s President previously President and CEO of Chairman of Falconbridge and Chief Executive Officer for Noranda Inc. Directorships Limited (1994-2003); Director- 12 years. Directorships include: include: Brascan Corporation, ships include: Noranda Inc., Astral Communications Inc., Shell Canada Limited and Strongco Inc., Great Lakes Power Noranda Inc., Nexfor Inc. and a Sustainable Development Inc., Sentient Global Resources number of Brascan’s business Technology Canada. He is also Fund and Cambior Inc. units. Chairman of the Board of Chairman of the International Trustees of the Royal Ontario Council on Mining and Metals. Museum and Director of the C.D. Howe Institute.

ROBERT HARDING, FCA G. EDMUND KING NEVILLE W. KIRCHMANN Chairman, Brascan Corporation Partner, President of Toronto, Ontario DeCew Capital Corporation Kirchmann Holdings Ltd. Appointed in July 2000 (2,4,6) Toronto, Ontario Toronto, Ontario Appointed in June 1994 (2,4,5,6) Appointed in December 1997 (1,4,5) Director of the following Brascan companies: BPO Properties Formerly Chairman and Chief Previously President and CEO of Corporation (Chairman), Executive Officer of CIBC Wood Coca-Cola, Canada and Noranda Inc. and Nexfor Inc. Gundy Corporation. Directorships Southern Africa. Formerly Director of Burlington Resources include: Rockwater Capital President and CEO of The Inc., Chairman of the Board of Corporation, Caldwell Partners Princess Margaret Hospital Governors of the University Ltd., the Canadian Cardiology Foundation. Directorships of Waterloo, Chair of Campaign Society and the Centre of include: Clearly Canadian Waterloo and a Trustee of the Addiction and Mental Health Beverage Corporation and United Way of Greater Toronto. Foundation. Interlink Community Cancer Nurses (Chairman).

56 Board of Directors

MARY A. MOGFORD DEREK PANNELL DAVID H. RACE Corporate Director President and Corporate Director Newcastle, Ontario Chief Executive Officer Toronto, Ontario Appointed in December 1995 (1,2,3,5) Noranda Inc. Appointed in April 1994 (1,3,5) Toronto, Ontario Formerly Deputy Minister of Appointed in April 2001 (3,4) Chairman Emeritus, CAE Inc. Finance and Deputy Minister of and previously President and Appointed President and CEO of Natural Resources for Ontario. CEO, CAE Inc. (1985-1993). Noranda Inc. in June 2002. Directorships include: Empire Honorary Director, Bank of Previously President and COO of Company Limited, MDS Inc., the Nova Scotia. Laureate Canadian Noranda and CEO of Falconbridge Potash Corporation of Saskatche- Business Hall of Fame. Limited, Vice-President of wan, Sears Canada and the Compañía Minera Antamina in Altamira Advisory Council. Member Peru, Senior Vice-President, of the Board of the Hospital for Sick Copper Group, President of Children, the Toronto Symphony Noranda Copper Smelting and Foundation and Associate Member Refining and President of of the Board of the Canadian Policy Brunswick Mining and Smelting. Research Network.

AARON W. REGENT JAMES D. WALLACE COMMITTEES President and President of 1 Audit Committee Chief Executive Officer Pioneer Construction, Inc. 2 Corporate Governance Committee Falconbridge Limited Sudbury, Ontario 3 Environment, Health and Safety Toronto, Ontario Appointed in January 2001 (1,4,5,6) Committee Appointed in February 2002 4 Human Resources and Directorships include: Waters Compensation Committee Previously Executive Vice- Holding Corporation Limited, 5 Independent Directors’ President and CFO of Noranda Northstar Aerospace Inc., Northern Committee Inc., President and CEO of Trilon Ski Company Limited and Marslen 6 Pension Investment Committee Securities Corporation and Investments Limited. Chairman- The Chair of the committee is in bold Senior Vice-President and CFO ships include: Alexander Centre of Brascan Corporation. Director Industries Limited and Laurentian of Compañía Minera Doña Inés University. Board member of de Collahuasi S.C.M., Noranda Councillors of Ontario’s Promise: Income Fund, the National Ballet The Partnership for Children and of Canada and the Hospital for Youth, Northeastern Smart Growth Sick Children Foundation. Panel, Cancer Care Ontario.

57 Corporate Governance Initiatives

Ongoing Corporate Governance Initiatives

During 2003, the Board of Directors and management enhanced the Company’s standards with respect to corporate governance practices and financial reporting integrity and transparency. The improvements, in part, were in response to the requirements of the Sarbanes-Oxley Act of 2002 and new Securities and Exchange Commission (“SEC”) regulations.

Recent developments initiated by Falconbridge include the following:

CORPORATE GOVERNANCE GUIDELINES BOARD COMMITTEES • The Board of Directors adopted a statement of • The terms of reference for each of the principal com- Corporate Governance Guidelines to strengthen corpo- mittees of the Board were expanded to outline increased rate governance, expand insider accountability and responsibilities under the respective mandates from increase Board oversight. the Board.

CODE OF ETHICS PUBLIC ACCESS • Falconbridge revised its Code of Ethics to conform with • The Company’s Corporate Governance Guidelines, new U.S. regulatory guidelines. Code of Ethics and Terms of Reference for the Board committees have been posted on the Company’s website DISCLOSURE COMMITTEE for ease of access by shareholders and the public • Falconbridge revised the composition of its Disclosure generally. Committee, whose core members now comprise the Senior Vice-President & General Counsel; the Vice- Our practice is to anticipate and implement any gover- President, Investor Relations, Communications & Public nance initiatives that our Corporate Governance Affairs; the Senior Vice-President, Procurement, Committee believes are appropriate in the context of our Logistics, Transportation & Information Services; and extensive international business activities and the general the Corporate Secretary. The Committee oversees and global business environment. monitors compliance with Falconbridge’s Disclosure (see Management Information Circular for more information) Policy and advises the Chief Executive Officer, the Chief Financial Officer and the Board on public disclosure matters generally.

AUDIT COMMITTEE MEMBERSHIP • The Board revised the composition of the Audit Committee, and amended its terms of reference, to provide that all members shall be “unrelated” directors under the guidelines for improved corporate governance adopted by the Toronto Stock Exchange.

DIRECTOR STOCK OPTIONS • The Board made the determination that as a matter of policy non-managementdirectorsare noteligible for stock options issued under the Company’s Stock Option Plan.

58 Officers of the Corporation

Officers of the Corporation

DAVID KERR MICHAEL AGNEW CRAIG DUFF IAN PEARCE Chairman of the Board Vice-President Assistant Treasurer Senior Vice-President Technology Projects & Engineering AARON REGENT PETER EICHINGER President & Chief Executive RICK BURDETT Vice-President KATHERINE RETHY Officer Vice-President Procurement Senior Vice-President Information Systems & Procurement, Logistics, Chief Information Officer Transportation & BRENT CHERTOW ALLEN HAYWARD Information Services President, Canadian Copper & Vice-President Recycling ROBERT BURROW Nickel Mining Vice-President MARTIN SCHADY Finance – Nickel Operations Senior Vice-President JOSEPH LAEZZA DAVID HOLOWACK Business Development President, Nickel Vice-President DEAN CHAMBERS Strategy & Six Sigma Treasurer PAUL SEVERIN FERNANDO PORCILE Senior Vice-President OLLE JOHANSSON President, Copper Exploration SERGIO CHAVEZ Vice-President President & General Manager Marketing & Sales PETER KUKIELSKI Ferronickel Operations JEFFERY SNOW Executive Vice-President Senior Vice-President ANDRE JORON Projects & General Counsel DENIS COUTURE Vice-President Vice-President Human Resources MICHAEL DOOLAN Investor Relations, ROBERT TELEWIAK Senior Vice-President & Communications & Public Vice-President PATRICE LAFRANCE Chief Financial Officer Affairs Environment, Safety & Health Assistant Secretary

JOHN DOYLE STEPHEN YOUNG TED LAKS Vice-President Corporate Secretary Taxation Vice-President Performance/Six Sigma

59 Corporate Directory

Corporate Directory

Head Office Falconbridge Dominicana, Kidd Metallurgical Division Falconbridge Limited C. por A. Postal Bag 2002 BCE Place Bonao, Dominican Republic Timmins, Ontario P4N 7K1 181 Bay Street Telephone: (809) 682-6041 Telephone: (705) 235-8121 Suite 200 Fax: (809) 221-8423 Fax: (705) 235-7318 Toronto, Ontario Sergio Chavez Daniel Picard M5J 2T3 President & General Manager General Manager Telephone: (416) 982-7111 Fax: (416) 982-7423 Custom Feed Compañía Minera Falconbridge Lomas Bayas Falconbridge International Limited Nickel Galleguillos Lorca 1610 Suite 201, Stevmar House Antofagasta, Chile Sudbury Mines/Mill Rockley, Christ Church, Barbados Telephone: (56) 55 252-577 Onaping, Ontario Telephone: (246) 435-9969 Fax: (56) 55 227-348 P0M 2R0 Fax: (246) 435-9978 Telephone: (705) 966-3411 Gordon Stodhart Ric Lorrimer Fax: (705) 966-6544 General Manager President Parviz Farsangi General Manager Falconbridge International S.A. Corporate Avenue Lloyd George 7, Box 2 Marketing and Sales Subsidiaries and Offices Sudbury Smelter B – 1000 Brussels, Belgium Falconbridge Europe S. A. Falconbridge, Ontario Telephone: (32-2) 401-8330 Avenue Lloyd George 7, P0M 1S0 Fax: (32-2) 401-8331 Telephone: (705) 693-2761 Box 2 Fax: (705) 699-3932 Michael McSorley B – 1000 Brussels, Belgium Chairman David Rae Telephone: (32-2) 401-8200 General Manager Fax: (32-2) 401-8201 Copper John Smillie President Raglan Mine Compañía Minera Doña Inés de 120, avenue de l’Aéroport Collahuasi S.C.M. Rouyn-Noranda, Québec Av. Andrés Bello 2687, Piso 11 Falconbridge (Japan) Ltd. J9X 5B7 Las Condes-Casilla 180 Nihonbashi First Building 8F Telephone: (819) 762-7800 Santiago, Chile 2-19, Nihonbashi 1-Chome Fax: (819) 797-0531 Telephone: (56-2) 362-6500 Chuo-ku, Tokyo 103, Japan Denis Lachance Fax: (56-2) 362-6562 Telephone: (81-3) 3272-0900 General Manager, Raglan Operations Thomas Keller Fax: (81-3) 3272-0901 Chief Executive Officer Toshiaki Oiwa President Falconbridge Nikkelverk A/S Serviceboks 604 Kidd Mining Division N-4606 Kristiansand South, Norway Postal Bag 2002 Telephone: 47-38-10-10-10 Timmins, Ontario P4N 7K1 Fax: 47-38-10-10-11 Telephone: (705) 264-5200 Edward Henriksen Fax: (705) 267-8709 Managing Director Michel Boucher General Manager

60 Corporate Directory

Falconbridge U.S. Inc. Falconbridge (Australia) Pty. Falconbridge Nouvelle Twin Towers – Suite 245 Limited Calédonie SAS 4955 Steubenville Pike Exploration Division 9 rue Austerlitz, 6e étage Pittsburgh, Pennsylvania Suite 701, Level 7 BP MGA 08 U.S.A. 15205-9604 Toowong Tower – 9 Sherwood Road Nouméa Cedex 98802 Telephone: (412) 787-0220 Toowong, Queensland, 4066 Nouvelle Calédonie Fax: (412) 787-0287 Australia Telephone: (687) 246-040 James Moore Telephone: (617) 3721-4222 Fax: (687) 246-049 President Fax: (617) 3871-1379 Bruce Dumville Scott Bruce Project Director Director of Exploration, Australasia Exploration Offices Falconbridge (Australia) Pty Ltd. Queen’s Quay Terminal Falconbridge Ventures of Africa Suite 701, Level 7 207 Queen’s Quay West (Pty.) Ltd. Toowong Tower – 9 Sherwood Road Suite 800 PO Box 12708 Toowong, Queensland, 4066 Toronto, Ontario Hatfield 0028 Australia M5J 1A7 Pretoria Telephone: (617) 3721-4222 Telephone: (416) 982-7111 South Africa Fax: (617) 3871-1379 Fax: (416) 982-7420 Telephone: 27(12) 348-2182 Brian Hill David Gower Fax: 27(12) 348-2117 Managing Director General Manager, Nickel Exploration Dean MacEachern Tony Green Regional Exploration Manager, Africa General Manager, Copper Exploration Falconbridge France SAS 17 Square Edouard VII Falconbridge Brasil Ltda. 75009 Paris Technology Centre Avenida Afonso Pena 2770 France P.O. Box 40 2nd Andar Telephone: 33 (01) 53-43-51-60 Falconbridge, Ontario P0M 1S0 30130-007 – Funcionarios Fax: 33 (01) 53-43-51-62 Telephone: (705) 693-2761 Belo Horizonte – MG Derek Job Fax: (705) 699-3600 BRASIL President Michael Welch Telephone: (55-31) 3281-2800 Manager of Geology, Sudbury Region ext.111 Fax: (55-31) 3281-5595 P.O. Bag 2002 Helio Diniz Timmins, Ontario P4N 7K1 Exploration Manager, Brazil Telephone: (705) 264-5200 Fax: (705) 267-8996 Subsidiaries, Project Offices and Damien Duff Associated Companies Manager of Geology, Timmins Region Noranda Chile Limitada – Falconbridge Chile S.A. 3296, avenue Francis-Hugues Avenida Andres Bello 2777 Laval, Québec Piso 8 H7L 5A7 Las Condes Telephone: (450) 668-2112 Santiago, Chile Fax: (450) 668-2929 Telephone: (56-2) 337-0600 James Robertson Fax: (56-2) 334-7220 Director of Exploration, North America Fernando Porcile President, Copper

61 Shareholder and Corporate Information

Shareholder and Corporate Information

Stock Exchange Listing Falconbridge Dividend Policy Transfer Agent & Registrar Toronto, Trade Symbol: Falconbridge views common share For information regarding dividend FL (Common Shares) dividends as an importantpartofa cheques, share certificates, stock FL.PR.A (Preferred Shares Series 2) shareholder’s return on investment. transfers, etc., please contact: As a result, it aims to pay a common Computershare Trust Company Index Listings share dividend atall pointsof theeco- of Canada S&P/TSX Composite nomic cycle, as long as the payment Tel: 1-800-564-6253 or S&P/TSX Mining does notimpair theCorporation’s (514) 982-7555 S&P/TSX Materials financial position. It s expected that Fax: 1-866-249-7775 or S&P/TSX MidCap the common share dividend will (416) 263-9524 increase or decrease to reflect the [email protected] Outstanding Shares (Millions) Corporation’s operating results and December 31, 2003 financial position. Inquiries Common Shares 178,792,492 Denis Couture The preferred shares of each series Preferred Shares Series 1 89,835 Vice-President, Investor Relations, issued by the Corporation rank in Preferred Shares Series 2 7,910,165 Communications & Public Affairs priority to the common shares with Tel: (416) 982-7020 Annual Dividend Per Share respect to the payment of dividends. Tracey Wise Common Shares Cdn$0.40 Auditors Investor Relations Manager Preferred Shares Series 1 Cdn$0.08 Deloitte & Touche LLP Tel: (416) 982-7178 Preferred Shares Series 2 Cdn$1.47 Toronto, Ontario Visit Our Website Annual Meeting Browse www.falconbridge.com to The annual meeting of shareholders learn more about Falconbridge and will be held on April 16, 2004 at the mining industry. the Design Exchange, Trading Floor, 234 Bay Street, Toronto at 2:00 p.m. Version Française La version française du rapport annuel sera fournie sur demande. Share Trading Information Common Share Quarter Volume (Millions) Low High 2003 First 26 $ 15.37 $ 18.13 Second 18 15.25 18.95 Third 24 17.35 23.18 Fourth 29 21.81 31.78 2002 First24 $ 15.52 $ 18.89 Second 28 17.95 20.95 Third 23 14.25 20.15 Fourth 22 13.30 16.30

62 Creative Direction: S.D. CORPORATE COMMUNICATIONS Design: RAVE! DESIGN INC. Portrait Photography: TONY HAUSER Location Photography: GRAEME OXBY Typesetting: IBEX GRAPHIC COMMUNICATIONS INC. Printed in Canada: QUEBECOR WORLD MIL INC. Falconbridge is a leading producer of nickel, copper, cobalt and platinum group metals. We are also a major recycler and processor of metal-bearing materials.

Falconbridge is committed to improving shareholder returns through the responsible and profitable growth of our core nickel and copper businesses. We will accomplish this by focusing on high-quality and long-life ore bodies, by optimizing returns from our current assets, and by preparing to take advantage of market opportunities when they present themselves.

We target a minimum after-tax return on equity of 15% and an 18% return on net assets. Falconbridge entered the mining business in 1928 and today employs 6,400 people in 14 countries. Our common shares are listed on the Toronto Stock Exchange under the symbol FL. As of December 31, 2003, Falconbridge was owned by Noranda Inc. of Toronto (59.2%) and by other investors (40.8%).

Falconbridge Limited BCE Place, 181 Bay Street, Suite 200, Toronto, Ontario, Canada M5J 2T3 t. 416.982.7111 f. 416.982.7423 e. [email protected]