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) 2 3 7 14 1 11 5 13 9 12 13 5 13 4 5 6 11 10 11 8 10 11 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 70 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 $8 million. smelter and CCR refinery Review Montcalm feasibility study 6Cooperative activities with Noranda and make development decision on successfully implemented. Lowered this nickel deposit operating costs through a 15% Made development decision and workforce reduction. Ability to 3started construction in November. process higher value complex con- centrates has been verified. Falconbridge: Strong Fundamentals During the past two years, Falconbridge has built a solid foundation in the nickel and copper markets, two metals with excellent fundamentals. Shareholder value will be created with a strategy focused on maximizing the value of our assets, profitably growing our production base and maintaining a strong balance sheet. Return on Net Assets 2003 Share Price Return on Equity (Cdn$) 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.